There are several options available within the terms of your mortgage that allow borrowers to rapidly reduce the amount of time it takes to pay down a mortgage. With a little planning and budgeting you can be on the road to being mortgage free faster. Below are 9 tips below that you can take advantage of to reduce your mortgage.
1. Switch your payments to an accelerated payment schedule. Simply switching from monthly payments to an accelerated weekly or bi-weekly payment schedule will reduce the time it takes to pay off your mortgage by 3 years. It is important to recognize there will be a few months a year that you will have three mortgage payments due so make sure that you budget for that. Most lenders will allow you to set your payments to coincide with your pay dates so that your payments come out the day you get paid. This makes your payments easier to manage.
2. Budget yourself to make a lump sum payment annually. Most mortgages will allow you to pay down anywhere from 10% to 25% of the original principal balance. Surprisingly, more than 95% of Canadians do not use these privileges. A lump sum payment goes directly towards the principal of the mortgage and making the equivalent of one monthly payment a year will knock approximately 3 years off the life of your mortgage.
3. Increase your payments as your income increases. As your salary increases, increase your payments accordingly. It might be fun to think about spending that extra monthly on luxuries that you don’t need but why not use it to pay down your mortgage instead? Figure out what the increase means on a monthly after tax basis and then apply all or a portion of that increase towards your payments.
4. Round up your payments. Rounding up your payments to the nearest hundred dollars may not seem like a lot of extra money to pay but over time it adds up. For example if you are paying $870 bi weekly on your mortgage, consider rounding up to $900, that extra $30 you pay goes right towards the principal. Now factor that in over the 26 bi weekly payments you make a year and that works out to be almost $4,000 in principal you have paid off in 5 years.
5. Pay a variable rate as you would a fixed rate. If you are in a deeply discounted variable rate I’m sure you’ve become accustomed to paying an interest rate in the low 2.00% range for the last few years. While the low payment is nice, think about the benefit of setting a higher payment to mirror what a fixed rate would be. Most variables allow you to fix a payment above the minimum required amount every month. For example, a $400,000 mortgage with a 25 year amortization and a variable rate at prime less .80% (2.20%) would give a monthly payment of approximately $1732/month. At a fixed rate of 3.50% the payment would be $1997/month. That’s a difference of $265/month, by taking your variable rate and increasing the payment to the higher amount; you are paying more principal off every month. If you fix your payment, it also won’t change until the time that variable rates increase high enough that your interest rate on the mortgage is above the 3.50% you have set the payments at.
6. Contribute to your RSPS to help pay down the mortgage. Use the tax refund that you receive yearly from your RSSP contributions; apply it directly towards the principal of the mortgage. At an annual salary of $80,000 and a marginal tax rate of approximately 39.5% you will receive back approximately $3950 for every $10,000 you contribute to your RSSP. At the same time you are saving for the future you are also helping pay down the mortgage annually with the tax refund you are generating.
7. Monitor interest rates and see if it makes sense to renegotiate the terms of your mortgage. Keep an eye on where current interest rates are or work with a competent mortgage professional, who will help track and manage this for you. This will allow you to be on top of opportunities that may arise to refinance your mortgage into a better interest rate. A lot of clients are scared by hearing a penalty is involved. Running a cost benefit analysis that factors in the cost of the penalty vs. the interest savings on the new loan will help you make a decision. If it does make sense to renegotiate the term, a lot of times the penalty can be included in the mortgage and not out of pocket.
8. Shop around at renewal. It is shocking how many clients sign back their mortgage agreements at renewal without actually taking the time to investigate the options to them. Banks send out renewal agreements at posted rates with the expectations that more than half of their clients will sign back without even negotiating. When you are at renewal you are free to transfer from one lender to the next and usually free of charge so it pays to compare the terms available with other financial institutions.
9. Think outside the box. Mortgage interest on your principal in Canada generally isn’t tax deductible but there are different programs out there that are available to consumers such as the Tax Deductible Mortgage Plan or the Smith Maneuver that you can use to help pay down your mortgage faster with no real added monthly payment. It can be very complicated and isn’t right for all borrowers but is worth discussing with your mortgage advisor. Your mortgage advisor will discuss with you how the programs work to see if you are a candidate and explain the pros and cons of doing so.