Courtesy of one of our favourite mortgage brokers:
Reagan Burton at S&R Mortgage Group Ltd.
Imagine what life would be like if one of your biggest expenses was eliminated. Here's how to make it happen...
If you own a home, it's likely that you're still dragging the old ball-and-chain. No not that one - we're talking about your mortgage. For many homeowners, 10, 20 or even 30 years down the road seems like an impossibly long commitment, which often means we slog along, and forget all about what it would be like to be mortgage-free.
And who can blame you? Assuming you have the average Canadian mortgage of about $280,000 at a 3.2 percent interest rate amortized over 25 years, if you make the monthly payments, you'll likely be receiving a senior's discount long before you pay off your home. So how can you pay down your mortgage faster? Here are some simple steps to help you break free...
1) Pay more often
There are many options for making your mortgage payments, but the more frequently you pay, the better. That's because your mortgage accrues interest each and every day. The shorter the space between payments, the less interest adds up. If you take the standard monthly payments on your $280,000 mortgage, it'll take you the full 25 years to pay it off, and you'll pay more than $126,000 in interest. Paying bi-weekly or weekly will help, but the savings will be minimal because this only involves dividing your monthly payment to make 24 or 48 smaller payments per year, rather than the standard 12.
It's with accelerated weekly and bi-weekly payments that things get interesting. That's because with an accelerated bi-weekly mortgage, you'll make 26 payments in a year, and 52 payments for the accelerated weekly. This is a way to sneak in a few additional payments over a standard monthly mortgage. In our example, the bi-weekly accelerated option would shave two years off the time it takes to pay off your mortgage compared to a standard monthly payment, and reduce your interest expense by $17,000. The weekly payments shave off even more. The best part is, each payment will be smaller and easier to budget; you won't even miss the little bit more you pay each year.
2) Make lump sum payments
When you get a tax return, an unexpected bonus or some other joyful cash injection, consider putting it on your mortgage. Adding just $1,000 extra to your mortgage per year will allow you to pay it off four years sooner and, combined with accelerated bi-weekly payments, chip another $8,000 off the interest you pay for your home. When extra cash tempts you to spend, just think about how much disposable income you'll have when your mortgage disappear. Then put it on the house instead
3) Increase the payment amount
Another way to ditch that mortgage pronto is to increase the amount of each payment. This can be a good strategy to apply as your income increases over time. Let's say you score a raise of $250 per month. Lucky you! Put that on your mortgage and you'll really be leading a charmed life. You'll be mortgage-free seven years ahead of schedule, and will shave a whopping $24,000 off your mortgage (assuming you're still making accelerated bi-weekly payments). If you continue to apply your raises to your mortgage over time, the effect will be even more significant. You might even own your home before your kids hit college!
4) A lower interest rate
These days, mortgage rates are near all-time lows, but it doesn't hurt to negotiate a better rate with your mortgage broker no matter how low they are. Is there anything less satisfying than paying interest? We thought not. The difference between a 2.99 percent rate and a 3.2 percent rate adds up to about $6,000 in interest over the course of the mortgage. So whether you're signing up for a first mortgage or renewing an existing one, shop for the lowest rate you can get. Over the long run, those efforts really pay off. Hey, why pay more than you have to?
5) Make your mortgage tax-deductible
In the U.S., mortgage interest is tax-deductible. Unfortunately (or perhaps fortunately, considering the trouble the U.S. mortgage market's been facing), the Canadian government just isn't that generous. That said, there are still some ways to make your mortgage tax deductible. This involves borrowing against it to purchase income-producing investments. Under the Canadian tax code, interest paid on money borrowed to earn income is tax deductible. This strategy can help homeowners become mortgage-free faster, but it isn't a sure bet. Borrowing against your home can be risky, especially because your investments may not yield expected returns. With that in mind, should you go with this option, find a financial advisor who can help you make it work to your advantage.
Think of the freedom
A mortgage isn't forever and (surprise) it doesn't even have to feel like it is. Give your debt a little extra care and attention and you can be free of it years faster than you'd even dared to hope. What you do next - with all that money - is entirely up to you!
Reagan Burton at S&R Mortgage Group Ltd.