Pay off Your Mortgage Faster Quicker Sooner
Imagine a young couple leaving the bank right after they signed for their mortgage. The banker fully explained their amortization schedule for their new mortgage. They had already known that their mortgage would start at $300,000, their interest rate was 5% and they would be making payments of $1601.07 for 30 years. What they didn't fully understand is that the total that they would pay over these 30 years was $576,386 and $276,386 of that was interest. They also found it hard to believe that after their first 5 year term paying a total of $ 96,064 their mortgage balance was $275,285. Of the $96,064 they paid, their balance was reduced by less than $25,000. They were shocked to say the least.
If you have a mortgage and were unaware of the costs you likely felt the same way. Can you change this? Of course. Increasing payments, doubling payments, and making lump sum payments will all benefit you. The only way to pay your mortgage off quicker and save interest is by throwing more money at it, there is no silver bullet! How do you do this?
First, contact your bank and find out what your prepayment privileges are as you will have to work within their guidelines to avoid penalties. Some banks allow prepayments only on the anniversary date, some allow double payments on regular payment dates and some allow lump sum payments or increased payments anytime up to a certain percentage of your original mortgage. There are many other variations, each bank is different. This is something to think about when you are shopping for a mortgage. The more flexible the prepayment privileges the better.
I am going to compare difference scenarios based on the mortgage information above.
The easiest way to implement a plan to pay down your mortgage faster and save you money is to switch from a monthly payment to a bi-weekly payments. You simply divide your monthly payment by 2 and pay every second week. Although it doesn't feel like it, you are essentially making an extra mortgage payment a year. Results:
Mortgage paid off 4.7 years earlier, $49,880 saved.
Bonus from work or saved up some cash? Make a lump sum payment of $6000 on every anniversary date. Results:
Mortgage paid off 11.75 years earlier, $118,717.60 saved.
In contrast to the $6000 lump sum payment on the anniversary date, you will be better off making an extra monthly payment of $500. Same amount of money out of your pocket. Results:
Mortgage paid off 12 years earlier, $122,649.44 saved.
Double up on a monthly payment twice a year as you can afford it. Results:
Mortgage paid off 8 years earlier, $83,874.61 saved.
Generally everyone's financial position improves over the years. You receive raises, student loans get paid, etc. Let's increase our monthly mortgage payment by 5% per year. Results:
Mortgage paid off 12.67 years earlier, $109,452.59 saved.
Let's look at at 10% increase per year. Results:
Mortgage paid off 16.17 years earlier, $141,146.17 saved.
The best advice I feel I can give is not to put your mortgage on autopilot. Actively track your mortgage payments and balance. You will find it motivational to see what you are saving.
I recommend using a calculator from You can keep track of your mortgage and play with the numbers to see how you can save yourself thousands.
I do want to bring to your attention that when you look at your numbers keep in mind that it is based on your current interest rate. When your term is over you will have to renegotiate and will likely end up with a new rate. If the rate is lower you can keep your payments they same and your amortization period will be shorter or you can keep your amortization period the same and your payments will decrease. If the rate is higher it will be just the opposite. You can increase your payments to keep your amortization period the same or you can keep your payments the same and increase your amortization period. Naturally I would suggest trying to keep your amortization period shorter as you will save money.
Renewing the original example after the first 5 year term at 4% will result in a new mortgage payment of $1,448.06 saving $153.02 a month to keep the original amortization period of 30 years. Renewing at 6% will result in a new mortgage payment of $ $1,761.29 costing an extra $160.22 to keep the original amortization period of 30 years.
I encourage you to start making extra mortgage payments early and often! The result will be a savings of tens of thousands of dollars!
Pay off Your Mortgage
It is often asked if you should pay off your mortgage or invest for the future. It is hard to compare the financial differences because rates of returns, tax brackets and mortgage interest rates vary. I feel the psychologically, paying the mortgage first is beneficial.
The security of having your home fully paid off can not be over looked. With a paid off home you won't suffer in bear markets and you will be able to sleep at night. A job loss for a few months will not put your home in jeopardy and you can always borrow against the equity in your home.
If this is they way you are going to structure your priorities make sure that when you do have the mortgage paid off you put your normal mortgage payments into investments for your retirement fund. If you don't have the discipline to do that then stick with investing for the future while making normal mortgage payments.
I am curious about your opinion.
No Down Payment Mortgages
Last fall with Canada's credit crunch the federal government did away with zero down payment mortgage and mortgage amortized over 40 years. The maximum amortization is now 35 years, but you can still purchase a home without a down payment thanks to CMHC's Flex Down Program and a lender's 5% cash back incentive.
How does this work? The lender advances the full purchase price of the home to the lawyer on the closing day providing you with the required 5% down payment and leaving you with a mortgage on 95% of the purchase price plus the CMHC premium.
Is there a catch? Yes, the lender charges you the posted interest rate, currently 5.85% and the CMHC is slightly higher. You will also have a portion of your cash back clawed back if you break the mortgage contract within 5 years. Is this a good deal for someone purchasing a home? I will provide you with some numbers and you can decide on your own.
A $300,000 home purchased with a 5% down payment and a 25 year amortization period would mean the total mortgage amount would be $292,837.50 consisting of $285,000 (purchase prices less down payment) and a CHMC premium of $7,837.50. At an interest rate of 4.39% payments would be $1602.92 and the balance after a five year term would be $256,630.31.
A $300,000 home purchased with a lender cash back incentive and the CHMC Flex Down Program and a 25 year amortization period would mean the total mortgage amount would be $293,265 consisting of $285,000 (purchase less 5% cash back incentive) and a CHMC premium of $8,265. At an interest rate of 5.85% payments would be $1850.26 and the balance at the end of a five year term would be $262,897.85.
The difference in payment is $247.34 a month so after the five year term the total payment difference is $14,840.62. This amount basically makes up the $15,000 cash back that was used for a down payment. The difference in the balance at the end of the five year term is $6,267.55. The total monetary difference is $6,108.16 over the five year term or $101.80 a month.
Should you purchase a home with a program like this? Only you can answer this question, but as you can see in the long run there is not much of a difference. If it will take you two years to save up $15,000 for a down payment and house prices increase 2% a year you will be better off buying now with a no down payment program.
Free Money
There has been a long term debate of whether people are better off paying down their mortgage or contributing to RRSPs. Due to the variables of tax brackets and the return on the RRSPs there are no clear cut answers. Most of the time the opinion given is do both, contribute to your RRSP and use your tax refund in the spring to pay down your mortgage. This “meet in the middle” approach is good but can be optimized to give you some free money and have you debt free a little sooner.
Most people are aware that if you contribute to an RRSP you should see a tax refund in the spring. The bad news is the C.C.R.A. has held onto your money for the whole year and then given it back to you without interest. The math does not work out in your favour. The good news is it doesn’t have to be that way.
You can go to your Human Resources department and ask to fill out form T1213 Request to Reduce Tax Deductions at Source. For example let’s say that you are contributing $600 per month to an RRSP and every spring you get a tax refund of $2,400 as a direct result of your monthly RRSP contributions. That refund is great, but the C.C.R.A. has owed you a little bit of that money every month. Once you fill out the form you will now see an extra $200 monthly on your pay cheque . Unfortunately you will not get a refund in the spring. The C.C.R.A. will take your monthly RRSP contribution into account and tax you less. You have your money now! What good does this do you? Well, now instead of a $2,400 lump sum mortgage payment in the spring you can increase your monthly payments by $200. It makes a big difference.
A $250,000 mortgage at 6% with monthly payments of $1,487 has an original amortization period of 30 years. Add the $2,400 prepayment every spring and you save $81,634 in interest costs and your house is paid for in 22.5 years. Not a bad deal at all.
If you don’t make a $2,400 prepayment every spring and instead increase your monthly payment by $200 you will save $84,620 in interest and have your house paid for in 22.33 years. For about an hour of your time you have saved just under $3,000.
I believe that the little things make the difference and this little rearrangement of your finances will help you pay off your mortgage faster, save you money, and help you be debt free faster!
Pay Off Your Mortgage in Record Time
The title is a little misleading, but you may have heard or seen claims of such. There are no tricks to paying off your mortgage faster. It is a debt like any other, extra payments mean you bring the total cost of interest down and you will have it paid off sooner. There are companies that will guide you on how to pay off your mortgage quicker with their advanced software. Be aware they come with a hefty price tag and you can do it yourself.
The most popular way to pay down your mortgage is to make payments every two weeks rather than monthly. Simply take your current mortgage payment, cut it in half and you now pay every two weeks. You are essentially now making an extra mortgage payment every year as there will be two months that you make three mortgage payments. Ideally you get paid bi-weekly and this strategy fits right into your budget.
Here is an example with a $250,000 mortgage at 5.5% over 25 years.
Monthly Payments: $1525.98
Number of Payments per Year: 12
Total Payments: $18,311.76
Balance after 5 Years: $222,968.63
Amortization: 25 Years
Bi-weekly Payments: $762.99
Number of Payments per Year: 26
Total Payments: $19837.74
Balance after 5 Years: $214,084.83
New Amortization: 21 Years 3 Months
Projected Interest Savings: $35,480.17
Simply increasing your monthly mortgage payment by 10% produces these results:
Monthly Payments: $1,678.58
Number of Payments per Year: 12
Total Payments: $20,142.94
Balance after 5 Years: $212,474.24
Amortization: 20 Years 9 Months
Projected Interest Savings: $40,616.38
As you can see, some simple increases to your mortgage payments can save you thousands of dollars. No magic, just applying some discipline.
There are various companies marketing mortgage accelerator software or money merge accounts. These software programs will keep you on track and motivate you to pay your mortgage down faster but with price tags of $1,000 - $3,500 USD you are paying for that motivation. The software does not do anything that you can not do yourself. If you have total dept of $250,000 it is pretty basic that you will be able to pay that off faster than if you add the cost of the software to your total and you now have $258,500 to pay off.
The concept is the software tells you what debts you should be paying when and how much. I attended a presentation for one version of this software and none of the reps could tell me exactly why the program suggested paying down a a debt with a lower interest rate when there were debts with higher interest rates. That will never make sense. Mathematically, it is impossible to save paying down debt this way.
To do it yourself you need to eliminate all high interest debt, possibly with a line of credit and then pay off the line of credit. Do not carry a balance on any credit cards and avoid taking out other high interest loans. Then make extra payments to your mortgage with your discretionary income. Most mortgages allow you to increase your payments or apply lump sums to your balance. Contact your lender for more information.
Where do I get money to make extra payments?
Figure out where you are spending your money and then figure out what you can eliminate. Apply the savings to your mortgage. Google money saving tips, money saving ideas or any variation and you will find literally thousands of ideas.
Take the money you could have spent on the software and apply it to your mortgage. Download a mortgage calculator from . Track your payments, your balance, and your interest savings all for free. Want to see what the big screen TV is costing you if you applied that $2,000 to your mortgage? Put it in as a prepayment and take a look at the changes.
Good luck on your journey to reduce your debt!