6 Easy Tips to Pay off Your Mortgage Faster [Updated]April 6, 2015
Being mortgage-free is a top priority for many homeowners. After all, owning a home is better than owning a mortgage. This view seems to be shared by many Canadians. A 2013 survey released by the Canadian Association of Accredited Mortgage Professionals shows that of the group of mortgages that were paid off between 2010 and 2013, the actual amortization length ended up being 11.7 years instead of the original amortization schedule of nearly 18 years.
There is a trade off to wanting a longer amortization period. You make smaller monthly payments but you end up paying a whole lot more in interest. Financial freedom is a dream for many, and it can be yours too. With some small changes, you can be relieved of mortgage stress and skip paying thousands extra in interest.
Getting from debtor to mortgage-free owner is actually easier than you think, and just by making a few adjustments to your monthly budget and being mindful of the cost-saving options available to you, you’ll be home free. Here are six easy tips to get you to debt-free home ownership.
Pay More Often
Typically, we make mortgage payments once a month. However, by increasing the frequency of payments, you’ll shave years off your amortization length and save money. For example, instead of making one $1,000 payment a month, pay $500 bi-weekly. This would be called an accelerated bi-weekly payment schedule, and it basically means you apply an extra $1,000 a year towards your mortgage.
Make an Annual Lump Sum Payment
Often, you can make a lump sum payment either on the anniversary of your mortgage or at the beginning of each calendar year, without penalty. These amounts will be applied to the principal. Banks offer different programs and rules will vary, but typically you can make a lump-sum payment in the neighbourhood of up to 15% of the original borrowed amount. Check with your lender though first, because you don’t want to be penalized for making a prepayment on your mortgage. Also, remember, everything helps, so if you can only afford $100, it will still chip away at your mortgage.
Pick a Shorter Amortization Period
If you’re like most borrowers, you’ve picked a 25-year amortization period to completely pay off the interest and principal owing on your loan. Opting for a shorter loan period may increase your monthly payments by a bit but the trade-off is that you save a significant amount of money, several thousands of dollars over the lifetime of the loan. This is money that you can direct to other uses like saving for retirement, your kid’s education or for a great holiday.
Round Up Payments
Every bit counts when it comes to paying off your mortgage. A relatively painless way to be mortgage-free faster is to round up your payments. If your accelerated bi-weekly payment is $673, rounding up to $700 will do just the trick, and you won’t even notice the impact on your budget.
Apply Unexpected Money Towards Your Mortgage
Birthday gifts, work bonuses or even a promotion are unexpected sources of money. Consider applying these unexpected funds to your mortgage. Doing so won’t have any impact on your monthly budget because these weren’t income you were counting on in the first place. But remember to make these prepayments only when you’re allowed to do so without penalty. Check with your lender when the best time is to apply a lump-sum payment.
Here’s another suggestion. Increase contributions to your RRSP and direct the higher tax refund to the principal owing on your loan.
Keep Up To Date
After you’ve committed to a regular payment for your home loan, don’t just stick it away into your drawer and forget about it. You need to be informed about new interest rate and mortgage options because you may end up saving a truckload of money.
As an example, you took out a fixed rate for five years, but borrowing rates have since dropped. By keeping yourself up to date, you will be able to benefit from this opportunity by checking out options for re-financing your loan. Speak to your loan officer to establish if there are any penalties for re-negotiating your mortgage and take steps to secure a new loan at the reduced interest rates.
Buying a home is a big dream. Don’t let it be a weight around your neck. Instead, come away a winner by being committed to getting mortgage-free.