Stretching out your mortgage over as long a period as possible may keep your payments down and help your short-term cash flow. But it will also put off the day you’ll be able to use that money for something else – and may even cost you more in the long run. Here are some ways you can own your home sooner:
1. Pay more than the minimum
Let’s say your mortgage is $1,000 a month but you can comfortably afford to spend another $200. Doing so will reduce the amount of interest you pay and save you years of mortgage payments, notes Vince Gaetano, principal broker and owner of Monstermortgage.ca. “We advise clients to pay what they are comfortable paying and not just make minimum payments,” he says. “Doing so will allow you to be debt-free more quickly.”
He notes that with interest rates at low levels today, any increased mortgage payment will have a larger portion of the payment go towards the principal.
Renewing your mortgage at a lower interest rate? Don’t lower your mortgage payments. As Gaetano says, keeping your payment the same amount or even raising it contributes significantly to the acceleration of your mortgage. “You initially qualified at that amount so you can afford it,” he says.
2. Make a lump-sum payment every year
This could be your tax refund, your annual bonus or any windfall that falls into your lap. “Even an increase to your mortgage payment of $25 to $30 will result in significant time taken off your mortgage repayments,” says Gaetano.
Most mortgages provide privileges that allow you to make additional payments per year, usually between 10% and 25%. Gaetano advises that you confirm these particulars before signing a new mortgage agreement. “These prepayment options are important if you are committed to paying off your mortgage quickly,” he says.
He suggests making lump-sum payments to the nearest thousand. Let’s say you have $195,320 left on your mortgage: You’d make a payment of $320 to bring it down to an even $195,000 which over the long term can reduce your amount of mortgage payments and interest.
3. Make accelerated biweekly payments
What’s better: paying $1,000 a month or $500 every two weeks? The latter strategy comes out ahead. For a truly accelerated program, divide your monthly mortgage payment in half and make that payment every two weeks. This means you’re ultimately making 26 half-payments in a year, the equivalent of one full additional monthly payment. “The 13th payment is what we call the accelerant. It allows you to get that mortgage paid down faster,” says Gaetano.
Paying frequency may not seem like a big deal but check out this example: The Smiths have a $200,000 mortgage at 6% and are paying $1,280 in monthly payments. If the interest rate and their payments remain the same, their mortgage will be paid off in 25 years.
Compare this to the Browns, who have the same $200,000 mortgage and 6% interest rate. They chose to pay $640 in accelerated biweekly payments. If they keep this up, it will only take them 21 years (four years less than the Smiths) to pay off their mortgage. In the process, they will also save $35,000 in interest payments.
Whether you’re taking out your first mortgage or renewing an existing one, these strategies can help you kick your mortgage to the curb years sooner.