Canadian homeowners carried an average of $190,000 in mortgage debt in 2015
This according to a Manulife Bank of Canada survey. That’s a lot of money to owe a lender and thousands of dollars in interest to pay over the life of a mortgage.
One way to limit the amount of interest you pay is to pay off your mortgage faster than your agreed upon amortization schedule. Quickly paying down your mortgage will reduce the principal and thus reduce your interest charges. More money for you, less money for your lender.
Fortunately, there are several ways to pay your mortgage off quickly that require almost no effort. Let’s take a look at them below.
Choose Accelerated Mortgage Payments
Accelerated mortgage payments are the oldest trick in the book and the first step you should take if you are hoping to pay down your mortgage faster with almost no effort. Accelerating your mortgage payments involves switching your mortgage payment frequency from monthly to accelerated bi-weekly.
An accelerated bi-weekly mortgage payment amount is determined by taking your monthly mortgage payment and dividing it by two. That amount is withdrawn from your bank account every two weeks. You’ll make 26 mortgage payments in a year, and the payment amount is slightly more than a regular bi-weekly mortgage payment.
By paying your mortgage down more frequently and by paying slightly more, you’ll become mortgage debt free sooner. Here’s an example:
For a home for $400,000 with a $350,000 mortgage. your monthly payment will be $1,591 at today’s best mortgage rates of 2.42%.
According to RateHub’s mortgage payment calculator, with a 25-year amortization, you’ll pay $118,980 in interest over the life of your mortgage.
But if you switch to accelerated bi-weekly mortgage payments, you’ll have a bi-weekly payment of $796, pay off your mortgage in 22 years instead of 25 years, and pay $105,540 in interest. You’ll be mortgage debt free three years earlier and save $13,440 in interest just by switching your payment frequency!
Round Up Your Mortgage Payments
This technique works with all types of debt, including your mortgage debt. Let’s say that you bought a home for $500,000, with a down payment of $50,000, and had a 25-year mortgage at today’s best mortgage rate of 2.42%. Your monthly mortgage payment would be $2,046.
Now, that’s a lot of money to pay towards a mortgage every month, and you might not have much cash left over to pay down the mortgage quicker than the 25-year amortization term. But you don’t need to make big prepayments to make a dent in your mortgage. Rounding up your payment to $2,100 will help you pay it down sooner. You could easily save $50 per month by eating out less, avoiding the mall, or riding your bike to work instead of driving your car.
Use Windfalls to Make Extra Payments
Even if you don’t have a single penny to pay down your mortgage on an ongoing basis, you can still pay down your mortgage pain-free by using windfalls. Windfalls are any money you receive that you weren’t expecting. Here are some examples of windfalls:
- An income tax refund
- An insurance settlement
- Money received from selling a vehicle or items you don’t need anymore
- An inheritance
- An employment bonus
You can pay down your mortgage much faster by designating any money received from a windfall towards your mortgage.
This method of paying down your mortgage is painless because windfall money is a surprise. Because it wasn’t part of your budget, you don’t rely on it to make ends meet. That money is free and clear yours—and you can use it to better your financial situation by paying your mortgage off sooner.
Keep Your Payments the Same
Finally, if you have an existing mortgage that’s up for renewal, you need to shop for the best mortgage rates. Don’t just take the rate your lender offers you. When your mortgage comes up for renewal, make sure to do your research and find the best mortgage rate. If you secure a mortgage rate that’s better than your current rate, your mortgage payment will go down.
But instead of taking this decrease, you should opt to keep your mortgage payment the same. By paying the higher monthly payment, you’ll pay more towards the principal of your loan. If you keep your higher mortgage payment (and if your prepayment rules allow it), you’ll pay off your mortgage much faster.
RateHub.ca is a website that compares mortgage rates, credit cards, deposit rates, and insurance with the goal to empower Canadians to search smarter and save money.