Mortgages in Canada are generally amortized between 25- and 35-year terms. While this seems a long time, it does not have to take anyone that long to pay off their mortgage if they choose to do so in a shorter period of time.
With a little bit of thinking ahead, and a small bit of sacrifice, most people can manage to pay off their mortgage in a much shorter period of time by taking positive steps such as:
•Making mortgage payments each week, or even every other week. Both options lower your interest paid over the term of your mortgage and can result in the equivalent of an extra month’s mortgage payment each year. Paying your mortgage in this way can take your mortgage from 25 years down to 21. Basically, what happens when you choose a more frequent payment option is that you are paying interest on the principal for a slightly shorter period of time.
For example, with a monthly mortgage payment, you are paying interest on the total outstanding principal balance for the entire month. With a biweekly payment, you are only paying interest on this amount for half of the month, and then paying interest on this amount less the amount of your last payment. It is a small difference each time, but over the long term it adds up.
The most common approach is to match your mortgage payment frequency with your pay frequency. The majority of people are paid on a biweekly basis, so this seems to be the most popular.
•When your income increases, increase the amount of your mortgage payments. Let’s say you get a five per cent raise each year at work. If you put that extra five per cent of your income into your mortgage, your mortgage balance will drop much faster without feeling like you are changing your spending habits. Most lenders allow changes to your mortgage payment amounts without penalty. The amount they will allow you to change varies from lender to lender, but is generally in the 15-20 per cent range.
•Mortgage lenders will also allow you to make extra payments on your mortgage balance each year. Just about everyone finds themselves with money they were not expecting at some point or another. Maybe you inherited some money from a distant relative or you received a nice holiday bonus at work. Apply this money to your mortgage lender as a lump-sum payment toward your mortgage and watch the results. Again, prepayments in lump sums can often be made without penalty, depending on the terms of your mortgage.
The most common prepayment amount again is in the 15-20 per cent range. This applies to the original principal balance. So if your mortgage was originally $200,000, you have it paid down to $183,000 and your pre-payment amount allowed is 20 per cent, you would be able to pay up to $40,000 on your mortgage without penalty.
By applying these strategies consistently over time, you will save money, pay less interest and pay off your mortgage years earlier!
Dean Bala is a mortgage broker and Realtor working out of the Creston Valley Realty office in Creston. For more information, he can be reached at 250 402-3903 or dean_bala@yahoo.com.