I received a few e-mails requesting those details so, as promised, here is the data:

February 29, 2012 Sales:
TransCanada Pipeline – $43.02
Sun Life Financial – $$21.70
Proctor and Gamble (USD) – $67.70

March 1, 2012 Sales:
Crescent Point Energy – $46.98
Fortis – $32.70
Davis and Henderson – $17.63
Power Corp. – $25.50
ScotiaBank – $55.59
Bonterra Energy – $55.59 

March 2, 2012 Sale:
Annaly Capital (USD) - $16.50

 All securities traded in Canadian Dollars on the Toronto Stock Exchange unless otherwise noted.

I am currently in the process of building the portfolio back up and am sitting in mostly cash at the moment – which is fortunate for me as the market has backed off some from when I liquidated this account in early March.

How Does It Feel?

In Joe’s comment, he offered up that I had missed a reason to pay off my mortgage and that is the peace of mind that it offers.

While he is correct that it does offer peace of mind knowing that as long as I pay my property taxes, my house will never be taken away from me, it honestly doesn’t ‘feel’ any different.

It isn’t that I expected to feel much different without a mortgage payment every month, but for some reason I expected to feel something. Maybe I expected to feel relief, or satisfaction?.  In any event, I do not regret the decision whatsoever, but the shift of stress now seems to have planted itself squarely on the shoulders of replenishing the investment and savings account(s).

What To Do With That Extra Cash Flow?

Because the majority of the cash that was used to pay the mortgage off came from a brokerage account, the former mortgage payment is now being directed to that account to replenish that capital.  I have automatic transfers set up and am currently treating this as a ‘bill’ that required being paid each month just like the mortgage did.

Treating the transfer of funds to my investment account as a bill is likely part of the reason that it doesn’t feel any different not having a mortgage.  I set this up on purpose to ensure that I do not fall victim to lifestyle inflation . I certainly don’t need to frivolously spend that extra cash simply because I don’t have a mortgage payment any longer.

 Since I already max out my retirement accounts, have no other debt and an emergency fund, the replenishment of the brokerage account will be the top priority. Some of those funds will also be earmarked for a few things that have been neglected in the quest to pay off the mortgage. The earmarked funds will be directed to the following categories:

1.) Vehicle Replacement Fund – Although both 2003 Hondas are still serving us well, replacing one of the vehicles in the next few years is likely inevitable.
Disclaimer – I absolutely hate buying vehicles. I believe that they are the worst use of money and generally cause people more financial troubles than housing debt. More on this in an upcoming article.

2.) Home Maintenance – While major repairs such as a new furnace or air conditioner would be covered by the Emergency Fund, a more general home maintenance fund will take care of deferred maintenance such as new paint, upgraded finishes, shingles etc. A home should maintain or increase its value over the long term, especially if it is well maintained. And, a well maintained home is more efficient and comfortable to live in.

3.) Vacation Fund - It was important to my family not to sacrifice too much in the quest to become completely debt free, so we did take vacations every second year. However, with the additional cash flow from paying off the mortgage, some of the funds will be earmarked to increased vacation time. This doesn’t mean frequent air travel and/or all inclusive luxury vacations, but simply more time with friends and family. Spending from this fund could include local camping, visiting friends and/or family in their homes, or destination vacation travel. The idea is to invest some money and time in fostering relationships with others – including the immediate family. Often, being away from the distractions of home life allows people to focus on just being together.

 As you can see, there are plenty of places to direct the additional cash flow from what used to be the mortgage payment.   Due to all of these different competing priorities, it doesn’t feel like there is extra money to go around. That said, regardless of which account the funds get transferred to now, the net result is the accumulation liquid assets.

Did I miss anything that you feel is important?  What is the first goal that you will focus on when the mortgage is paid off?

Because I was paying just 2.5% on the mortgage proceeds, it was a very difficult decision to sell off some of my equity holdings and liquidate some of my savings to pay the mortgage out completely.

At the beginning of March 2012, I started selling off some stocks and finally paid out my mortgage on March 16, 2012.

Why Paying Off The Mortgage Was Right For Me

The one constant that we have in personal finance is that everyone’s situation is different. That is, in effect, what makes personal finance “personal” after all.

In my particular situation there were a few things that seemed to align, leading me to the conclusion that paying the mortgage off completely was the right thing to do.

1.) Variable Rate Mortgage

While I was paying just 2.5% on my mortgage, it was a variable rate mortgage (Prime – 0.50%). This means that the rate could change in the future, and at this point, rates really have nowhere to go but up!

That said, I had paid down the mortgage enough that even a sharp increase in the rate wouldn’t make or break my ability to service the debt. However, any increase interest rates would result in me sending more money to the bank – I think we can agree that sending more money out is not the ideal situation.

2.) Cash Flow Analysis

Cash flow is the ticket to play the game!

You may have heard me say that before, but it is absolutely true. Regardless of your balance sheet, if you are not generating enough cash to service your expenses (liabilities) then you are drowning.

In this case, it wasn’t that I was not able to service my expenses, but the fact that the amount owing on my mortgage balance required more in cash out-flow each month than the corresponding savings/investments were producing. Put another way, my monthly mortgage payment was higher than my average monthly income stream from my savings and equity holdings.

3.) Emergency Fund

As you know, it is very important to have an Emergency fund. Many financial gurus suggest 3-6 months of living expenses.  I am more conservative than that and preferred to wait until I had an emergency fund of 12 months of living expenses.

What is important to note is that my mortgage payment was my largest monthly expense. Once I had amassed enough to pay off the mortgage and still have 12 months of living expenses covered (not including the mortgage payment, obviously) I felt I would have enough liquid cash available for emergencies to pay the mortgage off completely.

4.) Stock Market Rally

Over the course of the previous several months, the stock market had been rallying without any signs of retraction. Many of my holdings had been reaching 52 week highs or all-time highs and the metrics did not seem to justify that kind of steep advance in price.  In addition, any rally of several months without a pause or retraction is generally unsustainable.

Note: I am far from a successful technical analyst or market trader, but the length of the rally and the fact that I was finding it hard to justifying adding to existing positions or entering in to new ones, led me to believe that the market may be over extended and it might be a good time to cash out and pay off the mortgage.

As you can see, it wasn’t just one factor, but a number of factors that came together at the same time that led me to believe that paying off my mortgage was the right decision.

It should also be noted that none of the equities or savings that I liquidated to pay off the mortgage came from retirement accounts or my retirement pension/employee savings accounts.  It is of the utmost importance that those accounts stay in tact.

As with all decisions related to personal finance, everyone’s situation is unique. This post is not advice for you to pay off your mortgage, or follow the same path that I took. The above set of circumstances just happened to come together for me  and led me to the decision to pay off my mortgage.

If there is enough interest, I will provide a follow up post with the dates, prices and names of the stocks that were sold to pay off my mortgage.

If you have paid off your mortgage, or are planning to in the near future, I would love to hear your story in the comments!

Cheers!

What are Life Leases?

In basic terms, a life lease is a form of prepaid rental housing.  The owner of a life lease purchases the right to occupy a unit and use the common facilities for as long as the lease remains in place. The length of the lease term could be for life or for a fixed number of years. Depending on the contract structure and jurisdiction, as we will learn later in the article, a life lease is a legal agreement that usually lies somewhere between renting and owning a residential premises.

Depending on the legislative environment, the occupant of a life lease unit may be referred to as the purchaser, lessee or tenant.  The developer or owner of the life lease units may be referred to as the sponsor, lessor or landlord. A life lease is not equivalent to the ownership of a condominium or strata unit even if the life lease project has been registered with a condominium or strata plan.

Typically, life lease projects are targeted at those over 55 and may also be targeted at specific ethnic or religious groups.

A life lease may, depending on the terms of the lease (see below) be sold, either to a third party or to the lessor. Construction of new life lease projects may be undertaken by for-profit or not-for-profit entities.  Where a for-profit entity develops a life lease project, ownership of the project is generally transferred to a not-for profit entity after completion.

Few jurisdictions have legislation covering life lease projects.  In most jurisdictions, the life lease is simply a contractual arrangement between the lessor (generally a not for profit entity) and the lessee.

Advantages of Life Leases

• Most commonly provides accommodation for seniors in a community of seniors.  Amenities are generally geared to this target market.
• May allow lessees to obtain “ownership” of a property at below market levels.  This can occur because land may be donated or sold to the sponsor at below market rates or the sponsor may not earn the usual developer’s profit on the project.  New construction may not always provide this opportunity as sponsors are often inexperienced and profits given up by a not for profit developer may be partially or wholly offset by increased consultant costs.
• Can allow individuals on fixed incomes to tailor level of rents to their incomes.
• Generally not subject to the will of a condominium or strata council.
• Life leases may avoid land transfer tax in some jurisdictions where this applies.
• Redemptions by, or sales back to, the lessor (which may have a waiting list) may reduce market risk.

Disadvantages of Life Leases

• Units may not be freely marketable (e.g. lease may require units to be sold back to the lessor at predetermined prices).
• Lease transfer restrictions (such as a requirement for new lessees to be “approved”) may depress resale prices.
• Title is held by the lessor and registration of a lease on title may or may not be possible (in jurisdictions with land transfer tax, lease registration generally triggers tax payment).
• New construction is generally not covered by the usual new home warranty program.  As such, deposits are often used to fund development costs and are uninsured (i.e. the lessee risks losing the deposit if the development is unsuccessful).
• Lessee does not have input into operations through a condominium or strata council.
• Lessee generally does not have registered title to his/her unit.
• It may be difficult to obtain residential mortgage financing of a life lease unit.
• Lessor may not have liquid assets to fund redemptions.
• Lessees who wish to vacate may need to find their own substitute tenant.

The Life Lease Ownership Process

• Applicable terms and conditions of life leases vary widely but the general features are similar.  Life leases should not be confused with ownership of a dwelling unit on leased land.
• The lessee of a life lease unit pays a sum of money to the lessor.  The amount of money paid may be the full cost of the unit leased or it may be a lesser amount.  If the lessee pays the full cost of the unit, then (subject to the terms of the lease), the lessee will generally only pay a monthly maintenance fee (roughly equivalent to condominium or strata fees).  If the amount paid by the lessee is less than the full cost of the unit, the lessee will also pay a prorated rent (e.g. if the cost of a unit is $200,000 and the lessee pays $100,000 up front, his/her rental payment will be approximately equivalent to a payment on a $100,000 mortgage plus the monthly maintenance fee)
• Most not for profit lessors of new life lease projects expect full payment in order to cover construction costs.
• The lessee does not generally obtain title to the unit.  Some leases do not permit the registration of the lease but, where this is permitted, registration of the lease generally triggers the payment of land transfer tax.

Types of Life Leases

• Zero balance lease/life estate: the purchaser pays in advance for the right to occupy a unit for the duration of his/her lifetime.  No redemption value exists (i.e. the lessee or the lessee’s estate cannot sell the leasehold interest).
• Declining balance redemption value: the redemption value of the unit is fixed and reduces on a pro-rata basis over a fixed term until a redemption value of Zero Dollars is reached.  Generally, if the lessee moves or dies while there is a redemption value, the unit is returned to the lessor and the lessee (or estate) has a claim for the redemption value.
• Fixed value: the redemption value is constant for the life of the lease.
• Indexed redemption value: the redemption value is based on an initial fixed value with periodic indexing to an inflation-sensitive index.
• Future value:  probably the most common type of life lease.  The lease may be sold at market value with the lessor usually taking an administration fee to facilitate transfer of the unit.  The tenant may bear the market risk if the value of the life lease unit has fallen.

Who Develops Life Lease Properties?

• Life lease project sponsors are often religious or charitable foundations.  While these may have been successful in raising the initial funds for the project, they may have limited development experience and they may lack the ability to fund cost overruns.
• A full review of the history, resources and capacity of the developer should be undertaken by the buyer.
• Life lease projects are often targeted at the constituencies of the charitable or religious foundation developers.  It is essential, therefore, to ensure that the life lease agreements are non-discriminatory.

As we can see, the concept of the life lease is very complex. Because each development may have a different set of lease parameters, and many jurisdictions have no legislation governing the parameters of life lease developments, it is essential to get an informed legal opinion on the specific development to type of life lease contract that you are considering.

1.)    The interest rate charged on the mortgage

2.)    The amortization, or length, of the mortgage.

When it comes to lenders or banks deciding upon the amount and rate of the mortgage loan, they will certainly look into the financial background of the borrower.

Lenders are typically looking to satisfy themselves of the Three C’s of credit – Including the capacity to repay the loan, along with the credit history and the character of the individual. These factors can be determined initially by looking at the credit score, and secondly by calculating several ratios before the determination of how much credit they can grant to the borrower.

The Real Cost of A Mortgage

When one decides to buy a house, there are several payments that must be paid on time in addition to the actual mortgage payment. These other payments should always be included when we ask ourselves the question ‘How much can I borrow for a mortgage’?

Such additional payments consist of home owners insurance, property tax and home owners association fees. When these are all added to the mortgage payment, they comprise a more realistic cost of home ownership. In addition, add this to your other anticipated monthly expenses and this is one of the ways to estimate how much you can really afford when you apply for a mortgage.

Private Mortgage Insurance – PMI

This might be another expense that could alter how much mortgage we can afford. Private mortgage insurance, also known as PMI; is an additional cost that must be added if you are not able to afford 20% of the homes price paid as a down payment. In such a case, you will need to purchase private mortgage insurance in order to protect the bank’s investment in your high ratio mortgage.

Front-End Ratio

The front and ratio is the comparison between the monthly mortgage cost-which includes insurance, real estate taxes, private monthly insurance with your total monthly income. Generally mortgage costs are given to make up between 26% to 29% of your monthly income, in this case your monthly maximum repayment amount would be $840. This is another analysis you can use in answering the How much I can borrow for a mortgage question.

Back-end Ratio

When your total income is compared with your total debt payments, this is called back end ratio. This, more comprehensive, ratio includes credit card debt and college loans, and any other debt you have. It can make a total of up to 33 to 40% of your income.

For example, if your bank sets 35% as the limit, and you have a monthly income of $3000. In this case your total debt paid in a month would be $1,050. If you pay $400 as a monthly student loan, you would then have a maximum of $650 left from your income which can be used to repay the mortgage loan.

Credit Score

If you have a good credit score, the banks may increase the limit of the above ratio calculations because your history of repayment cements the bank’s faith in your credibility. Once the ration is determined, all the aforementioned characteristics and calculations help both the borrower and lender in deciding how much credit is really affordable for the borrow.

As you can see, answering the question ‘How much can I borrow for a mortgage’ is not as easy as we might think.  There are many variables that lenders take into consideration and we must fully understand those variables in order to determine how much mortgage we can really afford.  It’s just not as easy as some online mortgage calculators would have you believe!

For more information on Mortgages, check out my Mortgage Survival Guide For the First Time Homebuyer!