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.