For most people, a house is the most expensive thing they will ever buy, and if you’re an owner, you know that those mortgage payments consume a significant chunk of your income every month. What would you do if you were mortgage free? Whether you have dreams of retirement, travel or just a little more financial breathing room, chances are you have plans for that extra disposable income. The good news is, you don’t have to wait decades to get there. Check out these five simple ways to pay off your mortgage faster – and save thousands in interest charges.
Pay More Often
When it comes to paying down a mortgage, the standard monthly payment isn’t the best option. In fact, the simplest way to pay down your mortgage is to make more frequent mortgage payments. That’s because your mortgage accrues interest on an ongoing basis, so each and every dollar you pay today is one less dollar accruing interest tomorrow.
There are several payment options available on a mortgage, but it is the accelerated weekly and bi-weekly payment plans that will help you make the biggest dent in your biggest loan. That’s because these payment plans sneak in a couple of extra payments in a year (26 for bi-weekly and 52 for weekly) over standard payment plans (which make 12, 24 or 48 payments per year). On a $300,000 mortgage with a fixed 5 percent interest rate and 25-year amortization, choosing an accelerated payment option can shave interest costs by $37,000 over the course of the loan.
Make Lump Sum Payments
If you get a raise or come into some other unexpected money, consider putting it on your mortgage. If you do this regularly, you’ll be amazed at how quickly it’ll slash years off your loan. Consider that $300,000 mortgage again. In this case, a yearly lump sum payment of $2,000 will save $47,000 in interest over the course of the loan and will allow you to pay off your mortgage more than four years sooner. Combine this with an accelerated weekly payment plan, and you can save thousands more.
Increase Payment Amount
A lot can change over the course of a mortgage; you might get a big promotion at work, or your kids may move out on their own. For many people, this means more available income. If you’re still working on paying down your mortgage, using this money to increase your monthly payment amount can be a great way to get the job done faster.
So, if you have the $300,000 mortgage we’ve been using as an example here, you’ll have monthly payments of about $1,700 per month. Now let’s say you can add an extra $500 per month to that. That’s about the same as the monthly payment on a new car, but it’ll reduce the cost of your mortgage by more than $86,000 over its lifetime, allowing you to be mortgage free nearly nine years sooner.
The interest rate on your mortgage has a major impact in how much you end up paying for your home. That’s why in some cases, it can pay to refinance a mortgage, even if there may be penalties and fees for doing so. Your mortgage broker can help you determine whether refinancing will work in your favour, but if it does, it can save you thousands of dollars. On a $300,000 mortgage, the difference between a four percent rate and a five percent rate is approximately $50,000 over the 25-year period. That’s why shopping around for the best mortgage rate is worth the trouble. A mortgage broker can help, and even guide you through a mortgage refinance when in it’s in your interest to do so.
Get a Tax Deductible Mortgage
Unfortunately for home buyers, Canadian mortgages aren’t tax-deductible like they are in the U.S., but there are some investing strategies to make them that way. The Tax Deductible Mortgage Plan (TDMP) is a structured investment plan that converts a non-tax-deductible mortgage loan into a tax-deductible investment loan. This essentially makes the mortgage interest tax deductible, helping homeowners to collect a tax refund. This can then be applied to pay the mortgage down more quickly. Although there are no out-of-pocket expenses for this program, home owners must meet a few simple guidelines to qualify. Check with your mortgage broker to see if it’s a fit for you.
Many people assume that short of winning the lottery, they have to drag their mortgage payments out for the full amortization period, which is usually at least 20 years. Fortunately, there are several simple moves any homeowner can make to save on interest and, ultimately, be mortgage-free faster.