In her latest column, Jenni MacDonald talks about how to pay off your mortgage faster: Do you remember the day your parents burned their mortgage documents because it was paid in full and discharged? It was a celebration that few of us expect to experience in our own lives. For many, this isn’t even a realistic goal anymore… but can it be? Here are some tips that may help you get close to being mortgage free!
Make lump sum payments. Most mortgages come with a “Pre-payment privilege” of 15% – 20% of the original principal. That means that over the course of a year, you can directly pay off some of the principal that you owe on your mortgage without penalty!! Check the details of your mortgage to see if you can make several payments or one a year. It will save you thousands of dollars in interest and knock years off your mortgage.
Increase your monthly payment amount. Again, most mortgages have a pre-payment privilege to increase your payments up to 20% once a year… maybe if you get a raise, increase your mortgage payment by that amount so you don’t miss it but your mortgage gets paid years faster!
Increase your payment frequency. A little word of caution on this option. You must ask for an accelerated bi-weekly payment not just a bi-weekly payment. It’s a little complicated with the mathematics but, basically, an accelerated bi-weekly will give you 2 extra payments a year that go directly to the principal you owe and will help you pay your mortgage off about 3 years earlier. If you match these payments to your pay schedule, you may not even notice you are paying a little more than you were on a monthly schedule.
Switch your mortgage to a better rate. This may or not fit with your situation. A Mortgage Broker can compare the current mortgage rate you qualify for with the rate you are currently paying. There are situations where, even after paying a penalty to get out of your current mortgage, the savings on the rate difference will help you pay your mortgage faster. I would even recommend keeping the same monthly payments you are used to so that you are getting a better rate but paying extra every month. Please consult with a Mortgage Broker before venturing down this path!
Refinance and roll all of your debts into your mortgage. I know increasing your mortgage does not sound like a fast way to pay it off but, with discipline, it can be a great idea. The trick is to pay ALL other debts in full with a new mortgage but set the payment amount at the total you are currently paying on all those high interest cards. The extra amount goes directly against principal and your mortgage gets paid faster. Again, this step comes with a warning to consult a Mortgage Broker to make sure the numbers are in your favour. Also, if you choose to follow this step (here’s where the discipline comes), you cannot, under any circumstance, run up the credit cards, loans and lines of credits that you just cleared! That would completely demolish the reason for increasing your mortgage in the first place!! Discipline is required!
RRSP contribution. If you make an RRSP contribution as part of your Retirement Saving plan, use the tax refund to put directly against your mortgage as part of your pre-payment. That is a win-win!
Make an extra mortgage payment. If you put aside a little money from each pay cheque, you can make an extra payment on your mortgage if you haven’t used up your full pre-payment privilege for that year.
Get a variable rate mortgage instead of a fixed rate mortgage. Because Banks can adjust the variable rate to match the economy, they are often better rates than fixed rate mortgages. If you choose a variable rate mortgage but set your mortgage payments on the fixed rate payment amount, you can save and pay your mortgage earlier. This is not for the faint of heart however. If Prime rate changes, a variable rate does change with it. The risk is fairly low that your mortgage payment will go higher than the payment you had chosen but it is a risk. If you prefer to be absolutely certain that you don’t want your payments to change over the term of your mortgage then avoid this option!
Move to a less expensive house. Sometimes, the house we live in – which was a perfect size when all our children were living at home – is too much now. Look at a less expensive house for your future years. This option could open you up to a new freedom in your financial lifestyle that you hadn’t considered possible.
Port your mortgage. If you do decide you need to move, check with your lender to see if your current mortgage is “Portable”. This just means that you can take your mortgage to the new property without paying a penalty to break your current mortgage. This can save you a lot of money in penalties. It is especially desirable if you have a great rate on your current mortgage.
Get a tenant. If you don’t want to move but have too much space, could you convert your basement or rooms in rental units? Using the rental income to pay directly against your mortgage might just be the answer for you. Not everyone can be a landlord but it might be worth some thought!
Jenni MacDonald (www.jmacdonald.ca) has been an award-winning Mortgage Broker with Dominion Lending Centres for over 9 years and has many years of experience in the banking world. She works with over 40 lenders, credit unions, and private lenders to find the best mortgage for each client. You can contact her by phone or text at 613-551-0639 or via email at firstname.lastname@example.org
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