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.