As a homeowner, you have big incentives for paying off your mortgage early. Along with being debt-free sooner, you can save a substantial amount in interest and put your money toward more important things than debt. Paying off your mortgage faster is also easier than you may think.
These strategies can help you pay down your home loan in no time.
To demonstrate how much you can save, we will assume for each strategy that you bought a home for $472,000 (the average home price in Calgary) with 15% ($70,800) down. You have a 5-year fixed loan with a 25-year amortization schedule and an interest rate of 4%. Your mortgage payment (including mortgage insurance) is $2,169 a month.
Making regular mortgage payments with no prepayments will result in $47,685 in interest over five years or $238,411 in interest over the amortization period. You can use this mortgage calculator to personalize the results.
Add Extra Money to Every Payment
Rounding up your regular monthly mortgage payment or adding a fixed sum every month can add up over time. If your mortgage payment is $823, consider paying $850 each month or even rounding up to $900. This strategy is even more effective if you make bi-weekly payments.
With the example figures above, adding $31 (taking your payment to $2,200) to every monthly payment pays off the loan almost a full year early and saves a total of $6,402 in interest. If you round up your payment to $2,500 (an extra $331 a month), you take just over four years off your loan with total savings of almost $53,785.
Make Bi-Weekly Payments
It's in your best interest to really understand your mortgage payments. Making your mortgage payments bi-weekly instead of monthly can be one of the easiest ways to pay off your mortgage faster without feeling the effects. To do this, make a half-payment every two weeks. Because there are 52 weeks in a year, you will end up making a total of 13 full mortgage payments. Using the example above, your bi-weekly payment would be $1,000.41. And even a single extra payment every year can add up over time.
There are two ways to make bi-weekly mortgage payments: choosing a bi-weekly payment schedule with your lender or a self-managed payment schedule. If your mortgage is set up for bi-weekly payments, it can shorten the life of your loan by close to four years. The downside is you are then required to make bi-weekly payments. There may be times in your life when you do not have the extra money.
Simply making your regular payments and adding one extra mortgage payment to your principal can achieve the same results without making two payments every month or being required to stick to this schedule.
Double Every Other Payment
If you want to pay off your loan as fast as possible, try to double every other mortgage payment. This means you will make a total of 18 mortgage payments in one year. If you do this every year, you will pay off your mortgage an amazing eight years early and save about $75,614 in interest.
Use Your Tax Refund
If you're going to get a tax refund, there's no safer bet than using it to pay down your mortgage. It won't change your regular scheduled payments and you may not have a new gadget or vacation to show for it, but you'll be thankful you made this painless lump sum payment when you're ready to renew or refinance your mortgage.
Reconsider Your Low-Risk Investments
If you have money invested in low-risk products like bonds or Guaranteed Investment Certificates (GICs), it may be wise to use these investments to pay down your mortgage once they mature. After all, these investments offer a fairly low return that's probably lower than your mortgage rate. You will not be increasing the risk of your investment, but your money will earn a better return by saving you a substantial amount in interest charges.
Make a Lump Sum Payment with a Windfall
If you come into unexpected money from some source, use the money to make a lump sum prepayment on your mortgage. Depending on the terms of your mortgage, you may be able to prepay up to 20% of your original mortgage principal, or you may need to use the money to double up on monthly payments.
Watch for Restrictions and Penalties
Closed mortgages usually have lower interest rates than open mortgages, which makes them a popular choice for homebuyers in Alberta. While you can increase your monthly payment or make lump-sum payments to some degree, the amount you can overpay will likely be restricted and you may be penalized for paying off your mortgage too soon. You'll have to decide whether an open or closed mortgage is right for you.
Always make sure you check your prepayment privileges, which determine the percentage you can increase your regular payment or make a lump sum payment. There may also be a minimum amount you are required to prepay, if you choose to do so. The Government of Canada offers an excellent resource for learning about prepayment penalties and how to avoid them.
If you dream of breaking free from your mortgage payments and owning your home outright, the dream is within reach. Making extra monthly payments or lump sum payments can dramatically reduce the term of your loan and save you thousands in interest. All of these strategies can pay off, so choose the option that works best for your lifestyle and finances to put yourself on the fast path to paying off your mortgage for good.