5 tips for making a dent in your debt.
Congratulations! You’re a homeowner. Now that you have a place to call your own, you may be wondering how to pay down your mortgage a little bit faster.
According to a BMO 2015 home-buying report, the average Canadian expects to pay off their mortgage by age 59 — but 31 per cent think they’ll still have a mortgage by their 65th birthday. Looking to ditch your debt quicker — without over-extending your budget? It may save you hundreds (if not thousands) in the long run.
The biggest benefit is saving money on interest charges. The longer it takes to pay down your mortgage, the more you’ll pay in interest. The BMO report found that, on average, Canadians believe they’ll pay approximately $60,000 in interest on their mortgage (and this number hits $100,000 for B.C. residents).
First-time homebuyer tip: Curious how mortgage payments work? It’s all about the amount of money you’re borrowing and the length of the loan. Based on these factors, your lender will calculate your payment schedule. Some of your payment will go toward interest (the amount paid on the amount you borrowed), and some will go toward your principal (the amount initially borrowed under the mortgage). You may pay more toward interest than principal in the first few years of your loan, and more toward principal in the later years. Calculate your potential payment schedule with our nifty mortgage calculator.
- Choose the right payment frequency: You typically have the choice of paying down your mortgage monthly, semi-monthly, bi-weekly, weekly, accelerated bi-weekly or accelerated weekly. By choosing an accelerated weekly or bi-weekly option, you’ll end up making the equivalent of one extra monthly payment per year. This simple strategy alone can save you thousands of dollars in interest over the life of your mortgage and shorten your amortization period. Use our Mortgage Payment Calculator to see how small changes can make a significant difference.
Tip: Consider aligning your payments with your pay period, so you’re sure to have money in the bank for your mortgage payment. Just make sure you have enough cash left over from each paycheque to pay your other monthly bills, as well as contribute to your savings account.
- Consider increasing the amount of your payments: Once you’ve become comfortable paying your regular mortgage payments and other monthly bills, you’ll have a better sense of what you can afford. Take a good look at your budget to see if there’s any room to increase your mortgage payments — even a small amount, such as $50 or $100 a month, can help you save on interest in the long run.
Tip: Chat with your mortgage lender or review your mortgage agreement to confirm your payment options. There are often restrictions as to when you can make changes, and how much you can increase your payments.
- Make lump-sum payments, if possible: In addition to increasing your regular payment amount, the fastest way to be mortgage-free is to make lump-sum payments whenever possible. Most mortgage lenders allow you to pay a lump sum, up to a certain amount, throughout the year that goes just towards your principal, not the interest. If you find yourself with any cash to spare, say from a tax return, bonus or financial gift, it’s a good idea to put at least a portion of it towards your mortgage to help pay down the principal faster.
Tip: When interest rates are low, it’s a great time to make aggressive principal payments, according to the BMO Wealth Institute.
- Renew at a lower rate, if possible: At the end of your mortgage term, you have the option of renegotiating or renewing your mortgage. If rates are low, you can lock them in with a fixed rate mortgage (but consider keeping your payment amount the same to help pay down your principal faster). If you think rates might go down further, you may consider a variable mortgage rate, which fluctuates with the market prime rate. Fixed rates give you the security of knowing exactly what your payments will be each month, regardless of any changes to the prime rate, which makes it easier to budget. Variable rates are more unpredictable, but could save you more over time if you’re up for a bit of risk and uncertainty.
Tip: Start reviewing your renewal options early — don’t wait until you receive a notice from your current lender.
- Be realistic about your payments: While it’s a good idea to be aggressive with your payments, you don’t want to compromise your daily needs and other financial commitments, quality of life, or emergency fund and savings. While there are extreme examples (like paying off your mortgage in three years), it’s okay to be slow and steady with your approach. Make a budget that includes your mortgage and all other financial obligations, and see where you net out.
Tip: Looking for ways to save cash in other areas of your life that you can put toward your mortgage? Turn your spending habit into a savings habit with these 7 tips.