Your mortgage will be the largest debt you’ll ever take on, but that doesn’t mean you should resign yourself to being in debt for the next 25 years. There are several steps you can take to pay off your mortgage quickly.
The first thing you can do is shop around for the best mortgage rate using a mortgage broker. Even a one percentage point difference in your interest rate will save you thousands of dollars in interest charges over a 25-year amortization.
Another way to reduce the overall cost of your mortgage is to pay off your mortgage early. This is a popular strategy in Canada. A Mortgage Professionals Canada report finds that most recent homebuyers expect to repay their mortgages in 19.2 years.
I plan to pay off my 25-year mortgage 10 years early. Let’s look at three strategies I’ll use to accomplish this goal.
Choose an accelerated payment schedule
When you take on a mortgage, you must make regular payments to repay the principal and interest that’s accumulated. There are different payment schedules to choose from, such as:
- Accelerated bi-weekly
- Accelerated weekly
Monthly—Your mortgage payment is withdrawn from your account once a month. Let’s use the example of the home I plan to buy next year: I plan to purchase a home worth $300,000 with a $35,000 down payment. At 2.49% interest, my monthly payment would be $1,214. If I choose a monthly payment schedule, $1,214 would be withdrawn from my account once a month.
Bi-weekly—A bi-weekly mortgage payment is when your monthly mortgage payment is multiplied by 12 and divided by 26 payment periods in a year. The resulting amount is withdrawn from your account twice per month.
$1,214 x 12 ÷ 26 = $560.31
Choosing a bi-weekly mortgage payment makes sense if you are paid bi-weekly, since your payments will correspond to your paycheques.
Accelerated bi-weekly—An accelerated bi-weekly mortgage payment is calculated by multiplying your monthly mortgage payment by 13 and dividing by 26. Using the example above, my accelerated bi-weekly payment would be:
$1,214 x 13 ÷ 26 = $607
With an accelerated bi-monthly mortgage payment, you still make payments twice a month but the amount is slightly higher, which allows you to pay down your mortgage slightly faster.
Weekly—A weekly mortgage payment is your monthly mortgage payment multiplied by 12 and divided by 52. This payment would be withdrawn from your account every week.
$1,214 x 12 ÷ 52 = $280.15
Accelerated weekly – Finally, an accelerated weekly payment is when your monthly mortgage payment is divided by four and withdrawn every week.
$1,214 ÷ 4 = $303.50
If you want to pay off your mortgage early, choose either accelerated bi-weekly or accelerated weekly. You’ll pay slightly more, which will help you pay down your mortgage more quickly.
If I choose the accelerated bi-weekly option, my bi-weekly payment will be $607 and I’ll pay off my mortgage in about 22 years instead of 25 years, according to Ratehub.ca’s mortgage payment calculator.
Looking to determine your mortgage payment?
Monthly mortgage prepayments
Most lenders give you the option to make extra payments on your mortgage, up to a certain percentage of the monthly payment. This is called a mortgage prepayment (you can also prepay a lump sum once a year; I’ll get to that below).
Paying extra on your mortgage each month is fairly common and a great way to become mortgage free sooner.
For example, PC Financial’s prepayment privilege allows you to pay an additional 25% on top of your monthly mortgage payment. Using my example of a $1,214 mortgage payment, I could add $303.50 ($1,214 x 25% = $303.50) to my mortgage payment every month, for a total payment of $1,517.50.
I plan to prepay my mortgage each month. I’ll accomplish this by purchasing a home well below my maximum budget. If I prepay my mortgage by 25% every month and choose an accelerated payment schedule, I’ll be able to pay my mortgage off in 18 years instead of 25 years.
The maximum percentage you can prepay varies and each lender is different. Check with your lender to make sure you don’t overpay and incur a penalty.
Annual lump-sum prepayments
Most lenders also offer the option to make a lump sum prepayment once per year. The percentage can be as high as 25%. However, 25% of the original mortgage is a large sum of money and I won’t be making an extra payment that large any time soon. But that doesn’t mean I can’t make smaller lump-sum prepayments.
I plan on using my income tax refund as a lump sum prepayment every year. As of May 9, the average tax refund this year is $1,677, which is about what I receive every year.
If I were to use that yearly refund to pay down my mortgage in addition to accelerated payments and increasing my monthly payment by 25%, I will be mortgage-free in 15 years instead of 25.
Budgeting to pay off your mortgage early
Paying off your mortgage early is possible, but finding the money in your budget can be difficult. There are two steps you can take to ensure you’ll be able to pay off your mortgage early.
First, buy within your means. By leaving plenty of room in your budget for prepayments, you’ll be able to pay off your mortgage quickly. If you buy too much house, your finances will be stretched thin and your mortgage payments will be too high. This will make it difficult to pay off your mortgage early.
When I buy a home, it’ll cost much less than my maximum purchase price. I plan to buy a less expensive home because I don’t want to be house poor and I want to have the funds available to pay off my mortgage early.
The second step you can take is to increase your income. You can ask for a raise, work overtime, or start your own business on the side. Increasing your income will give you the disposable income you need to pay down your mortgage faster.
Should you pay off your mortgage early?
Now that I’ve explained how you can pay off your mortgage early, it’s time to answer the question, “should you?”
With today’s ultra-low interest rate environment, paying down your mortgage early isn’t a no-brainer. When deciding whether to pay down your mortgage early, make sure any high-interest debt is paid down first and that your retirement is well funded. Once these priorities are satisfied, attacking your mortgage and paying it off early is a great way to own your home sooner and reduce the overall interest you pay to your lender.
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