Reader Case: How Can I Retire Early with Mortgage Debt?

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Guess what? It’s time for another reader case! With all the questions lately about interest rate hikes, banking instability, and spiking mortgage payments, this one is timely:


Hello Millennial Revolution,

We are a couple with no kids who have been dreaming of early retirement, but unfortunately, we only discovered your book last year and are approaching 48 years old. We moved from Brazil to Canada in 2013 and have been working hard to achieve financial independence. However, we made the mistake of buying two properties in Toronto and having a large mortgage with a high-interest rate.

Despite this setback, we are determined to retire early and travel the world, mainly in Asia and South America, starting at age 52.

We have two possible plans and would love your expert opinion:

Plan 1: In 2027, we will sell our properties, pay off the mortgages, and invest in equities. This and our savings should put us in the CAD 2 million range. We believe we could sustain our lifestyle using the 4% rule and future retirement pensions at 65.

Plan 2: In 2027, we will rent out our properties, move to South Asia, and live off our savings until we run out of money. Once our savings are depleted, we will sell the Toronto properties and live off the proceeds plus the retirement pensions at 65.

However, our plans have been complicated by a recent setback. I was just laid off from my job in February 2023, which has cut our income in half until I find another job. This has made us consider retiring now instead of waiting another four years.

We would greatly appreciate your expert advice on our situation. Here are some details about our finances:

·      Gross/net annual family income *still considering two salaries: CAD 221,000 / CAD 171,300

·      Monthly family spending: CAD 9,300 (including annual travelling +  leisure)

·      Debts:

o   Townhouse mortgage (primary residence): Variable interest rate at 5.4%, minimum monthly payment of CAD 2,950, and outstanding balance of CAD 464,968

o   Condo mortgage (rent property): Fixed interest rate at 3.16%, minimum monthly payment of CAD 1,400 (mortgage should be refinanced in May/23) and outstanding balance of CAD 310,000

o   Car loan: Nissan Kicks 2019 – Fixed interest rate 1.9%, minimum monthly payment of CAD 433, and outstanding balance CAD 7,872

·      Fixed assets:

o   Townhouse in Toronto (market value: CAD 950,000, and we could rent it for more than CAD 3K monthly

o   Condo in Toronto (market value: CAD 500,000) we currently rent it for CAD 1,650/month but could easily be rented for 2K due to the location, and it is entirely high-end furnished

o   Condo in Brazil (market value: CAD 100,000) rented for only CAD 290/Monthly

·      Investments and savings:

o   Brazil: CAD 195,445 (stocks and bonds)

o   Canada: CAD 190,244 (stocks and bonds) and CAD 30,000 (cash)

We understand our situation is imperfect, but we are determined to make early retirement a reality. We hope that you’ll be able to help us achieve our goal.

Thank you for your time and consideration.

Retireby52


Yikes! With a variable interest rate of 5.4% on one of their properties, and another one coming up for renewal in 2 months, this doesn’t bode well for this couple.

When interest rates were scraping the floor and housing prices were rising, it was easy to feel optimistic, but as we all know, things could turn on a dime.

When they both had high salaries, there might have been some way to make this situation work, but unfortunately one of them got laid off. And sadly, as high paying jobs go, no matter how much you make, there is no such thing as guaranteed job security.

Can we get them out of this sticky situation?

Let’s summarize their finances:

Income (net):$171,300 / 2 = $85,600/year (after job loss)
Spending:$9,300/month x 12 = $111,600
Debt:$310,000 (Primary) + $464,968 (Condo) + $7872 (Brazilian Property) = $782,840
Liquid Assets:$195,445 (Brazilian Stocks) + $190,244 (Canadian Stocks) + $30,000 (cash) = $415,689
Property:($950,000 + $500,000) x 95% (Canadian Real Estate Commissions) + $100,000 x 94% (Brazilian Real Estate Commissions) =$1,471,500

Right away, we see they’re in trouble. After the job loss, with their net income cut in half to $85,600 and annual spending of $111,600, they are in the red by $26,000 a year, or $2166.67 per month!

They didn’t break down their monthly spending, but I suspect the reason why it’s so high is because of their primary residence. The mortgage alone is $2950. Once you add in property taxes, insurance, maintenance, that cost takes up nearly half of their monthly spending. So right away, we know that they can’t afford to keep doing what they’re doing, unless they find a 2nd job to stop the bleeding.

So what can they do? What moves do they have? Can they even afford to keep the house and still retire? Let’s find out, by…MATHING THAT SHIT UP.

Plan 1: Sell off all real estate and rent

First of all, let’s examine what happens if we liquidate everything and go back to being renters.

If they sold their properties and paid the real estate agent fees of 5% (Canada) and 6% (Brazil) respectively, they would have a net worth of $1,471,500 (Proceeds from sale) – $782,840 (mortgage balance) + $415,689 (liquid assets) = $1,104,349.

They spend $111,600/year, but a big chunk of that is the mortgage and home ownership costs (property taxes, maintenance, insurance, etc). If we break out these ownership costs, we can see that they add a significant amount to the cost of owning a house.

Mortgage:$2950/month
Toronto property taxes (0.611013%)$950,000 x 0.611013% = $5804.62/year or $484/month
Insurance$100/month
Maintenance (1% of property value/year):$950,000 x 1% = $9500/year or $792/month
Total:$4,326/month

So, if they got rid of it, that would save them $4326/month.

Their rental property costs them $1400/month in mortgage, but that also doesn’t include property taxes, condo fees, insurance. If we add that all in, we get…

Mortgage:$1400/month
Toronto property taxes (0.611013%)$500,000 x 0.611013% = $3055.07/year or $255/month
Insurance$50/month
Maintenance (1% of property value/year):$500,000 x 1% = $5000/year or $416.67/month
Total:$2121.67/month

So that means the condo is costing them $2121.67/month, and their renters paying them $1650/month, for a total NEGATIVE cash flow of $471.67/month.

So getting rid of the their primary residence would save them approximately $4326/month and selling the investment condo would save them $471.67/month.

That being said, they would also need to find a place to rent. What if they were to downsize to a small rental? Well, currently, the average rent for a 1 bedroom in Toronto is $2500.

So their new monthly spending would be $9300 (current monthly spend) – $4326 (saved from primary residence) – $471.67 (saved from condo) + $2500 (rent) = $7002.33/month or $84,027.96/year. With their current one person $85,600 after-tax salary, they’d be just above water and able to save $85,600 – $84,027.96 = $1572.04. Their new FI number would be $2,077,500 and their net worth right now is $1,104,349, so if we throw it into a projection, it would take…

YearBalanceSavingsROITotal
11,104,349.001572.0466,260.941,172,181.98
21,172,181.981,572.0470,330.921,244,084.94
31,244,084.941,572.0474,645.101,320,302.08
41,320,302.081,572.0479,218.121,401,092.24
51,401,092.241,572.0484,065.531,486,729.81
61,486,729.811,572.0489,203.791,577,505.64
71,577,505.641,572.0494,650.341,673,728.02
81,673,728.021,572.04100,423.681,775,723.74
91,775,723.741,572.04106,543.421,883,839.21
101,883,839.211,572.04113,030.351,998,441.60
111,998,441.601,572.04119,906.502,119,920.14

So if we do all this, our couple can retire in 11 years. This would mean they’d be 59 instead of 52. Not too bad, but let’s see if we can better.

Plan 2: Rent out the properties, move to SE Asia to reduce expenses

What if they rent out their primary residence, and move to South East Asia to reduce their expenses?

The Retirement “O-X” Visa allows retirees to stay in Thailand up to 10 years if they are at least 50 years old, have a bank deposit of at least 3 million Baht (or $121,000 CAD, $88,000 USD), and buy health insurance coverage of at least 400,000 Baht ($16,000 CAD, $12,000 USD).

They should be able to qualify for this in 2 years, so in the meantime, they could travel through Southeast Asia on tourist visas.

Theoretically, they should easily be able to live on $30,000 CAD/year even with the recent inflation, while eating out and getting massages every other day since we just did this recently.

That being said, if you haven’t lived in Thailand before, I would advise taking a sabbatical from work (if possible) and try living there for 90 days first (you can get a 60 day visa and extend it) to see if you like it. Don’t just automatically assume you’ll be happy living abroad in another country if you’ve never lived there before. Vacations are not the same as long time travel.

To generate $30K/year in passive income, they would need a portfolio size of $750,000, and without selling their properties to unlock the equity, they would only have investible assets of $415,689, which isn’t enough.

They mentioned they want to rent out the properties while they are abroad. Would the cash flow be enough to cover their expenses in Thailand?

Let’s look at our cost ownership table again. Most of the numbers would be the same, but you’d have to add in a property manager to take care of the place while you’re gone. Property managers typically charge 6-8% of the monthly rent. Our readers estimated they’d be able to rent out this property for $4000 a month, so that’s what we’ll use as a conservative estimate.

Mortgage:$2950/month
Toronto property taxes (0.611013%)$950,000 x 0.611013% = $5804.62/year or $484/month
Insurance$100/month
Maintenance (1% of property value/year):$950,000 x 1% = $9500/year or $792/month
Property Manager (8% of rent)$4000 x 8% = $320
Total:$4,646/month

This means that if they were to rent it our for their estimated $4000/month, they’d be bleeding cash every month. Super. Oh, and given that the interest rate is variable, their mortgage will be going up soon, so this bleed will get even…gushier. Eww. That sounded gross.

Now, what about the investment condo?

The condo is being rented out for $1650/month, even though their mortgage is $1400/month and set to increase in 2 months when they refinance. If their mortgage interest rate jumps from 3.16% to 5.5%, their monthly mortgage would increase to $1,831.

Add in insurance, condo fees, etc., this is how much their condo would cost them per month:

Mortgage:$1831/month
Toronto property taxes (0.611013 %):$500,000 x 0.00611013 = $3055/year or $255/month
Insurance$50/month
Condo fees$250-500/month depending on the condo. Optimistically, let’s say $250.
Property Manager fee (6-8% of monthly rent):$2500 x 8% = $132/month
Total:$2,518/month

Their current tenants are paying only $1650, so this property is also bleeding cash.

So far for both properties, they’re already in negative cashflow territory and we haven’t even looked at the Brazillian property being rented out for a measly $290/month.

Under plan 2, unless they manage to rent it out for way higher than they’re getting now, both properties are bleeding cash to the tune of about $1500 a month. This adds $1500 x 12 = $18,000 onto their SE Asia living expenses, bringing it to $48,000, and with their liquid assets of $415,689, they run out of money less than 10 years. They said they want to spend it down until they can collect CPP and OAS (which is our government-run pension plan, similar to Social Security), but that wouldn’t start until age 65, which is 17 years away, so they would run out of money before then. So, plan 2 is a bust.

So, with rising mortgage costs, negative cashflow from their properties, high expenses and the loss of half their income, they are definitely not going to retire by 52.

Conclusion

OK here’s the situation.

If our reader stays where they are now, their single salary isn’t enough to support their massive living expenses. They will bleed money every year until they run out and lose it all.

Going to Thailand doesn’t help. Even renting out the townhouse doesn’t help, unless they convince somebody to rent it out way over market value, all their real estate holdings are still cash flow negative. They’d be bleeding a little slower, but still bleeding.

However, if you sell everything, downside your living expenses and move back to renting, there is hope on the horizon because their living expenses would drop below their salary. They wouldn’t be able to save, but if they take the proceeds of over $1M and invest it carefully, time should eventually rescue them in about 10 years.

Or they need to immediately get a second job.

Is early possible? Yes, but it would take some drastic changed. Meaning, sell all the real estate, and then take an absolute hatchet to their expenses. In order to meet their 52 retirement target, their expenses would need to be cut in half, from $111,600/year to $55,800/year. With one after-tax income of $85,650, this means they could still save $29,850/year. And if get every penny out of equity out of their properties, it would take them:

YearBalanceContributionsROI (6%)Total
1$1,104,349$29,850$66,260.94$1,200,459.94
2$1,200,459.94$29,850$73,818.60$1,304,128.54
3$1,304,128.54$29,850$80,038.71$1,414,017.25

Less than 3 years to reach FI, which means they would be 51 years old, meeting their dreams of retiring by 52. I’m doubtful that they can reduce their expense by that much. Hopefully they can prove me wrong since they don’t have kids to support.

If this analysis seems dire, it’s because it is. Massive fixed spending caused by owning 3 homes, one of which is in another country, insufficient liquid savings, and rising mortgage costs, followed by a job loss? There are no easy fixes to this, but this is the only realistic pathway to retirement I see for this couple. Sell all their property, invest everything they own into passive income-producing assets, CUT half their spending, and then MAYBE in 3 years they might be able to pull it off.

What do you think?  What would you do in their situation?


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22 thoughts on “Reader Case: How Can I Retire Early with Mortgage Debt?”

  1. I agree Retireby52 should sell ALL of their properties immediately and invest in anticipation of retiring outside Canada.

    1) Rental properties

    Based on the analysis, both the Toronto and Brazil condos are losing money. They could try to increase the rents but, based on the results, making money from these properties is clearly not a focus for them. Some people enjoy and are good at managing properties to make income and some folks have other things to do. Respectfully, I think Retireby52 has other things to do. Get out ASAP and put your money into passive income investments.

    2) Home they live in

    While selling this home will allow them to lower their costs, doing so also accelerates their path to a nomadic lifestyle. With the kids out of the house, we recently sold our principal home in Texas since we knew we didn’t want to live there permanently. We are now renting until we finish up work and other commitments this year and then we’ll hit the road. I cannot tell you how much getting rid of the house has allowed us to focus on our future rather than managing our day-to-day. Our home was a psychological “boat anchor”, even before considering the $.

    =====
    That said, before they sell it all, they should think about one more important question: if they decide to come back to Canada or Brazil later in life, are they OK being renters in a smaller town or city that fits their budget? The rents in larger cities will likely continue to rise at a faster rate than smaller places and they may be priced out in places like Toronto and Rio 15 years from now. If they are good with this, sell it all. If not, sell the house, keep the condo in the location you’d likely want to live in (while raising the rent to make a profit), sell the other condo, and work a few more years.

    Good luck to you both!

  2. I think in the short term the laid off person should have 2k in Employment insurance payments to help a little…..maybe save half that per year and add once new employment is found? Sorry for the job loss I hope you get your dream 🙏🏻

  3. Something else to consider:

    “They said they want to spend it down until they can collect CPP and OAS” Their CCP and OAS amounts will be impacted by their temporary or permanent departure from Canada. In fact, they might not even qualify for any OAS as they need to have resided in Canada for at least 20 years after age 18 to be eligible to start receiving OAS abroad.

    Based on what we pay for insurance on an out-of-town property of half the value, I suspect the insurance cost estimate is on the low side.

  4. How about selling the condo and the property in Brazil, using the cash to pay a lump sum into their townhouse, reducing the mortgage and making it cashflow positive when they rent it out? This way it seems like they could have enough to retire in Thailand now, or could save way more until they’re 52?

  5. It doesn’t look good. Cutting expenses in half would require a big change in lifestyle. Going from owing to renting is also a big change. Can they adjust? That’s the biggest question, IMO.
    Try spending much less and see if they can still enjoy life. If not, then it’s probably best to keep working.

  6. “What if they were to downsize to a small rental? Well, currently, the average rent for a 1 bedroom in Toronto is $2500.”

    Sounds like you’re over-estimating the rent, since yourselves (Wanderer/Firecracker) are renting for only $1000 a month in Toronto, if I recall correctly.

    They should be able to do the same. No?

    1. Agree, was confused that they are charging $1650 per month, and think they can charge $2k “ due to the location, and it is entirely high-end furnished”… whereas Wanderer/Firecracker think a basic 1BR is going for $2500/month in Toronto.

      At least one of the numbers doesn’t add up.

      1. $2500 for rent in Toronto is right in the ballpark. Wanderer/FC lived in super cheap rental over 10 years ago, benefiting from rent control. Rents have skyrocketed in Toronto and Vancouver over Covid.

  7. Where are the CRA taxes in all this . The second rental condo will be taxed fully . The CRA will also go after those assets in Brazil with taxes up to 50% on the Brazil condo and stocks.
    OAS, CPP? they’ve only been in Canada since 2013 and will qualify for hardly any which will also be taxed.
    So life’s not easy and FIRE. Get back to work until aged 65 as you’ve got a long road ahead

  8. A serious case of KISS is needed here. Keep it simple. Sell the properties. Invest the equity. Rent. Get back that double income, cut spending and save and invest aggressively. Retire when your close to a 5% SWR with a lifestyle that’s acceptable. Get a fun part time gig after retiring to keep busy.

  9. I think the initial analysis was done wrong. The person said they had 2 incomes: “CAD 221,000 / CAD 171,300”. One of them was lost, so they’re still either making $221,000 or $171,300 per year after the one lost job … no? Or, did they actually mean to say “CAN 221,000 / US 171,300”???

    1. When they had two incomes…
      Gross: CAD $221,000
      Net: CAD $171,300
      With only one of them working $171,300 / 2 = $85,600/year net

  10. Great article – thanks! Two points; (1) Why is principal repayment omitted? Looks like they have principal repayment of around 850 each month on the townhouse that is omitted in the analysis. (2) There is no discussion or consideration for house price growth. Or the fact that they have leveraged exposure to house price growth as homeowners. Whilst this cannot be relied upon and there is downside risk as well silence / no consideration seems strange when making big decisions such as these.

    1. Exactly and as usual on this site. Really good info on investing portfolios with real life experience to back it up. Very poor advice when it comes to analyzing RE and options -the no real life experience as owners and bias against RE shows.

  11. I owned 3 houses in the GTA for roughly 15 years and I now live abroad and rent. Getting rid of the homes and all the headaches that come with it have been worth it. My husband and I rent an apartment in Mexico and we love not being home owners any more. We simplified our lives and are very happy.

  12. Why not sell the real estate and move to Thailand (or LCOL Brazil?). Why do they need to rent out the real estate to live in Thailand? I’m actually confused here…thanks!

  13. There’s always an opportunity cost with something. At the end of the day sometimes holding on to that RE can reduce options and flexibility that comes with FI. But some people take refuge in owning physical assets. It all depends on what you want your future to look like and how much risk you are comfortable with.

  14. Just curious if the whole expense thing is over estimated. Do they not escrow property taxes and insurance premiums into the “mortgage” in Canada? If I speak of my monthly $700 mortgage payment on my rental condo, it is already covering those expenses since it escrowed in. But we are in Maryland, US for now.

  15. Hi,

    My personal view is as follows:

    – Sell all the properties and invest the proceeds (less five years of the annual expenses) into the investment portfolio. These five years of expenses will be five X the difference between the annual expenses minus the generated dividend.
    – Leave one year of annual expense for the current year expenditure. This will be clear cut of one year expenses which does not take into consideration of the generated dividend from the investment portfolio.

    I do agree that there will be a need to reduce the current expenses. I believe that this is likely to be due to the incurred expense required to service the loans arised from the said property.

    Wtk

  16. If they really want to retire now I think they need to consider option 3, sell both Toronto properties and move to either Brazil and live in their paid for condo. With the roughly 1 million in assets (current assets + profits from the two sold Toronto properties) they can spend ~40k Canadian a year, and with their essentially paid off condo in Brazil and a much lower cost of living in Brazil should be more than possible no? They should also be able to use this condo as a home base and spend the next few years slow travelling through South America (one of their goals). If they don’t wish to move back to Brazil, I agree with selling all three properties and retiring over seas on south east Asia.

  17. Stick to the original plan of retiring in four years. Get another job to replace the lost income. Grind it out and cut back on expenses during these four years. Increase rents on the properties as soon as possible. After four years of this, things will look a lot rosier. Good luck!

  18. Yes, these are 2 ideas of MoneyMarty (march 28, 2022 above) are very important points, and I will add refinance, why they don’t refinance and take some equity out of these houses, and cover the expenses with that for the next 2 or 3 years, and after that they will have more equity and less debt, if they need can refinance again…

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