One of the greatest moments of my life happened about a year ago when I sat across the desk from my bank manager and made the last payment on my mortgage, 23 years after purchasing my home.
Most Canadians have good intentions about becoming mortgage- and debt-free but might not be doing the right things to get there.
A recent report from the Canadian Mortgage and Housing Corporation found that 75 per cent of recent home buyers feel it is important to pay off their mortgage as soon as possible.
While that might be good news, the same report showed that only 39 per cent of recent buyers had their mortgage payments set higher than the minimum required and only one in five had made a lump sum payment to their mortgage.
“When it comes to putting your mortgage on the fast track a little can go a long way,” said Victor Peca, mortgage broker with Mortgage Intelligence. “While Canadians have good intentions to lower their mortgage balance, they may need a bit of guidance on how best to reach the finish line.”
Mortgage and banking experts suggest a number of strategies homeowners can implement to pay off their mortgage years faster and save a lot in interest payments.
The first is to consider carefully your amortization period.
While 30-year amortization periods are common, don’t assume that’s the best option. If you can afford higher payments, opting for a shorter amortization period will not only get you debt-free sooner, but save you thousands of dollars in the long run.
“If you want the flexibility to have lower payments in the future, choose the 30 year amortization but set your payments for 25 years or shorter — that way you get the best of both worlds,” advises Peca.
Another option is to increase your payment frequency. Opt for biweekly accelerated payments — take your current monthly payment and divide it in two, then set those payments for every two weeks. You’ll make 26 payments a year instead of 24, and pay off your mortgage faster.
Moving to biweekly accelerated payments for a $200,000, 25-year mortgage at a 3.79 per cent rate will save you $14,957 in interest and help you pay off the mortgage almost three years sooner.
You can visit migroup.ca to calculate your savings through biweekly accelerated payments.
Another strategy is to make lump sum payments.
During the first years of your mortgage, a high portion of your payments goes towards interest. This decreases gradually as you continue to pay down the principal.
The sooner you make a lump sum payment in the life of your mortgage — whether it’s your annual bonus, your income tax refund or just savings you’ve socked away throughout the year — the greater the impact it will have in the long term.
Adjust your payments. Peca advises that borrowers may be able to secure a lower monthly payment by taking advantage of the current, relatively low interest rates.
“Keep your current mortgage payments the same when you move to a lower interest rate,” Peca said. “You’ll be paying down more towards the principal and less towards interest.”
Likewise, when you get a raise, consider allocating a portion of your higher salary towards increasing your monthly payment — your monthly budget probably will never know the difference.
“By using simple, slow and steady adjustments to your payments and choosing the right mortgage, you can cross the finish line sooner,” Peca said.
Talbot Boggs is a Toronto-based business communications professional who has worked with national news organizations, magazines and corporations in the finance, retail, manufacturing and other industrial sectors.