Purchasing a home is a major accomplishment, but paying off your mortgage as early as possible will be the best investment you can make. A 2010 Canada Mortgage and Housing Corporation (CMHC) survey indicated that 68 per cent of recent homeowners felt there was a strong chance they could pay off their mortgage earlier than their current amortization schedule, and 27 per cent have made additional lump sum mortgage payments or have increased their regular payment amounts.
How to pay off your mortgage faster
Ready to save some serious money? Here are a few easy ways you can pay off your mortgage faster:
1. Accelerated bi-weekly payments
Instead of paying your mortgage on a monthly basis 12 times per year, pay your mortgage every two weeks for a total of 26 payments each year.
Example: A $300,000 mortgage paid on a monthly basis with a 3 per cent interest rate over 25 years will cost you $125,920.44 in interest. However, if you increase your payment frequency to accelerated bi-weekly payments, you will shave nearly three years off of your amortization schedule, and save $16,058.57 in interest.
2. Round up your mortgage payments
Make no mistake: Every dollar counts when it comes to paying off your mortgage. The quicker you can pay off your loan, the more you will save in interest. A painless way to make your mortgage disappear faster is to round up your mortgage payments. So if your accelerated bi-weekly mortgage payments are $543, consider rounding up to $600 instead. The extra $57 will do wonders for your mortgage and chances are you will barely notice a difference in your monthly budget.
If you receive a raise, instead of increasing the cost of your lifestyle in the short term, consider throwing the extra amount you make onto your mortgage instead.
Example: Bi-weekly payments on a $230,000 mortgage with a 2.75 per cent interest rate over 30 years would be $468.53. Increase those bi-weekly payments by just $31.47 to $500, and you’ll shave nearly six years off of the amortization schedule.
Unexpected sources of money such as a birthday cheque from a relative or a bonus at work are considered sources of ‘found’ money.
‘Found’ money can be easily applied to your mortgage without any impact to your budget because it wasn’t money you were expecting or counting on.
Consider increasing your RRSP contributions, and then put your tax refund directly towards the principal of your mortgage.
Example: A one-time payment of $5,000 on a $250,000 mortgage at 3.75 per cent over 30 years will decrease your mortgage amortization by over 12 months.
4. Make a lump sum anniversary payment
Most banks will allow you to make an extra mortgage payment each year, which is applied directly to the principal. Taking advantage of this by making a lump sum payment — even if it’s as small as $50 a year — is a great way to chip away at your mortgage.
Example: An annual lump sum payment of $250 on a $400,000 mortgage at 3.50 per cent over 25 years, combined with a bi-weekly payment frequency will decrease your mortgage amortization by over 3.5 years.
Once you have a mortgage and start making your payments, it can be easy to just forget about it because it’s an automatic payment. But don’t stick your head in the sand. To be an informed homeowner, you need to keep up-to-date on interest rates and new mortgage options. You could potentially save a ton of money just by understanding what your options are.
Example: Let’s say that interest rates have dropped since you took out your mortgage a few years ago, but you are in the middle of a five-year fixed term with your bank. By understanding what the penalties are for breaking your mortgage, and reapplying for a lower interest rate, you could potentially save thousands of dollars over the long run.
While paying down your mortgage early will mean less interest paid over the lifetime of the loan, and a shorter amortization schedule, it’s not always the best decision for every homeowner. For example, if you have high interest debt on a credit card, no emergency fund savings, or haven’t started saving for retirement yet, the interest you would save on your mortgage will not be as beneficial to you as dealing with other financial issues.
Armed with information and commitment, these tips will help you pay off your mortgage faster. The freedom that being completely debt-free brings is a dream for many Canadians, so take the time to do some calculations and figure out what options are right for you.