3 ways to pay off your mortgage faster
Think your mortgage will be part of your life for decades to come? It doesn’t have to be. Here are three strategies to shorten your route to mortgage freedom.
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’ll also put off the day you’ll be able to use that money for something else. And, it may even cost you more in the long run.
So what can you do to pay off your mortgage faster? We’ve listed some options below.
But before you dive in, it’s important to consider your current financial situation. If the COVID-19 pandemic affected your finances, you may want to look into deferring your mortgage payments. Please see Canada’s Economic Response Plan: Support for Individuals for more information on mortgage support.
If you and your family are financially stable right now, here are some ways you can own your home sooner. Plus, find out how you can protect your mortgage and your family’s finances from the unexpected.
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’re comfortable paying and not just make minimum payments,” he says. “Doing so will allow you to be debt-free more quickly.”
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.
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. Speed up 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’ll only take them 21 years (four years less than the Smiths) to pay off their mortgage. In the process, they’ll 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.
Do you need mortgage protection insurance?
It’s an uncertain world. And while you may be able to cover your mortgage payments now, there’s no way of knowing what unexpected events life can throw your way. For example, picture any of these scenarios:
- How would you pay your mortgage if you got seriously ill or injured?
- Would your family be able to cover the mortgage without your income if you were sick or injured?
- Would your family be able to cover the mortgage if you died?
If you’re worried about the answers to these questions, then you may want to consider getting mortgage protection insurance.
Mortgage protection insurance can help cover your mortgage payments if you become critically ill or die unexpectedly. With mortgage protection, you can get a policy that has a combination of two types of life insurance:
- Term life insurance covers you for a set period, such as 10, 15, 20 or 30 years. It can be suitable if you’re looking for low-cost insurance. (Please note that while the premium may be low for the first term, the cost will increase when it’s time to renew.) If you died unexpectedly during your set term period, your family or beneficiaries would get a one-time payment that they can use for any purpose – including paying off the mortgage.
- Critical illness insurance gives you a one-time payment if you’re diagnosed with a serious illness that’s covered under the policy (and you meet the other policy conditions). You can use the money for medical expenses, to pay off your mortgage or for anything else you wish – it’s up to you.
What’s more, you can apply for mortgage protection whether you’re a homeowner with a mortgage or a first-time homebuyer.
