April 3, 2017

5 Must-Know Tips to Pay Less On Your Mortgage

When you consider the rapid pace of real estate price growth across the nation (and especially in housing markets like Toronto), it should come as no surprise that two thirds of the $2 trillion owed by Canadian households is mortgage debt. That’s indicative of the fact that many homeowners are carrying the costs of hefty mortgages. The good news: It is possible to reduce your mortgage debt load, plus pay less in interest over time. The secret lies in paying it off at a quicker pace than the traditional monthly payment schedule.

Here are five ways to pay less on your mortgage, and to decrease its overall timeline.

 1: Choose Accelerated Payments

The default for most homeowners is to make their mortgage payments on a monthly basis. But, should your finances allow, it can be very beneficial to increase the frequency of your payments to twice per month.

For example, let’s say you own a $500,000 home with your partner, and carry a $400,000 mortgage, extended over a 25-year amortization period, and at a five-year fixed rate of 2.39%. With payments made on a monthly basis, you pay $1,770, 12 times per year, for a total of $21,240.

Year	Total paid	Principal paid	Interest paid	Balance
2018	$21,240	$11,856	$9,384	$388,144
2019	$21,240	$12,141	$9,099	$376,002
2020	$21,240	$12,433	$8,807	$363,569
2021	$21,240	$12,732	$8,508	$350,837
2022	$21,240	$13,038	$8,202	$337,799
Total (term)	$106,202	$62,201	$44,000	$337,799

Fast forward five years, and you’ll have paid your mortgage down to $337,799, and will have shelled out a whopping $44,000 in interest payments! In comparison, with an accelerated bi-weekly option, you’ll have made 26 payments of $885, to a total of $23,010 per year.

Year	Total paid	Principal paid	Interest paid	Balance
2018	$23,010	$13,658	$9,352	$386,342
2019	$23,010	$13,986	$9,024	$372,355
2020	$23,010	$14,323	$8,688	$358,033
2021	$23,010	$14,677	$8,343	$343,366
2022	$23,010	$15,020	$7,991	$328,346
Total (term)	$115,052	$71,654	$43,397	$328,346

The real beauty of accelerated payments is the speed at which they put a dent in your mortgage principal. With this option, your balance would be $328,346. That’s a difference of $9,453, and two years off your total amortization.

Related Read: How to Calculate Your Mortgage Affordability

2: Shorten your amortization payment timeline

The most common length of time to pay off a mortgage is 25 years (or up to 30 years for homes where a minimum of 20% down has been paid). That may seem an eternity to be tied to a mortgage – but you can choose to reduce it to five, 10, 15, or 20 years.

For example, using the same mortgage scenario (a $400,000 mortgage with a five-year fixed rate of 2.39%, and accelerated biweekly payments), and a reduced timeline of 20 years, your bi-weekly payment would rise from $885 to $1,048.

Amortization period	Total paid over five years	Principal paid over five years	Interest paid over five years	Balance after five years
20 years	$136,237	$94,139	$42,098	$305,861
25 years	$115,052	$71,654	$43,397	$328,346

 While the interest savings aren’t as large upfront (just $1,299 saved over five years), you’ll make a $22,485 dent in the principal, and your balance will be reduced to $305,861. That’s almost 24% of your mortgage over five years, compared to 18% over a traditional 25-year timeline.

3: Boost your payments

Another way to cut down your mortgage payment timeline is to simply put more toward each payment. It doesn’t have to be a dramatic amount – for example, round up your two-week regular payment of $885 to $900 or $1,000. Remember, however, that once you up your payments, you cannot reduce them to the level they were during your term.

Despite this limitation, paying more on a regular basis is a popular tactic; a 2016 Mortgage Professionals Canada (MPC) survey found that 16% of those with a mortgage opted to hike their payments over the past year, by an average amount of $375 monthly.

4: Try Lump-Sum Payments

A lump sum payment (also referred to as a prepayment) is a larger payment made as a whole toward your mortgage. Depending on your lender, you may be able to pay between 10 – 20% of your mortgage’s total balance each year. Doing so helps reduce interest paid over time, as well as the mortgage amortization period – according to the same MPC survey, 18% of mortgage holders chose this approach over the past year.

5: Take advantage of renewal deals

Depending on how low mortgage rates are when your term comes up for renewal, you could negotiate and score an even better cost of borrowing. However, rather than enjoy the smaller payments that come along with a lower rate, continue to pay the same amount as you did before – that will effectively cut down on interest and your overall mortgage payment period.

That’s why it’s important to shop around for the most competitive rates – while having a lower rate won’t help you pay off your mortgage faster, it will save you significant dollars over the payoff period.

Assuming the same mortgage scenario as above, here’s how your payments can differ with various mortgage rates, and the amount of interest you’ll pay on your principal: 

Mortgage rate	Total paid over five years	Principal paid over five years	Interest paid over five years	Balance after five years
2.39%	$115,052	$71,654	$43,397	$328,346
2.54%	$116,990	$70,828	$46,162	$329,172
2.79%	$120,259	$69,483	$50,777	$330,517
2.94%	$122,245	$68,695	$53,550	$331,305