5 Ways to Pay Down Your Mortgage Early

Craig Sebastiano
by Craig Sebastiano April 3, 2017 / No Comments

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Canadians are carrying record amounts of debt. The household debt-to-income ratio rose to a record high of 167.3% in the fourth quarter of 2016, according to Statistics Canada. At the end of 2016, Canadian households owed more than $2 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 to pay off your mortgage at a quicker pace. 

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:

Year Total paid Principal paid Interest paid Balance
2018 $21,240 $11,856 $9,384 $388,144
2019 $21,240 $12,141 $9,099 $376,002
2020 $21,240 $12,433 $8,807 $363,569
2021 $21,240 $12,732 $8,508 $350,837
2022 $21,240 $13,038 $8,202 $337,799
Total (term) $106,202 $62,201 $44,000 $337,799

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
2018 $23,010 $13,658 $9,352 $386,342
2019 $23,010 $13,986 $9,024 $372,355
2020 $23,010 $14,323 $8,688 $358,033
2021 $23,010 $14,677 $8,343 $343,366
2022 $23,010 $15,020 $7,991 $328,346
Total (term) $115,052 $71,654 $43,397 $328,346

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 early. 

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.

Amortization period Total paid over five years Principal paid over five years Interest paid over five years Balance after five years
20 years $136,237 $94,139 $42,098 $305,861
25 years $115,052 $71,654 $43,397 $328,346

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.

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 2016 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 $375 a month.

4. Make lump-sum payments

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, 18% 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.

Bonus tip: Get a lower mortgage rate

You should also shop around for the best mortgage rate. 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. With a five-year term, here’s how different fixed mortgage rates will affect how much principal and interest you’ll pay:

Mortgage rate Total paid over five years Principal paid over five years Interest paid over five years Balance after five years
2.39% $115,052 $71,654 $43,397 $328,346
2.54% $116,990 $70,828 $46,162 $329,172
2.79% $120,259 $69,483 $50,777 $330,517
2.94% $122,245 $68,695 $53,550 $331,305

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.

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