Owning a house is an important priority for any person. A house provides some physical security and it is a roof over one’s head. It is even more important if you are starting your own family. However, owning a house is an expensive affair and if you are young, it could take you a decade to buy that dream house. It is for such situations that mortgage loans are created. The Canadian Banker Association estimates that as much as 68% of residential debt in Canada is made up of mortgage debt. On an average, Canadian mortgages are around C$280,000 at a 3.2% interest rate amortized over 25 years. This means that by the time, your skin gets wrinkled, your bone starts creaking and you are old, you will still be paying your mortgage.
So how do you pay off your mortgage faster?
- Pay Often: There are many options available for making your mortgage payment, but the more often you pay, the better. Mortgage accumulates interest each and every day. The standard mortgage payment of C$280,000, will take 25 years to pay, with an additional interest of C$126,000. Paying bi-weekly or weekly payments divide your monthly payments to smaller ones of 24 or 48 payments per year. Another option is the accelerated weekly or bi-weekly payment system. You’ll make 26 payments in a year for the accelerated bi-weekly option and 52 payments in a year for the accelerated weekly option. Not only would you reduce your time to pay off the mortgage by two years when compared to standard monthly payment, but you will also reduce your interest by C$17,000. Choosing this option will also cause a less budgeting headache as the payments will be smaller and easier to budget.
- Lump sum payment: Whenever you have a tax return or a bonus or an expected cash injection you should put in your mortgage payment. Spending an additional C$1,000 in a year on your mortgage will give you an advantage of paying it four years sooner and if combined with accelerated bi-weekly payments, you can reduce at least another C$8,000 of your mortgage interest. So whenever you have extra income lying around, spend it on your mortgage.
- Payment Amount: Another effective method to dispose of your mortgage payment is to increase your monthly payable. This is good strategy if you are a rising star in your workplace with an increasing salary check.
- Interest Rates: Always try to negotiate for a lower mortgage rate. It can never be too low. Even point percentages can make a big difference. For example, the difference between 2.99% and 3.2% in our example above results in C$6,000 of savings in interest in the mortgage. So, if ever you are renewing your mortgage try to get the least amount of interest rate.
- Tax-Deductible: If you have acquired your house through an asset swap where in you have sold off your investments and purchased a house, getting mortgage on it and buying back your investment, you will be eligible for a tax deduction on the interest. This is not the case for interest paid on pure mortgages.
Using these five methods you can hope to pay off your mortgage faster and instead of waiting for 25 years, by which time you will have grandchildren hopping on your lap, you will pay off your mortgage by the time your children are in college.
