Pay off your mortgage sooner

February 12, 2020 | Posted by: Mike Garganis

Pay off your mortgage early

To start off, let’s take a look at what a mortgage is. A mortgage consists of the principal (the amount of the loan) and interest (the percentage rate charged on a mortgage loan). We tend to talk about interest most often and the reason for that is the amount you pay in interest over the life of your mortgage can vary significantly based on your payment amounts, payment frequency and interest rate. The key to saving money on your mortgage is to pay off the principal as fast as possible.

Here are a few ways to pay off your mortgage sooner:

Increase the frequency of your payments

Most Canadians schedule their mortgage payments on a month-to-month basis. However, switching to accelerated bi-weekly payments will allow you to significantly slash the amount of interest over the life of your mortgage.

Consider this scenario: A mortgage with a principal balance of $100,000, with a fixed interest rate of 3.89% on a 30-year term. Our mortgage payment calculator reveals the following:

Regular monthly payment:

  • Monthly principal and interest payment = $470.
  • Total interest paid during the life of loan = $68,953.

Compare these numbers against an accelerated bi-weekly plan:

  • Bi-weekly principal and interest payment = $235.
  • Total interest paid during the life of loan = $58,283.

You’ll notice that you’re saving a whopping $10,670 in interest payments over the life of your mortgage. In addition to the interest savings, your loan would be paid off four years faster! An accelerated bi-weekly schedule means you’re putting in two extra payments (totalling $470) per year. Not that much considering you’d be keeping $10,000+ of your money over the span of the mortgage’s life.

Use prepayment options

Utilizing your lenders’ prepayment options is another great example of how you can lower your interest payments by attacking your principal. There are two types of prepayment provisions:

1) Increase your monthly payments

2) Submit a lump sum payment

Both options are great but depend on your financial situation. If you were to receive a raise from work, increasing your monthly mortgage payment makes sense. If you received a one-time bonus or inheritance, then the lump sum might be the way to go. The lump-sum can be deposited at any time during the year.

*Most provisions will have a maximum allowable amount, in the form of a percentage of your mortgage, which is set individually by your lender.

Keep your payments the same, even when interest rates drop

The market is always fluctuating, so if you have a variable rate mortgage and the Canadian Prime Lending rate drops – keep your monthly payments the same. You'll pay off more of your principal, plus, it won't affect your budget. The same reasoning is applicable to those looking to renew their fixed-rate mortgage, where rates are also at historic lows. By keeping the payment amounts the same, you're not forced to alter your lifestyle. Meanwhile, the rate of debt repayment on your mortgage increases significantly.

Refinance at a lower rate

With today’s low rates refinancing your existing mortgage could offer additional savings. A quick review comparing your current rate and the fees that are associated with refinancing to what your mortgage would look like with the new rate can help determine whether this option is right for you.

Not sure where to start? Contact me today to go over your numbers. I can show you how to pay down your mortgage sooner.


Mike Garganis
mgarganis@mortgagebymike.ca
416.481.6444

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