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 on your mortgage
Let’s say your mortgage is $2,000 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.”
- Read more: What interest rate hikes mean for homeowners.
2. Use a tax refund, pay raise or windfall to pay off your mortgage
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.
- Read more: 5 smart ways to use your tax refund.
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. Accelerate your mortgage 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.
Wondering if you should pay off your mortgage or save more in your RRSP? Weigh your options and find out what’s right for you with our free, easy-to-use RRSP vs. Mortgage calculator.