If you already have a mortgage or are looking to buy a new home, here are some simple tips I have used to pay down my mortgage sooner, build my home equity and save tens of thousands of dollars in interest.
#1 – Make The Largest Down Payment Possible. The more you can put down the less you have to borrow. If you are a first time homebuyer, consider the Home Buyers Plan (HBP).
If you are not able take advantage of the Home Buyers Plan but have a large RRSP, consider using an RRSP mortgage in combination alone or in combination with a bank mortgage. With an RRSP mortgage, your RRSP lends you the funds to purchase your home: You will be paying yourself interest instead of the bank.
#2 – Choose A Shorter Amortization Period. The longer it takes you to pay off your mortgage, the less interest you will pay over time. If you have a $200,000 mortgage at 3% you will save over $12,000 of interest by taking a 20 year mortgage rather than a 25 year mortgage.*
#3 – Consider Weekly Payments. Most banks allow you to make monthly payments, bi-weekly payments or weekly payments. By making your mortgage payments more frequently, you can reduce both your mortgage term and save interest.
Here’s how it works. Your bank calculates your payments monthly and your weekly payments are simply ¼ of the monthly payment. This means that you make more payments per year and more frequently.
If you have a $200,000 – 25-year mortgage at 3%, weekly payments will save you $10,000 and shave 3 years off your mortgage term.
#4 Make Extra Payments. Make an RRSP contribution and apply the tax refund against your mortgage. If you have already maxed your RRSP, consider applying and bonuses or inherence you receive against your mortgage.
Most mortgages allow you to make additional pre-payments every year. My mortgage allows me to make additional lump-sum payments of up to 20% of the outstanding balance every year.
#5 Give Your Payments A Raise. If you received a pay raise this year, consider giving it to your mortgage. If you were renting, chances are your rent will go up eventually, so why not increase your mortgage payments.
Many mortgages allow you to increase the amount of your periodic payments as well as make annual lump-sum payments. My mortgage allows me to increase my weekly payments up to 20% every year.
If I receive a 3% raise, I increase my weekly payments by 3%. This simple strategy will save you money but will shave years off your mortgage.
Try All Or Any Combination
You may not be limited to just one of these techniques. If you mortgage contract allows it you can do any or all of these to pay off your mortgage sooner.
* Assuming monthly payments.
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{ 11 comments }
“My mortgage allows me to make additional lump-sum payments of up to 20% of the outstanding balance every year.”
My RBC mortgage allowed a no-penalty yearly prepayment of a certain percentage (not sure now whether it was 20% or 10%) of the INITIAL principal, i.e., the mortgage amount from the time I transferred it to RBC (the regular bank employees were always confused about this, but the mortgage-centre people knew it alright). Which is a much better deal. I thought *this* is the norm!?
On top of that, the double-up feature for the regular payments also accelerates nicely the payoff of the principal (and saves on the total interest).
All this assuming you have the money to do it, of course…
@ AS:
I agree that the % of original principal is probably a better option, but my payments can increase by 20% per year of the prior year’s payment. If my original mortgage payment was $1,000 I could increase it to $1,200 in the first year and $1,440 the next.
When we first bought our home six years ago, we had a 10% down payment and amortized the mortgage over 25 years (at the recommendation of the bank manager, who suggested that it’d allow more flexibility in our budget). We did, however, set up an accelerated biweekly payment schedule, which reduced the effective amortization to about 19 years.
Thankfully, our incomes have gone up since that point, and we’ve increased our mortgage payments accordingly. Our payments are now about 50% higher than they were when we started, but we still have the flexibility to reduce the payments to the baseline if we hit a financial roadblock (job loss, medical issue, etc). As a result, we’re now on track to have the mortgage paid off in a little more than 4 more years. The dream of being payment-free before we hit age 40 is what enables us to fit the extra payments into our budget.
What’s really motivating is to have a spreadsheet that tells you exactly how much time you shave off your mortgage with each extra payment (or payment increase). It’s amazing to see how much of an impact extra payments have, especially in the first few years.
@ George:
I agree that a spreadsheet is a motivating factor although mine tend to get a little too complex. In most cases, I use a financial calculator to figure my remaining mortgage balance.
Our current mortgage is with Firstline (the broker channel for CIBC) and we’re permitted to increase our payments by 25% of the original payment amount each year, and to make lump-sum payments ($100 minimum) on any payment date. The lump-sum payments are limited to 20% of the original loan balance each year, and are in addition to the above-noted 25% yearly payment increase.
If you maximize both of these options on a 5-year mortgage, the mortgage will be fully paid off before the 5-year term is up…
As to spreadsheets, I’ve used one from this link, which works well and is fairly straightforward: http://www.vertex42.com/Calculators/Canadian-mortgage.html
@ George:
The most flexible is probably the Manulife One mortgage despite its fees. I find that if you are really disciplined you can pay down the mortgage much faster.
@ George:
I’ve seen this sheet before. It is good!
You have to play with it to properly do bi-weekly and weekly payments but there are instructions with the sheet to help do that.
Check out this mortgage calculator. It’s a great visual way to see how changing your payments, or adding prepayments can shorten your mortgage. http://www.drcalculator.com/mortgage/ca/
@ Mike,
Nice tool.
All 5 tips are good advice. My lender allowed me to make arbitrary extra principal payments with each monthly payment and I paid it off 4 years early. I didn’t calculate the interest savings, but I’m sure it was significant.
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