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Canada’s household debt is at a record high: it’s expected to rise to 174% this year (it was at 171% at the end of 2015). This means that for every $100 of disposable income, households have debt payment requirements of $171. A recent report from the Parliamentary Budget Officer said that of any other G7 country (leading industrialized countries), “Canada has experienced the largest increase in household debt relative to income since 2000.”
Debt can be scary and unsettling, and chances are your mortgage is the largest debt you’ll ever take on. With some thoughtful planning and dedication, you can make some relatively pain-free decisions and understand how to pay off mortgage faster, saving you thousands in interest without having to make drastic lifestyle changes and sticking within your budget.
1. Be informed and do your homework
Choosing a broker, or doing your own comparison shopping online on comparison sites can mean a huge difference in the mortgage rate you end up with. The average five-year fixed bank rate is 3.86%, and the average five-year fixed broker rate is 2.47%. That’s a difference of $27,522 in interest paid over five years.
If you already have a mortgage, you should continue shop around and compare rates, especially when you’re ready to renew. If you can secure a lower interest rate than you had in your previous term, you will find yourself with some added savings and extra money each month that you can put toward your mortgage.
You could also consider refinancing to take advantage of better rates, change your mortgage type, or shorten the term of your mortgage. There are penalties for refinancing, so it’s important to look into your agreement terms and conditions to determine if this will actually result in extra savings for you.
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2. Choose accelerated bi-weekly payments
This is one of the easiest ways to pay your mortgage off faster and you can really easily incorporate this method into your monthly budget. Choosing this option will work out to an extra month’s payment toward your mortgage every year. If your mortgage payment is $2,000, divide that by two ($1,000) and pay this amount every two weeks. This works out to 26 payments (or $26,000) per year instead of 12 ($24,000). By the end of the year with those two payments, you’ll have paid the equivalent of 13 months instead of 12. If you keep on that track your 25-year mortgage will be paid off in 23 years.
3. Round up your mortgage payments
By rounding up your mortgage payment you’ll make a minimal dent in your monthly budget, and the small extra amount will make a big difference over the course of your mortgage term. For example, if you have a $300,000 mortgage, with a 2.5% interest rate over 25 years, you’d be paying $1,344 every month. Round it up to $1,400 and that additional $56 (approximately the equivalent of your daily latte) will shave one year off of your amortization.
4. Put found money towards your mortgage payments
It can be really tempting to spend when you receive unexpected sources of money, such as a cash birthday gift, or a bonus at work. However, if you apply that directly to your mortgage, it will have no impact on your monthly budget, and it will go directly onto your principal.
You could also consider making adjustments to your other financial responsibilities, such as increasing RRSP contributions, then instead put that tax refund directly towards your principal.
5. Don’t adjust your budget!
If you get a raise at work, or pay off your monthly car payments or credit card and find that you have some extra money in your budget, don’t adjust anything! Put that extra money toward your mortgage.
6. Do adjust your budget!
Become a little more savvy with your money. Cut out that daily coffee, change your phone plan to a cheaper rate, go out for dinner less often, and readjust your monthly budget to allow for a few extra dollars to go toward your mortgage payment.
7. Make a lump-sum payment
Check your mortgage to see if you can make lump-sum payments on the anniversary you got your mortgage. Many lenders will give you the option to make a lump-sum payment on a closed mortgage up to 10%, 15% or even 20% each year without a penalty. It’s a great way to put that little bit extra onto your mortgage.
8. Keep your monthly payments the same at renewal, or make monthly payments as though your rate is already higher
If you’re able to secure a lower rate at your renewal date, and you find your monthly payments will drop, leave those monthly payments the same. Or, consider always making monthly payments as though your rate is already higher. Not only will you be putting extra toward your mortgage each month, if you happen to renew at a higher rate, your budget will already allow for that adjustment.
9. Find out if your mortgage is portable
A portable mortgage can be transferred to your new home. Look for one that offers an extended number of days to port it (up to 60, 90, or 120 days) so you don’t miss out on porting your mortgage while you’re waiting for the home sale to close. Porting your mortgage will allow you to take your current mortgage rate and terms with you, even if you’re only three years into a five-year term. Ensuring you have a portable mortgage will not only save you on potential penalties, but it will allow you to keep your interest rate if it’s lower than what is offered when you decide to move.
10. Shorten your amortization period
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And one final tip how to pay off mortgage faster (#11): be sure to look carefully into the privileges and penalties of your mortgage before you sign. Paying directly onto the principal, renewing or refinancing, or adjusting your amortization rate can come with hefty penalties. It’s important to weigh the benefits and pitfalls of making those lump sum payments or changes to your agreement. Sometimes it’s worth entering a mortgage at a higher rate can take advantage of those benefits over the course of your term.
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