Essential Knowledge Series
If you're reading this and have a home, you probably have a mortgage. If you don't, congratulations! For those with a mortgage, this post is for you.
Most people who have a mortgage are continuously looking for ways to pay it off quicker. That's why I've put together a shortlist of 3 little-known factors that can help you pay off your mortgage faster.
Increase the frequency of your mortgage payments
Utilize your pre-payment privileges
Shop for the best mortgage rates by using a good mortgage broker
1. Increase the frequency of your mortgage payments
This is one of the easiest changes you can make to pay off your mortgage faster. For example, let's imagine you currently have a $300,000 mortgage, amortized over 25 years with a 3.00% interest rate. Your monthly mortgage payment would be $1,420 per month. If you keep paying your mortgage monthly, it would take the entire 25 years to pay off your mortgage.
If you were to change your payment to accelerated bi-weekly, your new payment would be $710. Just changing the payment in this way would reduce the time to pay off your mortgage by 2 years and 9 months. In other words, instead of paying off your mortgage in 25 years, it'll now take you 22 years, 3 months. Changing the frequency to bi-weekly reduces your amortization because you're making two extra payments in a year. On top of that, if you set up the payment to be accelerated, you're increasing the amount of principal you're paying with every payment.
Changing your payment frequency might not seem like much, but the amount of interest you save over that period of time is dramatic and you'll be mortgage-free sooner. Everyone knows going into retirement mortgage-free is an achievement not easily accomplished. If you can afford the extra bit on a bi-weekly payment, I'd say it's well worth it.
2. Utilize your pre-payment privileges
Most, if not all of the major lenders give you the opportunity to apply pre-payments to your mortgage. Some will let you prepay once a year, some will allow it multiple times a year. Generally speaking, most lenders will give you a 10% or 15% pre-payment eligibility.
I know what you're thinking, "If I couldn't put more of a down payment on the mortgage when I bought the house, where would I get the money now?". That is a great point and not something I didn't take into consideration. Having a mortgage payment along will all of life's other expenses leaves little room for more saving.
With that being said, my recommendation would be to try and apply as many pre-payments as possible, even if it seems insignificant. Let's go back to our previous $300,000 mortgage example. If you were paying monthly and added another $200 per month to your mortgage payment, or $2,400 per year, you'd pay off your mortgage 4 years, 4 months faster! That's a significant reduction. In other words, your amortization would go from 25 years to 20 years and 8 months. That's the difference between retiring at 60 and 64.
Combine those pre-payments with the first tip of changing your mortgage frequency, and your amortization reduces from 25 years to 18 years, 9 months. I don't know about you, but I think there's somewhere in the budget to save another $200 per month.
If you have the ability to prepay, really think about it because as the old saying goes, if you don't think about the future, you can’t have one.
3. Shop for the best mortgage rates by using a good mortgage broker
This is probably the easiest step to take out of the three factors I've listed today. It doesn't cost you anything to talk to your broker. Yes, you'll have to look for a good broker, but thankfully if you're reading this blog you won't have to look far.
We help our clients every single day find the most competitive rates and give them the best bang for their buck. The lower your interest rate, the more of your payment goes right to principle. More going to principle gives you the opportunity to pay down your mortgage faster and be debt-free sooner.
Having a mortgage is a major undertaking and it can be difficult to see the light at the end of the tunnel. With that being said, always remember that when it comes to finances and really anything in life, the journey of a thousand miles begins with one step.
Questions/Comments?
Give us a shout in the comment section or find our contact details on the main page of our website at www.triedandtruemortgages.ca
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