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The Savings to be Made from Paying Off Your Mortgage Early

The savings to be made from paying off your mortgage early

For most Canadians, the biggest debt they will ever have is a home mortgage. And because mortgages typically have an amortization period of 25 years unless you go through a mortgage refinance, that debt will loom for a large chunk of their adult lives. Ready for the most rotten part? Homeowners who make minimum monthly payments will end up shelling out about twice the amount they originally borrowed.

There’s a simple explanation for why you end up spending so much: the money is first used to pay off the interest, not to pay down the principal. Let that thought settle in and you’ll quickly realise the advantages—and the urgency—of paying off your mortgage early. Free yourself from the amortization trap and become debt free by following these tips:

Increasing the Amount of Your Payments

The most obvious way to pay down your mortgage faster is simply to make larger payments. A good rule of thumb is to increase your payments by 10% to help shorten the lifespan of your mortgage. Just make sure you’re realistic about how much extra you can consistently pay, as most lenders will not allow you to readjust the payment conditions until the following term.

Increasing the Frequency of Your Payments

Increasing the frequency of your payments from monthly to bi-weekly will allow you to make the equivalent of one extra mortgage payment per year. That’s because instead of making 12 monthly payment of say, $1,000 per month (for a total $12,000 a year), you’ll be making 26 payments at $500 each for a grand total of $13,000. Even better? Look for an accelerated bi-weekly or accelerated weekly mortgage agreement to save money on accumulating interest.

Making Lump Sum Payments

Most lenders allow you to make a lump sum payment on your principal every year. Look for mortgages with a 10/10 or 20/20 repayment option. In a 10/10 prepayment option, for instance, you can pay up 10% of the principal in a lump sum payment annually as well as increase your monthly payments up to 10%.

Lump sum payments are an especially good option if you’ve acquired some extra money via a work bonus, inheritance, insurance claim, or good investment. But even if you can only afford to stow away a little extra cash each month, every little bit helps toward paying down your mortgage. Be sure to check the terms of your agreement for penalties and restrictions about making lump sum payments.

Refinancing Your Mortgage

Don’t rush to sign that renewal letter at the end of your mortgage term—you may not be getting the best mortgage rates available on the market. Opt instead to do some comparison shopping with RateSupermarket and refinance your mortgage for a lower interest rate. The amount you owe will decrease, but keep paying the original amount anyway to help pay down that principal faster.

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19 thoughts on “The Savings to be Made from Paying Off Your Mortgage Early

  1. All great ways to pay down your mortgage. I utilize a larger monthly payment to pay down my mortgage. It’s also important to note that extra money has the biggest impact on paying down total interest paid in the early years of repayment.

  2. We are making extra payments every month but will almost have enough cash to pay the bloody thing off shortly. We’re only 3 years into our first mortgage which is a 5 year term. I’m not sure if there is a penalty if I pay it off in full before the 5 years. I’ll have to look into that. I just want to make sure our emergency savings is where we want it before the big mortgage burning celebration… great tips.
    Cheers
    Mr.CBB

  3. I haven’t taken on my first mortgage yet, but I’d like to really soon. So I’m going to have to make a point of trying to pay it off as soon as possible. I’m sure it seems intimidating at first to try to pay of that much, but when you think about how much interest is being paid, it’ll be good motivation.

  4. I wish I could remember where I read it, but I saw a blog post recently that spelled out exactly how much you can save in interest simply by paying your mortgage twice a month (not bi-weekly, but literally on the 1st and 15th of the month) you can shave like 3 years off your principal. It was amazing to me, because it’s the same amount of money, just paid at different times!

  5. I think it’s easy to let a mortgage sit the whole term since the payments can be quite large, but it’s true that it doesn’t take a lot of extra money to significantly reduce the term (and total amount paid). These tips are great and easy to follow, thanks for sharing them with us!

  6. accelerated weekly/biweekly are the way to go, it’s what I have! If I choose to sign up for another mortgage (instead of selling the house and renting for a bit) I will def. be looking for a mortgage that I can prepay… really, I can’t imagine sticking to the SAME mortgage for 25 years… I can’t believe a lot of people do!

  7. We shopped for a whole bunch of prepayment flexibility, with a fixed rate. Everyone told us that most people just plan to prepay and never do… we’ve been proving them wrong forever 🙂

    I like the examples of putting even an extra $20/payment onto a 30 year… it saves SO MUCH interest!

    FYI – TD lets you adjust your payment amounts as often as you want. We were even able to drop ours below our original payment when we needed to free up some cash flow! We had that flexibility because we had paid off extra principle 🙂

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