Friday the 13th – Time to kill your mortgage debt

Alyssa Furtado
by Alyssa Furtado May 13, 2011 / No Comments

First, let’s understand what a mortgage is – It can be defined as principal + interest.  The principal portion is what gives you equity.  Interest, however, is wearing the scary mask.  The interest you pay on a mortgage is poisoning your bank account.  If you want to reduce the amount of interest you owe and the life of your mortgage, follow these steps to financial freedom.

Kill #1: Increase the frequency of your payments

Most Canadians schedule their mortgage payments on a month-to-month basis.  However, switching to accelerated bi-weekly payments will allow you to significantly slash the amount of interest over the life of your mortgage.

Consider this scenario:  A mortgage with a principal balance of $100,000, with a fixed interest rate of 3.89% on a 30-year term.  Our mortgage payment calculator reveals the following:

Regular monthly payment:poor piggy

  • Monthly principal and interest payment = $470
  • Total interest paid during life of loan = $ 68,953

Compare these numbers against an accelerated bi-weekly plan:

  • Bi-weekly principal and interest payment = $235
  • Total interest paid during life of loan = $58,283

You’ll notice that you’re saving a whopping $10,670 in interest payments over the life of your mortgage.  In addition to the interest savings, your loan would be paid off four years faster!  An accelerated bi-weekly schedule means you’re putting in two extra payments (totalling $470) per year.  Not that much considering you’d be keeping $10,000+ of your money over the span of the mortgage’s life.

Kill #2: Use prepayment options

Utilizing your lenders’ prepayment options is another great example of how you can slaughter your interest payments by attacking your principal.  There are two types of prepayment provisions:

1)  Increase your monthly payments
2)  Submit a lump sum payment

Both options are great, but depend on your financial situation.  If you were to receive a raise from work, increasing your monthly mortgage payment makes sense.  If you received a one-time bonus or inheritance, then the lump sum might be the way to go.  The lump sum can be deposited at any time during the year.

*Most provisions will have a maximum allowable amount, in the form of a percentage of your mortgage, which is set individually by your lender.

Kill #3: Keep your payments the same, even when interest rates drop

jasonThe market is always fluctuating, so if you have a variable rate mortgage and the Canadian Prime Lending rate drops – keep your monthly payments the same.  You`ll pay off more of your principal, plus, it won`t affect your budget.  The same reasoning is applicable to those looking to renew their fixed rate mortgage, where rates are also at historical lows.  By keeping the payment amounts the same, you`re not forced to alter your lifestyle.  Meanwhile, the rate of debt repayment on your mortgage increases significantly.

Defeat evil interest! Kill your debt! Be a hero, save your finances today.