Your mortgage is likely the largest single debt that you will ever carry, and there are some tangible benefits to paying it off faster than you originally scheduled. With the threat of rising interest rates in Canada looming in the horizon, these benefits could be highlighted even further.
Option 1 – Make larger monthly payments
This may seem obvious and may not be possible for everyone, but if you are able to make even moderately larger monthly payments you will quickly reap the benefits.
Let’s say you purchased a home for $600,000, with a $120,000 down payment – leaving you with a $480,00 principal. This is the money that you have borrowed to make the the purchase and on which you will be paying interest.
Once the loan portion of the purchase is amortized over the agreed upon duration of the loan, combined with your interest rate, you then know what your monthly payment will be. If we assume a constant 3% interest rate and a 25-year term, that leaves an approximate monthly payment of $2300 and a total of about $200,000 in interest to be paid over the term. If you can increase your monthly payment by $400, that equates to over $40,000 in less interest that you will pay to your lender. And if you can pay $1,000 a month more, or a monthly mortgage payment of around $3,300, you can complete your payments in 15 years and will be pay about $85,000 less interest than you would be with that $2,300 monthly payment in the example above.
Even if you only increase your monthly payment by $100, you would see a savings of over $10,000 in interest and would pay off your loan more than one year faster.
Many people value loyalty as a trait and apply this loyalty to the bank that they have chosen. Even if you have been with your bank for decades and have always received great service from them, that is not a good enough reason to just accept the interest rate that they present. You need to take the time to shop around at different banks, and speak with mortgage brokers.
Let’s say that 15 years into your 25-year mortgage you have a $235,000 balance from the example above. If you can find a rate that is 0.5% lower when your mortgage is up for renewal, you would save over $10,000 in interest payments.
Each time that your mortgage is up for renewal it is prudent to shop around your mortgage and find a credible lender that can offer you the best rate. There are many factors that go into calculating the rate the lenders will provide you and not all lenders make the same calculations.
Option 3 – Renew at a lower rate, but maintain the same monthly payment
Assuming that you land that lower interest that we discussed in option 2, that would lower your monthly payments. One great way to pay down your mortgage faster is to keep the same monthly payment that you were paying previously even with the new lower interest rate. By this point you will be accustom to paying your monthly mortgage, and with the lower interest rate you will save money in interest too.
Option 4 – Accelerated payments
Using the $2300 per month mortgage payment example, to accelerate your payments all you do is divide the monthly amount by two (i.e. $1150) and opt to pay bi-weekly as opposed to monthly.
By paying your mortgage in this manner, you end up making the equivalent of 13 months worth of payments in one year. More importantly, you also end up paying your mortgage off in just over 22 years, rather than in 25 years, and save more than $25,000 in interest payments.
Almost everyone should opt for accelerated payments.
Option 5 – Make a lump sum payment
Most mortgage agreements will allow you to make a lump sum payment without any penalty. Any payments made in this manner will go directly against the principal owing.
This might seem unlikely, but you can find a number of ways to make this type of one-time payment throughout the calendar year.
- Tax refund
- Investment gain
- Bonus at work
Any time you come across some additional funds, it can be very beneficial to put these towards your mortgage in the form of a lump sum payment.
There are many ways to expedite the payment period on your mortgage. By combining two or more of these options you can do this even faster. Find the option that works for you, start saving, and get to that mortgage free lifestyle even faster!