So you’ve bought a home, congratulations! If you are like the majority of the homeowners (66% according to Stats Canada) you have taken out a mortgage to purchase your home. And understandably so, borrowing at relatively low interest rates, to buy a home far outweighs paying rent and therefore someone else’s mortgage, while you save up $800,000. However, now that you have your home, paying down your loan whenever you can, instead of buying those extra shoes, can save you thousands of dollars in interest.
Here are a few helpful tips that are usually available for conventional mortgages through most lenders, and will help you pay off your mortgage sooner!
1. Accelerating your mortgage payment schedule. Moving from the traditional monthly mortgage payment to the “Accelerated Bi-Weekly” payment, where the mortgage comes out every two weeks, not just one day per month, will save you tens of thousands in interest and years in payments. Here is an example on a $150,000 mortgage at 5.5% interest 25 years amortization.
• Standard monthly payment of $915.59 - 25 years to pay off - $124,675.23 interest
• Accelerated bi-weekly payment of $457.80 - 21.2 years to pay off - $102,289.95 interest
• Difference: Pay off mortgage 3.8 years sooner, save $22,385.28 in interest
2. Increase your payment amount. This option will vary to how much, usually anywhere from $100 - the equivalent of your current mortgage payments. This extra amount goes directly to the principal. Depending on how much your current mortgage is and how much you choose this can save you literally $10’s or $100s of thousands in interest and take years off your mortgage. A fun hack I have done, as I was lucky enough to lock in at a very low rate two years ago, is adjust my payments to reflect what my payments will be based on today’s rate when my mortgage is due. My payments are now $600 more per month. So $600 x 36 months will pay an additional $21,600 off my principal for when I go to refinance in three years and has adjusted my lifestyle based on a new higher mortgage payment so there is no shock at that point. Plus with pre-payments you can use them later down the road to cover mortgage payments if for some reason you are not able to make them.
3. Annual lump sum. If you have any extra money sitting around you could apply it to your mortgage and it will go directly to the principal. There usually is a maximum of 10-15% of the original loan value and a minimum of $500 and needs to be done around the anniversary date of the mortgage. An example given was $2000 a year on a $350,000 mortgage with 2.5% rate would save $27,423 in interest and pay off your mortgage over three years sooner.
Other ways to help you pay off your mortgage faster are;
A. Getting or keeping a high credit score so when time comes to refinance you are able to negotiate the best rates with your bank based on that.
B. Keep an eye on interest rates, if they drop low enough again it may be worth breaking your existing mortgage to lock in to a new lower rate.
C. When your current mortgage term is up - shop around! Just because you’re using one bank now, doesn’t mean you always have to use them. Find the best rates and terms for you!
D. Consolidating other loans with higher rates into one mortgage loan will help you save hundreds or thousands of dollars in interest - apply the saved money to your mortgage to get further out of debt!
Once you have your mortgage down and are comfortable - its time to buy an investment property! Because, as crazy as it sounds, leveraging all your hard earned savings into a new bigger mortgage, that is then paid by tenants is an amazing way to build generational wealth! If you are interested in learning more about this method, please reach out to us!
Congratulations on your home ownership - best of luck with paying off your mortgage!
Disclaimer: I am not a mortgage broker or financial advisor. This article is based on a recommendation from articles I have read. Please consult a professional before making any adjustments to your mortgage to ensure there are no penalties and the numbers are correct. If you are looking to get your first mortgage or refinance your existing one, please reach out to us and we can refer you several amazing lenders we work with.
Written by Courtney Carroll (firstname.lastname@example.org)