Being mortgage-free earlier than expected is possible. And there are many ways to pay off your mortgage faster.
Imagine wiping out years off your amortization period, gaining more equity and saving thousands of dollars on interest rates. All of this is possible if you do one thing.
Prioritize paying off your mortgage early.
To pay off your mortgage faster and live debt-free, you need to ask yourself how aggressive you want to be in your payments. Reducing the principal mortgage debt requires sacrifice. You need to be determined and willing to put some money towards your mortgage that would normally be spent somewhere else. Just think about all the other things on your list to pay off like student debt and credit card debt, or perhaps you just want to save for an emergency fund or invest that money for retirement (a wise choice!).
If you decide to free yourself from your mortgage burden, follow these tips.
1. Maximize your down payment
Going for a larger down payment when you buy a home is a good strategy from the start. You will have less of the principal to pay back. And the larger the down payment, the less interest will go towards your mortgage lender.
Make an effort to get a down payment of 20% or more. With a lower down payment, you will be required by law to pay insurance premiums to the Canada Mortgage and Housing Corporation (CMHC). These premiums can add thousands of dollars a year and can even prevent you from making any other kind of prepayment towards your mortgage.
2. Change your payment options
Regular payments might not be the best method to pay off your mortgage faster. Switching to an accelerated payment schedule will reduce your amortization period and save you big bucks on interest rates. The recommended options are:
- Accelerated bi-weekly payments
- Accelerated weekly payments
Yes, you will have more payments each year. But you will shave off time. For example, with a bi-weekly schedule, payments will go through every two weeks instead of monthly. Your budget will remain the same, but in the calendar year, you will make one more extra payments. And throughout the years, that one additional payment can definitely add up.
3. Make extra payments
You can make extra lump sum payments whenever money is at hand to crush your debt. Add an extra sum each month towards the principal or round up your regular mortgage payments if possible. Increase your payment and over time, it will add up.
But there should be a word of caution about prepayments before you dump money into your mortgage.
Your lender might not allow it. They have their own prepayment rules. If you start paying off your mortgage early, you will save on interest rates, but they will lose out on their revenue. That is why prepayment options are only available for those with open mortgages, or they come with strict limitations and extra fees. For those with a closed mortgage, it is absolutely forbidden. It is always better to ask your lender first and re-read your contract before to avoid prepayment penalties (which can go up to the thousands). If you are lucky, you might find a lender with prepayment privileges!
4. Choose the right amortization period
Typically, an amortization period is 25 years. But a shorter term can work wonders. It will keep your budget tight, but picture being mortgage-free in 20 years or even 15 years! The key thing here is to know how much you can afford.
To figure it out, just search for a home in Homicity and use our mortgage calculator to know how much your monthly mortgage payments would be within a given amortization period. As long as it doesn’t hurt you financially, it is possible to pay off a mortgage in the short term with fewer interest charges.
But if you can’t afford to live frugally for a while, a longer term with regular payments and prepayment privileges is also the right road to take. The advantage here is that you will be in control and your budget will have some room to breathe. In case the unexpected hits you (think about losing your job), the lower mortgage can be a relief.
4. Use your extra money
Sometimes you get a stroke of luck. An unexpected fortune might come into your hands. It could be an inheritance, an investment gain, a lottery win, a raise, a bonus at work or even a large tax refund. Resist the temptation to spend it and put it towards your mortgage for some progress. You will not be missing out on anything since you are not used to having it.
6. Shop around for mortgage rates
When you apply for a mortgage or the time of mortgage renewal comes, try to see what else is on the market. Don’t stick with the financial institution you know or switch lenders. They might not have the best rate for you. You can either search for rates on Homicity or see what a mortgage broker can do for you. The less interest you are charged, the more money will go towards the mortgage principal.
For every homeowner, paying off the mortgage is the ultimate goal. And sacrifice pays off in the end. There will be tough decisions on what you spend, and maybe you’ll have to skip a vacation or two, but achieving financial independence is worth it.