Most of us that have a mortgage would like nothing more than to have our mortgage paid off. Being mortgage free is an achievable goal. But it is important to think through the process so that you utilize your money the best way possible. You may be surprised what conclusions you draw if you thoroughly think through your options.
Think about this!
1. Right now interest rates are the lowest they’ve ever been. Paying off your mortgage may not give you the same return as you’d get by investing in a higher interest investment return. Make sure you’ve talked with your financial advisor on money investment opportunities. It may be more beneficial to invest in other opportunities.
2. On the same note, there may be an opportunity to match retirement contributions through your employment. There are some fantastic opportunities with RRSPs which may give you a higher return for your money rather than paying off your mortgage.
3. Taking advantage of prepayment privileges with bonus money such as bonuses, inheritance, may not be as fruitful in returns as paying into higher interest return investments. Make sure you ask your lender how much it will cost to pay off your mortgage early. And make sure your ask your lender how much per year can be paid off. Some lenders say 15% and some lenders say 20%. Some lenders say 0%! Make sure you find out their guidelines.
Having said all that, there are great ways to pay your mortgage off faster. But before the suggestions, lets define some of the terms you need to know in order to understand your mortgage fully.
Amortization – paying off mortgage debt with a fixed repayment schedule in regular installment over a period of time. Most amortization periods are 25 or 30 years long.
Term – contracted period of time for a mortgage. Terms are usually 5 years long but can be any amount of time that you contract with your lender. 6 month terms, 1 year terms, 2 year terms, 3 year terms, 4 year terms, etc are all available through your lender. However, interest rates will vary with different term lengths.
Principle – the actual amount of the mortgage loan.
Interest – the interest incurred on the loan
Principle plus Interest (PI) – This is typically the payment that is taken monthly from your account. The actual principle amount and interest amount varies from payment to payment. However, the payment that is coming from your account will remain consistent from month to month.
If paying off the mortgage is your goal, consider the following:
1. Increase your scheduled payments to bi-weekly or even weekly payments. You will not pay as much interest by increasing your payment schedule. Note that your payment amount will NOT increase. Your payments are merely applied sooner which does not allow interest to compound as quickly, thereby lessening the amount of interest you are paying and, therefore, decreasing the time to pay off your mortgage. Take a look at http://itools-ioutils.fcac-acfc.gc.ca/MC-CH/MortgageCalculator.aspx?lang=eng and consider the tax savings.
2. Amortize your loan over a lesser amount of time. When your term renewal time comes up, you can negotiate with your lender a shorter amortization period. There is less flexibility with this option as your monthly payments will be higher. With this option, it is important to keep your eyes on the goal so you don’t get discouraged with the bigger payments. Your mortgage will absolutely be paid off faster.
3. Increase your scheduled payment by $25 or $50 per payment. Surprisingly, you might not even feel it as much as you might think. We are creatures of habit and once changes are implemented and become the norm, the higher payments are just expected and our mortgage pays down faster and faster.
4. Take advantage of prepayment privilege. Whether your lender allows 10%, 15%, or 20%, make it a goal to put something extra toward your mortgage every year. Make sure you ask your lender how to make a higher payment as they will have guidelines to follow.
5. If you receive a tax return, use it toward your mortgage. Making an extra payment every years will literally take years off the amortized time of your mortgage.
6. Any bonuses this year? Apply it toward your mortgage. Even a few hundred dollars down on your principal can make a significant difference in the amount of time to pay off your mortgage.
7. If you are a double income family, consider dedicating one of your incomes toward mortgage payments.
8. Purchase BELOW your means. That way, the extra the would be in a higher mortgage amount can be put into good use by increasing your mortgage payment amount by the difference.
The sense in paying off your mortgage faster…
1. Making a plan – a well structured plan will stop you from overspending. Putting together a plan forces you to think through your goals. Budgets cause us to narrow down our goals and stick with them. If a new adventure or unnecessary expenditure comes up, you can align it with your goals and consider if it fits. If it doesn’t, throw it. If it does, then it is likely time to sit down and revamp or consider your goals. Having a plan chases away thoughtless impulses and keeps you on the right track.
2. Peace of mind in owning your own home. When you sign your mortgage papers, the lender discloses to you that you will pay more than twice the purchase price of your home. Your amortization schedule will clearly show the amount of interest and the amount of principle that you pay with every payment. You can google amortization schedule and several calculators will come up. Just punch in your numbers and you will see how much interest versus principle that you actually pay.
3. Paying off your mortgage provides a reliable return on your investment. Typically, and most likely, your property purchase will result in an increase in value as the years go on. It has been argued that using the “extra” money that comes in toward investments will result in a higher return. However, most of us don’t have a plan in place and so that extra money gets quickly spent. A sure investment is increasing your monthly payments (even by a few dollars) resulting in a mortgage that is more quickly paid off.
4. Saving up for the 20% is much more economical than going into a property purchase too early (using 5%) down. You will literally save tens of thousands by NOT having to purchase the mortgage insurance that is not for your benefit but for the banks! On a $400,000 purchase price with 5% down, you will pay a 3.6% premium which amounts to just over $12,000.00 dollars (added to your mortgage).
5. When it comes time to refinance, make sure you know your options. Don’t assume that your lender has your best in mind and will give you the lowest rate available. Make sure you have a Dominion Lending Centres Mortgage Specialist look at your situation to see if there is a better option out there for you. This service is free so take advantage of it!
Courtesy of Geoff Lee, AMP – GLM Mortgage Group