Croot and Carey paid off their 25-year mortgage in 2002, 10 years earlier than expected. With the freed-up income, they were finally in a position to focus solely on building up their retirement savings—and that’s exactly what they did, continuing on with their regular jobs for three years prior to moving to Port Hope. These days, Phil is retired from his engineering career, while Heidi has transitioned to part-time work. Their only regret is that they didn’t figure out how to do this earlier.

As the couple will attest, paying off your mortgage is the single most important step towards financial independence and a prosperous retirement. Owning a principal residence outright gives you the financial freedom to funnel money that formerly went to your mortgage into your savings or to pursue lifelong dreams like travelling. Don’t forget, too, that mortgage interest adds tens of thousands of dollars to the real cost of a home, so a shorter mortgage slashes the amount you pay in total. Paying off your mortgage as quickly as possible should therefore be an important goal for any homeowner—whether you’re halfway through the process, just starting out, or even just contemplating buying a house.

If all the above advantages sound compelling, bear in mind that sacrifices will have to be made. “Paying off the mortgage early wasn’t easy,” Croot says. “We had friends who were going out twice a week for dinner and we didn’t do that.” Without question, tightening up your spending is a key tactic for freeing yourself from mortgage debt, but there are also many other strategies that won’t cost you a dime and can save you thousands. Allow us to let you in on the secrets every prospective and current home owner should know.

Polish off your credit score

If you’ve always paid off your debt in a timely manner, your credit score should be fine. But that doesn’t mean you couldn’t have any unexpected surprises, says Toronto fee-only adviser Jason Heath. He cites the example of a client who was buying a condo and was unaware she had $300 outstanding on a Holt Renfrew card. It took her more than three months to repair her credit rating. While that single infraction wouldn’t have been enough for a bank to deny her a mortgage, it could have resulted in a significant jump in her interest rate.

Moshe Milevsky, an author and finance professor at the Schulich School of Business, says people applying for mortgages should pull their credit scores six to 12 months in advance to make sure there’s nothing wrong. “Get your credit report from all the bureaus,” he advises. Also, try to avoid job volatility for at least six months before applying, as this will make your income appear more stable in the eyes of the banks.

Maximize your down payment

While all home mortgages in Canada require a minimum 5% down payment, paying 20% upfront is one of the single biggest cost-cutting measures a borrower can make. Not only will you owe the bank less principal and interest, but critically you will avoid having to pay Canada Mortgage and Housing Corporation (CMHC) insurance premiums that would add thousands of dollars to your mortgage. CMHC mortgage loan insurance doesn’t protect you—it protects your bank if you default. It’s mandatory in Canada for down payments from 5% to 19.99%. (This insurance can also be purchased through Genworth, a private company.) And the cost is substantial—for instance, if you only put a 5% down payment on a $350,000 home, the CMHC premium will be a hefty $9,144.

If you can’t afford an initial payment of 20%, putting down 10% to 15% will still reap major financial savings. “Those are the insurer breakpoints where insurance fees drop,” says Vancouver mortgage broker Rob McLister. “For example, putting down 10% instead of 9.9% saves you 0.75 percentage points off your entire mortgage amount. That’s $1,500 on a $200,000 mortgage.” For those looking to boost their down payments, the Home Buyers’ Plan is a popular option; it lets you withdraw up to $25,000 in a calendar year from an RRSP to put toward a home you are buying (or building).

One of the best strategies for avoiding mortgage default insurance premiums—and to get into the market sooner—is to buy a house that fits your budget. “Sometimes you can’t move into your dream house as quickly as you want,” says Jason Heath. “But with a smaller property you’re that much closer to having that 20% down payment, not to mention money left over.” That was the strategy Anne Langevin, a 43-year-old retail clerk, and her husband Rene, a 42-year-old finance manager, followed back in 1998 when they bought a $210,000 suburban starter home in Mississauga, Ont. “It was just the two of us and the house was reasonable. It wasn’t a huge mansion,” says Anne.

Get the best rate

Prospective home buyers often stick with their own financial institutions when applying for mortgages, but it pays to shop around. Credit unions and non-direct lenders, known as monolenders, will offer a discount—sometimes just a fraction of a percentage point—that will save you money on interest payments compared to larger lenders. For those worried about getting mortgages from more obscure companies, Heath says to remember you’re borrowing, not investing. “The fact it’s a more obscure institution makes it no riskier than a bank. You’ve already got the money.”

Heath recommends scanning the major rate comparison websites—such as Ratesupermarket.ca or Ratehub.ca—to get a general sense of where the market is. Also be sure to ask your lending institution if the interest on your mortgage will be compounded monthly or semi-annually. The less often the interest is compounded the better—semi-annual compounding could save you hundreds of dollars or more in interest.

If you’re not comfortable negotiating on your own, a mortgage broker will do that on your behalf for free. Mortgage brokers are paid a finder’s fee by the lender. There’s no charge for a pre-approval and no obligation. “We’ve always used mortgage brokers,” says Anne Langevin. “When you go into a bank you have to haggle for a lower rate. My husband and I don’t like to haggle.”

Normally variable-rate mortgages are a better deal than fixed-rate mortgages because you pay a premium for the security of locking into a rate. However, that doesn’t appear to be the case right now, says Jason Heath. “Fixed and variable rates have almost been identical for five years—2.9% on fixed and 2.8% on variable,” he says. “So, arguably the cost of locking into a fixed-rate mortgage is so cheap that it’s more compelling to do so.”

Watch the fine print

Securing a low interest rate can shave years off a mortgage, but equally important are the terms of your contract. “Not looking into that and just going by the rate can get you into trouble,” says Calgary mortgage broker Joe Jacobs. For instance, when the Bank of Montreal was the first major lender to drop its five-year lending rate to 2.99% early in 2012, you couldn’t break the mortgage to switch to another lender. “That’s a fairly significant thing,” says Jacobs, “but a lot of clients didn’t know what that was.”

This is where experienced mortgage brokers can make a difference, he says. They will review any restrictions or potential penalties on the mortgage that may end up costing you far more than a small rate difference.

Prepayment privileges also go a long way toward helping pay off a mortgage faster. It may seem unfair, but most mortgages limit your ability to pay off your debt early because the financial institutions will lose the interest revenue that they were expecting. Most mortgages allow borrowers to make annual prepayments of 10% to 20% of principal, without extra fees, with the increased payment amount going directly towards the principal. Just be sure to inquire about the details, as some “no frills” mortgages may prohibit this option. Also be aware that payout penalties—the fees you’ll pay if you break your mortgage early—can sometimes cost tens of thousands of dollars.

The right amortization

Those who want to pay off their mortgages sooner should choose the shortest possible amortization within their financial means, or, as Moshe Milevsky, puts its: “as short as possible until it hurts.” While the typical amortization period is 25 years, it can be as short as 15 years, or as long as 35 years (if you made a down payment of 20% or more on your home). Forcing yourself to pay off the mortgage in fewer years translates into lower interest costs and substantial savings. The major hitch, however, is that your regular payments will be much higher.

To give yourself the best of both worlds, Vancouver mortgage broker Mark Fidgett advises going with a longer amortization, but setting your regular payments higher with prepayment privileges. In effect, you could be paying off a 20-year mortgage in 10 years, but you’d also have the flexibility to switch back to smaller installments if you were to experience any changes like a job loss or the birth of a child. “That way, you’re in control,” says Fidgett. Your payment schedule can also make a big difference. Payments can be made every month, twice a month, every two weeks or weekly. Going with one of the latter two options is preferable because it will accelerate your payments by an additional two weeks every year. For instance, over a 25-year amortization period on a $350,000 home with a 3% rate you would save more than $18,000 in interest by going with an accelerated biweekly plan.

Prioritize your mortgage

Maximizing your down payment and procuring the best rate and terms possible will save you thousands of dollars. But extra payments will have the biggest impact. To do that, you’ll have to make some tough decisions about your spending and cut out non-essential items, such as family vacations and other luxuries. You may need to stop saving for retirement, depending how serious you are about being free of your mortgage. While that may seem extreme, those who free up their home debt quickly can easily make up for lost investment time later on, provided they funnel cash that previously went to their mortgage into retirement savings.

Remember that paying off debt has the same impact as saving, as both add to your net worth. However, most people’s retirement money is in investments that may or may not gain value, while money paid against the mortgage gives you a guaranteed return by saving you interest.

Nicholas Hui, an auto parts salesman, and his wife Kathy Chan, a law firm marketing manager, followed this strategy, paying off their $434,000 mortgage on their Markham, Ont. home in six years. “We didn’t have extravagant lifestyles,” he says. “We didn’t go to Europe or anything.” Instead, they opted for an open mortgage, which has a higher interest rate but no penalty for making extra payments. Several years of sacrifice and a few $20,000 and $30,000 lump-sum payments helped them meet their goal. These days, they’re quickly catching up on their RRSPs and have started RESPs for their young children—all without the burden of a large mortgage hanging over their heads.

The real key to paying off your home faster is to make sure you get a mortgage that allows you to make extra payments throughout the year and take advantage of them. “That’s the most likely way you’re going to pay off your mortgage a bit quicker,” says Heath. He says borrowers are less likely to make extra payments if they are only allowed to make a single lump-sum contribution on an anniversary date.

Another strategy for paying off your mortgage faster is to increase your regular payments to the maximum allowed without penalty, typically 10% to 15%. Some mortgage contracts also allow borrowers to double their payments. That was one of the strategies Anne and Rene Langevin used to pay off their $210,000 home in less than five years. In addition to making prepayments of 15% to 20% annually, says Anne, “we doubled-up payments whenever we could.”

Paying off your mortgage early isn’t easy, but you’ll thank yourself for it later on. Back in Port Hope, Heidi Croot and Phil Carey are living proof. These days, the couple enjoy living debt-free in their country home, which sits on seven acres of lush property in Ontario’s Northumberland County Forest. Although the two have socked away a nice chunk of money for retirement, Croot still enjoys working part-time to earn additional income—but at a far more relaxed pace. Budget vacations have long since been done away with, too. “We take more expensive ones now,” says Croot. “Africa is on the horizon. We did Maui last November.” All the sacrifices the couple made years ago to free themselves of mortgage debt have paid off. As Croot puts it, “It’s good to be alive and in the driver’s seat.”

The couple, who were only in their late 20s at the time, were establishing good careers for themselves and decent money was starting to come in. “The plan was to be as aggressive as possible to pay off the mortgage in 10 years,” says Levett. They succeeded, paying it off in just six years.

Levett and Elman did it by spending every dollar carefully. “We didn’t go on any extravagant trips or buy expensive cars,” says Levett. “One hundred per cent of the tax refund went to the mortgage.”

One of their biggest motivations was that they wanted to do renovations but had agreed to wait until their debt was paid off, says Levett. “The first one we did after paying off our mortgage was digging out and extending the length of our basement. And after a few years we gutted our kitchen.”

Want to pay off your mortgage early too? Read “Crush your mortgage” for tips on how to get a head start.

Such good habits served the couple well when they received cash gifts the year they were married. “We kept the money. We didn’t blow it,” says Anne. Along with those funds, and other money they had diligently saved, the Langevins—who now live in Oakville, Ont.—were able to put a $70,000 down payment on a $210,000 Toronto-area home back in 1998.

Before the purchase, while the couple was still living in an apartment, they never bought anything that wouldn’t be appropriate for a full-sized home. “Everything we purchased was always intended for a house,” says Anne.

They also bought only new items for their house with cash. “When we first moved in, we took turns sitting on the floor for six weeks because we had only one La-Z-Boy recliner. Then when we’d saved enough money, we bought a couch. We weren’t killing ourselves with credit-card bills.”

Want to pay off your mortgage early too? Read “Crush your mortgage” for tips on how to get a head start.

As fervent Toronto Raptors fans, they hatched a plan that allowed them to satisfy their itch for live basketball for free. They would purchase season tickets, which can provide up to 37% savings over regular game ticket prices, pick the games they wanted to attend on weekends, and then sell the remaining tickets at face value to break even. “It’s perfectly legal,” Nicholas points out.

The couple was also shrewd when it came to vacations. While European getaways were not within their budget, the Vancouver natives would go home annually, combining some downtime with family visits. And, of course, Nicholas says, staying with Mom and Dad is always free.

The couple’s main reason for paying off their home early was financial flexibility. As the parents of three young children, the couple wanted to start saving for their future schooling costs.

Want to pay off your mortgage early too? Read “Crush your mortgage” for tips on how to get a head start.

Bao Lam, a 43-year-old certified financial planner in Waterloo, Ont., believes in second opinions. He asked MoneySense for our thoughts on whether he’s on track to leave his high-paying—but stressful—job at age 47. That’s when he hopes to sell his business for $900,000 and invest that money until his retirement at 65. Bao’s 39-year-old wife Jeannette, who is currently his assistant, would stop working. “Doctors need a second opinion about their own health,” says Lam. “It’s no different with financial advisers.”

The Lams, who have a teenage son, have assets including a $325,000 home and $222,000 in registered and non-registered investments. They will be cashing in Jeannette’s $27,000 GIC and putting it towards their $118,000 line of credit later this year. The couple, who gross $180,000 per year, hope to have all their debts (including a $128,000 mortgage), paid off before retiring.

When they sell their business, the Lams will receive $90,000 gross per year for 10 years, with payments made monthly. “If I invest that money and don’t touch it until age 65, will that be enough to guarantee us a comfortable retirement?” asks Bao. “I plan to work at a salary job making $60,000 gross or so from age 47 until age 65—just enough to live on comfortably without saving a penny more. I’m not counting on CPP or OAS so the funds will have to come completely from my portfolio.”

The verdict

According to Heather Franklin, a fee-only adviser in Toronto, the Lams won’t be able to meet their targets. Selling Bao’s business sounds appealing, but the entire $900,000 won’t be available for investment until Bao is 57. At an annualized growth rate of 5%, the Lams should have $1.2 million at age 65. That sounds like a lot, but since the Lams aren’t counting on CPP and OAS—a pessimistic viewpoint, given that CPP is well funded—it’s not enough. Franklin says Bao should stay at his current job until 51 so he can save another $200,000 before he sells his business. “This will let him bulk up his savings and cushion him against any setbacks in his investments,” she says. “With all of us living longer and longer, he needs a minimum $1.4 million at 65 to ensure the portfolio takes him and his wife to age 95.”

Rui Torrao’s 10% cap rate target is very difficult to find these days: a recent analysis by Boardwalk REIT found cap rates for high-quality large apartment buildings ranged from 3.75% to 4.75% in Vancouver and 5.75% to 6.75% in southwest Ontario. In this hypothetical example, we’ve assumed you put 50% down on a property valued at $300,000. We’ve also assumed the mortgage interest rate is 3.5%, amortized over 25 years.

—S.M., Winnipeg

A: Unlike married couples, common-law spouses don’t have an automatic right to division of property. “In most cases, each party is entitled only to what is in his or her name, although our courts are adopting a more flexible approach to property claims,” says Valois Ambrosino, a matrimonial lawyer with Gardiner Roberts LLP in Toronto. But this doesn’t apply in Quebec, where common-law relationships are not recognized by the law. Nor does it apply in British Columbia, where recently-passed legislation requires common-law partners to evenly split all assets acquired during the relationship. For spousal support, a separated common-law spouse will have the same claim as a married spouse, in every province, except Quebec.

Rocco, his wife Catalina, and their three children—Peter, now 24, Salina, 18, and Paolo, 15—emigrated from Uruguay nine years ago with only $20,000 to their name. (We’ve changed names to protect privacy.) They decided to leave their native land after enduring two years of financial hardship. “In 2002, there was a huge economic crisis in Uruguay,” says Catalina, 47, an accountant. “The currency lost over one-third of its value overnight and it was catastrophic for us. We lost all our savings.”

Today the Medinas are slowly rebuilding their lives. They became Canadian citizens five years ago and bought a three-bedroom home in a middle-class suburb of Montreal. After struggling with several low-paying, dead-end jobs the family now has an annual household income of $145,000 and an annual surplus of about $36,000 after their taxes and monthly expenses have been looked after. That’s the good news.

Unfortunately, they have virtually no savings and their assets are minuscule. They have a modest $250,000 home with a mortgage of $235,000 at 2.5%. Their RRSPs amount to just $5,000, and they need to pay back $11,000 they borrowed in 2009 through the RRSP Home Buyers’ Plan. The family shares a Toyota Corolla worth $15,000 and still has $10,000 left on the car loan. All told, their net worth is just $25,000. “It’s embarrassing,” says Rocco.

The Medinas have three key goals. The first is to pay off their mortgage before Rocco is 65. The couple would also like to save enough money to give them an after-tax retirement income of $40,000. “I have a small $300 a month pension that will come from Uruguay when I’m 65, but nothing more than that,” says Rocco.

Finally, they want to help Salina and Paolo pay for four years of post-secondary education. Peter graduated last year and the couple is thankful he has found a job he loves in video game design. “He’s making $47,000 a year and is on his own now,” says Rocco. “He loves his job and leads an active social life. We’re so happy for him.” The Medinas want to provide an eduction for their other two children to help them get good jobs, too.

While they have clear goals, the Medinas have no idea how to achieve them. “We came to Canada because we wanted to start fresh,” says Rocco. “We knew it had a solid economy with a society that reflected our values. What we need now is a plan.”

The Medinas were raised in middle-class families in Uruguay, and both attended university. They married in 1986. “From the start, I loved everything about Catalina,” says Rocco. “She’s smart, beautiful and very funny. Who could ask for more?”

University is free in Uruguay, but it’s extremely competitive. “It’s easy to get in, but staying in is another matter,” says Rocco. “With a starting class of 500 kids in my engineering program, only 40 made it to graduation. The filtering process is insane.”

The Medinas settled in Montevideo, Uruguay’s capital, where their children were born. Rocco and Catalina had well-paid jobs, and in 1995 bought a townhouse for $80,000. Their only savings strategy was to pay down the mortgage, and when the 2002 banking crisis shocked the country their home equity evaporated. “The interest rate rose to 18% on the $45,000 mortgage,” says Rocco. “The mortgage was in U.S. dollars, but my salary was paid in pesos, which were worth next to nothing.” There was a run on the banks from people desperate to withdraw their money.

“Both Catalina and I were eventually laid off from our jobs because our employers could no longer pay our salaries,” says Rocco, who had worked with the same engineering firm for 17 years. “Our debt ballooned and our household income went to zero. I was 40 and we had three small kids. We decided to leave.”

The Medinas tried to emigrate to Australia but were turned down. Their second choice was Canada, and they were accepted in 2004. Before they left, their house in Uruguay was auctioned off for a paltry $28,000. That money helped them get settled in Montreal. “The first six months were really scary,” says Catalina. “We lived on the little bit of savings we had.”

There were other challenges, too. “We really knew nothing about Montreal, except that one of its main languages was French,” says Rocco. “We could speak Italian and Spanish, so we figured it would be easy for the whole family to adapt, but the accents were so tough!”

Getting good jobs in Canada also proved difficult. “When we arrived it was hard to find work at the level we were used to back home,” says Rocco. “Catalina initially found work at a local bakery, while my first job was working at a factory installing components in heavy machinery. It was depressing work.”

Rocco and Catalina slowly worked their way back up the salary scale. By 2009 they were even able to borrow some money from Rocco’s RRSP and put $20,000 down on a three-bedroom home in a middle-class suburb. “It’s just a modest little house but we love it,” says Rocco.

The family loves to swim, sail and ski. They also enjoy an active social life with the local South American social club. “We thought we would hate winter, but now we can’t get enough of the snow,” says Rocco. “It just goes to show, you never know what life has in store for you, and sometimes the surprises can be wonderful.”

The Medinas are grateful for how far they have come since arriving in Canada with almost nothing. But they feel they’re coming up short compared with their Montreal friends. “They have paid off their homes already and saved thousands for retirement,” says Catalina. “Have we been left behind?”

What the experts say

That MoneySense article spurred the Medinas to realize they need to make some changes if they’re going to enjoy a comfortable retirement. “That’s fantastic,” says Annie Kvick, a fee-only planner with Money Coaches Canada in North Vancouver. “It’s never too late to start saving for retirement.”

Al Feth, a fee-only financial planner in Waterloo, Ont., agrees. “The Medinas went through a true financial disaster, and they certainly had a difficult few years,” he says. “But they’ve proven themselves to be truly self-reliant. Now that they have $36,000 of income available for investing, they can accomplish a lot in a few short years.” Here’s what they need to do.

Start an RESP for Paolo. The Medinas want to give $6,000 a year to each of their two youngest children to help fund their post-secondary education. They should start by immediately opening a Registered Education Savings Plan (RESP) for Paolo.

When you contribute to an RESP, you’re eligible for a 20% top-up in the form of the Canada Education Savings Grant (CESG). But special rules apply to accounts opened when a child reaches the mid-teens, Kvick explains. “The Medinas need to start this year. The rule is you have to put in a minimum of $2,000 by the end of the calendar year your child turns 15 or you’re not eligible for the CESG at age 16 and 17.”

Kvick says if the couple makes RESP contributions of at least $5,000 in 2013 and in each of the next two years, they will get $1,000 in CESG annually. “That’s $3,000 in free money.” At the end of those three years they will have at least $18,000 in the RESP, plus whatever return they earn on investments. That won’t be enough to fund Paolo’s entire education, but it’s a good start.

Salina no longer qualifies for grant money, so there is no point opening an RESP for her. The Medinas should simply give her the $6,000 annually for the next four years to help finance her education. Some of this could be tax-sheltered in a TFSA.

Pay off their debt. This year the couple should pay off their $11,000 RRSP Home Buyers’ Plan loan as well as the $10,000 remaining on their car loan. “That will save them $3,600 a year in car payments, bringing the amount they have available for investing to $40,000 going forward,” says Feth.

Starting next year, the Medinas should also put an extra $10,000 towards their mortgage annually. “If they do this,” says Barb Garbens, a fee-only financial planner in Toronto, “their house will be paid off by 2026—just before retirement.”

Use Tax-Free Savings Accounts. The couple should start using TFSAs—not RRSPs—for retirement savings. When you draw money from an RRSP in retirement you need to claim it as income, but that’s not true of TFSA withdrawals. This flexibility will help keep the Medinas’ annual retirement income low enough to qualify for income-tested benefits such as the Guaranteed Income Supplement (GIS). It will also help them avoid OAS clawbacks.

Beginning in 2014, the Medinas should contribute about $11,000 each to their TFSAs until they are maxed out by 2017 (after which they would put in the annual $5,500 each).

Commit to a simple investment strategy. The Medinas are novice investors who don’t have the time or inclination to manage their money. They are also starting with a modest sum, so they’re not likely to find an adviser who is willing to help them.

That’s why they need a hassle-free strategy that will give them the broad diversification and investment returns they need to retire comfortably.

An ideal solution would be to open an account with ING Direct (ingdirect.ca) and use their Streetwise Portfolios. These one-stop Couch Potato portfolios are well-suited to first-time investors like the Medinas. Although the fees are relatively high for index funds (1.07%), there are no account minimums, no other fees or commissions, no need to rebalance, and no need to work with a discount brokerage.

The Streetwise Portfolios are available in four versions ranging from 25% to 100% equities. For their TFSAs, the Medinas should use the Streetwise Balanced Portfolio, which invests 40% in Canadian bonds, 20% in Canadian stocks, 20% in U.S. stocks and 20% in international stocks. This mix is conservative enough to use even in late retirement, but they can dial down risk by adding GICs as they get older.

Open a non-registered account in 2018. In four years the Medinas will be largely done paying for their children’s education. Then they could save more money, even after maxing out annual TFSA contributions until age 65. They should keep paying down an extra $10,000 a year on the mortgage until it’s gone. The remaining $20,000 should be put into non-registered accounts and invested like their TFSAs. (By now they’ll need an adviser to help.)

If they follow this plan, they will have over $400,000 in TFSAs and other investments by 65, assuming a 5% annual return. Add in government benefits and they should be fine. “With their work experience, I estimate they will receive a combined $1,000 a month from CPP, a combined $700 a month from OAS and $300 a month from Rocco’s Uruguay pension,” says Kvick. “Add in a combined $8,400 a year from the Guaranteed Income Supplement (GIS) and their annual retirement income will be $32,400. If they need a few thousand dollars more, they can draw from their savings with no fear of losing their GIS. Because they will have a paid-off house and very modest expenses, life will be just fine.”

Julie Cazzin is an award-winning business journalist and personal finance writer based in Toronto.