Are you interested in investing in real estate? Unless you can afford to pay for a property in cash, you’ll need to take out a mortgage. For many Canadians, the dream is to be mortgage-free by retirement. But what if you could pay down your mortgage a lot sooner? Once you have high-interest debt like credit cards taken care of, it can make sense to focus on your mortgage. Here are seven simple ways to pay your mortgage.
Accelerate Your Mortgage Payments
When you first sign up for a mortgage, you have the option of choosing the mortgage payment frequency. The default option at most lenders is monthly payments. However, that doesn’t help you pay off your mortgage any faster. If you want to pay off your mortgage early and put a dent in your mortgage balance, it helps to pay it more frequently.
Payment options offered by most lenders include weekly, biweekly, accelerated weekly, accelerated biweekly, and semi-monthly. If you pay your mortgage weekly, biweekly (payment every two weeks), or semi-monthly, it doesn’t have much of an effect on your mortgage balance (it’s more about choosing the payment frequency that works best from a cash flow perspective). However, when you select accelerated weekly or accelerated biweekly, that’s when it can help you pay down your mortgage sooner.
When you pay your mortgage on an accelerated basis, your mortgage payments are slightly higher than they would generally be. You’re making the equivalent of an extra monthly payment.
Probably the most straightforward and most painless way to pay down your mortgage is on an accelerated biweekly payment schedule. By choosing a pay schedule that matches your pay cycle at work, you’ll be paying a higher amount without even realizing it.
Make Lump Sum Payments
Most mortgages allow you to make extra payments every year, but some lenders only allow one. These can help you reduce interest payments and reduce mortgage debt faster. Other lenders are more flexible and let you make extra lump sum payments at any point throughout the year. If your goal is to be mortgage-free, you’ll want to choose a lender that lets you make lump sum payments anytime.
By making lump sum payments you’ll reduce the overall interest you’ll pay over the life of your mortgage. Unlike a regular mortgage that goes towards principal and interest, lump sum payments are principal payments. Lump sum payments go fully towards reducing the principal and amortization period on your mortgage.
Coming up with extra money to make lump sum payments can seem tough. The simplest way to do it is with extra money. For example, when you receive a bonus at work, inheritance or a tax refund, use some or all of it to make a lump sum payment on your mortgage.
Shorten Your Amortization Period
When most people sign up for a mortgage they go with a 25 year or 30-year mortgage amortization. While stretching your mortgage amortization over 25 years or 30 years helps from a qualification perspective, it doesn’t help you pay down your mortgage sooner. Even by stretching out your mortgage from 25 years to 30 years, it could cost you tens of thousands of dollars extra in mortgage interest, not to mention it will take you five extra years to pay off your mortgage.
If you can afford it and you qualify, why not go with a shorter amortization period? Instead of 25 years, you might consider going with 15 or 20 years. Your mortgage payments will be higher since the repayment period of your mortgage is over a shorter period of time.
It will help you pay off your mortgage that much sooner, so it’s worth considering. Just make sure you are okay with the higher mortgage payments from a cash flow perspective and you could handle them in a worst-case scenario (i.e. if you were to lose your job).
Increase Your Regular Mortgage Payments
Besides lump sum payments, most mortgage lenders also let you increase your regular monthly payments. Most let you increase your payments by between 10 and 20 percent once per year. By taking advantage of this, you’ll shorten your amortization period and could save yourself thousands or tens of thousands in mortgage interest over the life of your mortgage.
You don’t have to increase your mortgage payment to the full amount if you don’t want to. Although most lenders only let you do it once a year, so it’s a good idea to use it wisely.
While I’m all for paying down my mortgage sooner, it’s a good idea to ask if you can reduce your mortgage payment later on. You may be fine with higher payments now, but if you were to run into financial difficulty later on, you probably don’t want to be tied to higher mortgage payments.
Avoid Costly Penalties and Fees
If you want to pay down your mortgage early, it’s best to avoid costly penalties and fees. These include mortgage breakage penalties, not sufficient funds (NSF) fees, appraisal fees and the list goes it.
If you anticipate that you may need to break your mortgage at some point during your mortgage term, it’s best to choose a mortgage with a lower penalty. Variable-rate mortgages typically have a lower penalty than fixed-rate mortgages. With a variable rate mortgage, your penalty is usually just three months of interest, whereas it can be a lot more with a fixed-rate mortgage (mortgage lenders often use their inflated posted rate to calculate your penalty).
While a low mortgage rate can certainly help, sometimes it’s worth taking a slightly higher mortgage rate if it means paying a significantly lower mortgage penalty later on.
Shop Around for Your Mortgage
Many of us spend hours planning a vacation, but when it comes to our mortgage we often treat it as an afterthought. One of the simplest ways to pay down your mortgage sooner is by getting a mortgage with a lower interest rate. With a lower interest rate more of your money goes towards principal and less towards interest. With your increased cash flow, you can use it to make extra payments towards your mortgage and pay it off that much sooner.
It’s worth spending the time to shop around for your mortgage. By reaching out to a mortgage broker, he can shop around for mortgage options on your behalf. And the best part is that the services of a broker are free in most cases.
Be Careful When using a Home Equity Line of Credit
A Home Equity Line of Credit (HELOC) can be a powerful tool to build wealth, but it can also delay your plans of reaching mortgage freedom. When you’ve built up at least 20 percent equity in your property, you can apply for a HELOC with your lender. A HELOC can be helpful to have as an emergency fund, especially during COVID-19 if you lose your job; however, it’s best to be cautious when using it.
Before withdrawing funds from your HELOC, ask yourself what you intend to use the borrowed funds for. If it’s for something that will increase your net worth like a rental property or investments it might be worth it, but if it’s something you’ll consume immediately like a family vacation, it’s probably not the best idea to use.
By being disciplined with your HELOC, you can help ensure it helps you, rather than hurts you financially.