The following is a Guest Post by Comparasave.
Tips to Pay Off your Mortgage Faster
Mortgages are one of the main sources of debt in Canadian households, so it’s not surprising that most of us want to find a way to rid ourselves of this financial burden as soon as possible. By paying off a mortgage faster you can not only free up income to pay for or invest in other things, you can also save thousands of dollars in interest. If you are not doing at least one of the following to pay of your mortgage faster, you should be:
1. Bi-Weekly Payments
This is a very simple way to speed up the payment of your mortgage without even noticing – choose bi-weekly payments over semi-monthly. Instead of 24 payments per year you are making 26. Make sure you are choosing an accelerated payment option, which adds two payments rather than dividing an entire year’s payments by 26. With just a simple payment change you can save up to tens of thousands of dollars and be mortgage-free as much as four years earlier.
2. Increase Your Payment
Even just a slight increase in monthly or bi-weekly mortgage payments can make a huge impact on how quickly you own your home. For $50 a month you can shave as much as two years off your mortgage as well as saving over $10,000 in interest. Check with your lender, many of them let you increase your payment by up to 20% every year, so when your income increases you can do the same with your mortgage payment.
3. Watch Rates
Canadian mortgage rates are probably as low as they are going to get – so now’s the time to refinance if it offers an advantage. Make sure you find out from your lender the penalties involved, and account for expenses to put your new mortgage in place (notary, appraisal, etc.). Some lenders offer a “blend and extend” option if you are mid-term, so you can blend your current rate with the new rate to get a lower rate without having to go through the hassle of refinancing.
Now, while getting lower mortgage rates is great, it will only help pay off your mortgage faster if you keep your payment the same. For example, if your monthly payment is currently $1169 (at 5%) and you switch to a mortgage that is 3.5% your amortization period stays the same and your payment drops to $1001 per month. While you are now saving nearly $50,000 in interest over your term you can really take advantage of the lower rate by bumping your payment back up to $1169. That extra $168 per month results in an additional $32,000 in interest savings as well as paying your mortgage off 5 years faster.
4. Invest in your RRSP
This may seem a bit backwards, but by putting money into your RRSP for retirement you can reduce your tax burden. By taking your subsequent refund and applying it to your mortgage you can ensure that you have a healthy retirement fund as well as accelerating you towards a mortgage-free lifestyle. Even just $500 per year towards your mortgage saves you up to $10,000 in interest and cuts a year and a half off your mortgage term.
5. Lump Sum Payments
Whether it’s a tax refund, an inheritance, or a bonus from work, any extra cash that is put towards your mortgage makes a difference. Most lenders will allow you to pay up to 20% of your principal off each year. One $10,000 payment can take two years off your mortgage term as well as a saving of up to $20,000 in interest. If your lender does not allow lump sum payments then consider saving your extra cash until your mortgage renews, at which time you can reduce your principal. Another option is making mortgage prepayments. To learn more, visit the Financial Consumer Agency of Canada.
6. Do It All!
If you are really serious about paying off your mortgage then you may need to employ a combination of the above tactics. Also keep in mind that you can always reduce your amortization period when you renew your mortgage. While this will increase your payments, you’ll be paying significantly less in interest and be mortgage-free sooner. Good luck!
Note: All calculations based on a $200,000 mortgage at 5%, with a 25 year amortization period.