March 21, 2016
How You Can Pay Off Your Mortgage in Less Time
So you’ve bought a home and you’re determined to pay down your mortgage as quickly as possible. Rather than just making your standard mortgage payments, you have a few options to consider.
Option 1: Create an accelerated mortgage payment schedule
Obviously, paying more than the minimum is going to get the mortgage paid off faster. Here’s an example:
Let’s say the property you purchase is a flat $400,000, with a mortgage of $320,000. You have an amortization period of 25 years with a five-year fixed rate of 2.5%. If you choose monthly payments, you’ll make 12 each year at $1,433, meaning $17,202 annually.
However, if you accelerate to a biweekly payment option, you’ll make 26 smaller payments each year: $717 per payment, $18,635 per year.
While you’re paying out $1,433 more in the second scenario, that amount goes much further than you’d think. Because the timeframe to pay off your entire mortgage is shorter, you’re paying more onto your principal. In the first year, your mortgage balance drops by $7,679 more than in a monthly payment scenario.
Option 2: Use a shorter mortgage amortization
Typically, homebuyers will sign up for a 25-year amortization. If you shorten your mortgage amortization, you’ll pay a bit more at first but will save thousands in the long run.
Using the example above, and changing the amortization period to 20 years, you’ll pay $1,694 each month, totalling $20,234 per year. You’re paying $3,032 more a year, and your balance after five years will be $16,604 less than in the 25-year amortization scenario.
Now, let’s bump that up to a biweekly option. You’ll be paying $847 every two weeks, meaning your mortgage balance is $17,998 less than the 25-year scenario, after five years.
Increase your payment amount
Last year, the Canadian Association of Accredited Mortgage Professionals (CAAMP) reported that 16% of mortgage holders increased their monthly payments by an average of $285. You can do this, too; if you can afford it, simply increasing your payments will get the mortgage paid off a lot faster.
Make lump sum payments
Many lenders will allow you to make extra payments each year without having to pay a penalty, up to a certain amount—typically 25% each year. Last year, 16% of people with mortgages also made lump sum payments, with an average of $17,500.
So, while it is nice to have a bit of extra cash on-hand, if you can afford to pay off your mortgage faster, using these little tips and paying a fraction more can cut years off the end of your mortgage and reduce your stress throughout the entire process.
Unsplash: Jared Erondu