This piece was originally published on October 7, 2019, and was updated on October 14, 2022.
Canadians are carrying record amounts of debt. The household debt-to-income ratio rose to a record high of 174% in the second quarter of 2019, according to Statistics Canada. At the same time, Canadian households owed more than $2.25 trillion and about two-thirds of that amount was mortgage debt. If you don’t want to carry a lot of debt, there are a few ways on how to pay off your mortgage faster.
1. Accelerate your payments
For most homeowners, it’s common to make their mortgage payments on a monthly basis. But there are other payment options available that can reduce the overall amount of interest you pay.
Let’s assume you and your partner or spouse have a $500,000 home with a $400,000 mortgage, a 25-year amortization period, and a five-year fixed rate of 2.39%. If you make monthly payments, you’ll make 12 payments of $1,770 or $21,240 every year, according to Ratehub.ca’s mortgage payment calculator:
After five years, you’ll pay $44,000 in interest and your mortgage balance will be $337,799. (Note that some numbers in the charts will be off by a few dollars due to rounding.)
If you choose to go with the accelerated biweekly option, you’ll make 26 payments of $885 or $23,010 annually:
|Year||Total paid||Principal paid||Interest paid||Balance|
Accelerated biweekly payments help you pay off more of your principal. After five years, your balance will be $328,346—a difference of $9,453. You’ll also pay off your mortgage about two years earlier than you would making monthly payments.
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2. Shorten your amortization period
Typically, a mortgage amortization period is 25 years but you can reduce that to five, 10, 15, or 20 years. We’ll use the same example above (a $400,000 mortgage with a five-year fixed rate of 2.39%, and accelerated biweekly payments) and change the amortization period to 20 years. Your biweekly payment will rise to $1,048 from $885.
While you’ll pay just $1,299 less in interest after five years, you’ll put $22,485 more towards the principal and the mortgage balance will drop to $305,861. You’ll pay off nearly 24% of your mortgage in five years with a 20-year amortization instead of about 18% with a 25-year amortization. You can now use our amortization calculator to help you generate multiple amortization schedules using different amortization scenarios to help you get a sense of what your payments would be with a shorter amortization period.
3. Increase your payments
Another way to pay off your mortgage faster is to increase the amount you pay. If you make a regular payment of $885 every two weeks, you can round it up to $900 or $1,000. Keep in mind that if you decide to do this, you won’t be able to reduce your payments back to where they were during your term.
A 2018 Mortgage Professionals Canada (MPC) survey found that 16% of mortgage holders increased the amount of their payment during the past year by an average amount of $450 a month.
4. Make lump-sum payments to pay it off faster
A number of lenders allow you to make a lump-sum payment (also called prepayments) on your mortgage one or more times a year without having to pay a penalty. The lump sum you can make is usually between 10% and 20% of the original mortgage amount.
According to the same MPC survey, 15% of mortgage holders made a lump-sum payment in the past year to shorten their amortization period.
5. Keep paying the same amount when you renew
If you’re able to get a lower rate when your mortgage comes up for renewal, your payments will be lower. But instead of making the smaller payments, you should keep paying the same amount. Over the long run, you’ll pay less interest and your mortgage will be paid off faster.
Make your property work for you
All of these strategies require paying more money toward your mortgage, and your home can be a great source of income for this purpose. Consider renting some or all of your property to help accelerate your mortgage payments. You can rent out a secondary unit, take on a roommate or host short-term renters through services like Airbnb. As an added bonus, rental income can help with mortgage affordability if you’re buying a new home.
If having a tenant doesn’t appeal to you, and you don’t want to worry about landlord insurance, there are other ways you can earn rental income from your home. For example, you could rent out space for storage or rent an unused parking space to a neighbour.
Using this strategy can help you pay off your mortgage faster but it can also have tax implications. You will have to pay income tax on any rental income you earn. You may also have to pay capital gains tax on the portion of the property you rent out when you take it back for personal use or sell the home.
Bonus tip: Get a lower mortgage rate
You should also shop around for the best mortgage rates in Canada. While having a lower rate won’t help you pay off your mortgage faster, it’ll reduce the amount of interest you pay. We’ll assume you have a $400,000 mortgage with a 25-year amortization and you make accelerated biweekly payments. I used a mortgage calculator to calculate mortgage payments on a five-year term, here’s how different fixed mortgage rates will affect how much principal and interest you’ll pay:
A lower rate will result in smaller mortgage payments, more of your money will be applied towards the principal, and you’ll pay less interest. By getting a lower rate, you can use the money you’ll save to start building a nest egg or an emergency fund.