Get rid of your mortgage faster.
Some quick tips to reduce your mortgage
1) Shorten the amortization period.
When you take out a mortgage, you have to decide on the amortization period, or the length of time it will take you to pay off your mortgage. A typical mortgage in Canada has a 25-year amortization period. But the longer you take to pay off your mortgage, the more interest you’ll pay. If you opt for a shorter amortization period – let’s say 10 years – you’ll not only free yourself from debt more quickly, you’ll save a huge amount on interest. Consider a mortgage of $150,000 with an interest rate of 5%. If the amortization period is 25 years, you’ll pay $111,721 in interest alone over the lifetime of the mortgage. But if you reduce that to 10 years, the total interest is only $40,467.00 – a saving of over $70,000!
2) Pay more each month
This goes hand in hand with shortening the amortization period. If you want to pay off your $150,000 mortgage over 25 years and the interest rate is 5%, then your monthly payment will be $872. If you increase your monthly payments by $100 (to $972), then you will reduce your amortization period to around 20 years. Just that little extra every month means that you could be debt-free 5 years earlier and save on interest as well.
3) Take advantage of prepayment options
Most lenders will allow you to make lump-sum payments on top of your regular payments. Your mortgage agreement will specify the timing and maximum amount that can be paid without penalty (usually 20% of the original amount borrowed per year). By using your prepayment options, you can dramatically reduce your mortgage balance and hence the amount of interest on that balance. As more of your regular monthly payments go towards paying off the principal amount rather than interest, you’ll pay your mortgage off faster.
4) Switch from monthly to accelerated biweekly payments
The scheduling of your mortgage payments can also affect how long it takes to pay your mortgage off. Instead of paying $900 monthly, why not pay $450 every two weeks on an accelerated biweekly schedule? Your total annual payments would increase from $900 x 12 = $10,800 (monthly schedule) to $450 x 26 = $11,700 (accelerated biweekly schedule); that is, you make an extra month’s payment each year. Again, you end up paying less interest and shortening your amortization period.
These are just a few ideas to get you thinking about how to pay your mortgage off quickly. The faster you can bring your balance down (through lump-sum payments, etc.), the less interest you’ll pay on that balance, meaning that more of your monthly payments will go towards further reducing the amount owed.