By Deanne Gage
Think your mortgage will haunt you for decades and decades? Things can turn out differently. Here are three strategies that will get you mortgage-free quickly.
Stretching your mortgage repayments can lower your payment amounts and give you cash in the short term. But this choice postpones the possibility of using your money for something else… and it can cost you more in the long run.
So how can you pay off your mortgage faster? Here are some options.
But before exploring them, it is essential to take stock of your current financial situation. If the COVID-19 pandemic impacts your finances, you may want to defer your mortgage payments. See Canada’s Economic Response Plan for Individuals to learn more about the support available.
If your financial situation is stable, here are some ways to pay off your mortgage faster. Also, find out how to protect your mortgage and your family’s finances in the event of the unexpected.
- Pay more than the minimum due on your loan
Say your payment is $2,000 a month, but you can easily spend $200 more on it. You reduce interest and years to produce, notes Vince Gaetano by paying more. He is the principal broker and owner of Monstermortgage.ca.
“We advise customers to pay what they can rather than settling for the minimum,” he says. “Thus, they repay their debts more quickly.”
How to reduce your debts and improve your finances?
- Use your tax refund, salary increase or any other unexpected sum
Make a lump sum payment each year. It could be the equivalent of your tax refund, your annual bonus or any additional amount you have.
“Increasing your payment by $25 or $30 can significantly reduce the length of your repayment,” says Gaetano.
Five brilliant ways to use your tax refund
Most mortgages offer the possibility of making additional payments each year, generally representing between 10 and 25%. Mr Gaetano advises confirming that such a provision exists before signing a new mortgage agreement. “These prepayment options are important for paying off a mortgage faster,” he recalls.
He suggests using these lump-sum payments to round the amount to the nearest thousand. Suppose you still owe $195,320 on your mortgage. If you put down $320 and the balance is down to $195,000, you can reduce your payments and interest in the long term.
- Accelerate your loan repayment
Which is better: paying $1,000 a month or $500 every two weeks? The second strategy wins.
To speed up your repayment, split your monthly payment in half and pay that amount every two weeks. So you make 26 half-payments in a year, which is the equivalent of an entire additional monthly fee.
“This 13th payment is what we call the accelerator. It allows you to pay off your mortgage faster,” says Gaetano.
The frequency of payments may seem trivial but see the following example. The Tremblays have a mortgage of $200,000 at 6%, and they make monthly payments of $1,280. If the interest rate and the number of their prices do not change, their mortgage will be paid off in 25 years.
Now consider the case of the Dumonts. Their mortgage is also $200,000 with an identical interest rate of 6%. The Dumonts elected to make accelerated bi-weekly payments of $640. If they persevere, they will only need 21 years (four years younger than the Tremblays) to pay off their mortgage. By doing so, they will also save $35,000 in interest payments.
These strategies can help you get rid of them faster for a first mortgage or a renewal.
Do we wonder if you should pay off your mortgage or contribute more to your RRSP? Use our free and straightforward mortgage or RRSP calculator to see the different options and choose the one that’s right for you.
Should you take out mortgage insurance?
We live in an uncertain world. Even if you can repay your loan today, you don’t know what may happen. Consider the following possibilities:
What will you do if you fall ill or are seriously injured?
Will your family be able to pay without your income if you are sick or injured?
