Managing your mortgage: how to keep it as good debt
Although mortgage debt traditionally falls under the “good debt” category, if it’s not managed responsibly with a budget and a strategy in place, it can quickly become “bad debt”. It’s all about keeping a healthy ratio between your home’s equity and how much debt you have.
According to a new survey from the Mortgage Professionals Canada:
- 91 per cent Canadian home owners have 25 per cent or more equity in their homes
- Homeownership in Canada has fallen from 69 per cent in 2011 to 67.8 in 2017, due in part to high prices
- The majority of Canadians feel that real estate is a good investment
- Most Canadians are motivated to pay their mortgages down responsibly and quickly; one third shorten their amortizations to build equity and reduce debt more quickly
“It goes without saying, the best kind of debt is no debt at all. However, taking out a mortgage in order to grow wealth through owning a home can be considered good debt, because it is part of a longer term strategy to accumulate savings,” says Jeff Schwartz, Executive Director, Consolidated Credit Counseling Services of Canada.
When buying a house
When you begin your house hunt, you need a wish list for home features and location, of course, but you also need have a plan as to how you’re going to manage your mortgage responsibly. A good way to start is to keep your mortgage as low as possible when you buy your home in the first place.
Establish a budget for your house purchase, which will include not only a mortgage payment, but will leave enough cash flow to generously cover the other expenses in your budget. Remember that as a homeowner you’ll need to have an emergency fund on hand to pay for repairs and maintenance, so build that into your budget too.
Use this price point as the guide and top priority during your house hunt to keep your debt under control.
Plan to pay it down
Now that you’ve got your mortgage, develop your plan to pay it down. Most mortgages are extended over many years, which means significant interest charges over the course of the mortgage loan. The more quickly you can pay it down, the more money you’ll save. Additionally, you’ll build up equity in your home more quickly too.
Make lump sum payments when possible. Most lenders will let you make a lump sum payment every year without penalty. One bonus with this is that this payment is usually applied right to the principal of your mortgage, so it is an effective way to reduce your debt.
Another option is to reduce your mortgage amortization. While this will get rid of your mortgage more quickly and save you from paying interest, this strategy does mean that you’ll have higher mortgage payments. Only do this if you have plenty of wiggle room in your budget for that extra monthly cost.
Avoid other home owner debt
When you become a homeowner, you’ll quickly realize that there are lot of extra expenses- from home renovations to decorating to buying things like furniture and other big ticket items. Avoid using debt wherever possible for any of these.
“Not all homeowner debt is lumped into your mortgage payment, but it still costs you just the same and will cut down on your cash flow. Save up for big ticket purchases or for renovations if possible and avoid adding to your overall debt load,” says Schwartz.