Sniff...sniff...can you smell that? Spring is definitely in the air! With near record temperatures in the GTA this week it definitely feels like Spring is here. Along with the inevitable arrival of Spring comes a very busy real estate market. It seems like every day I see new “for sale” signs posted on the lawns in my neighbourhood and just as fast as they go up it seems the “sold” signs are just as quick to follow. With action in the real estate market, there is obviously also action in the mortgage market. As such, it seems like a good time to give some tips to pay down mortgages quicker for all those folks moving into new homes, taking on potentially bigger mortgages or just for people looking to become debt-free quicker.
Mortgages in Canada are generally amortized between 25 and 35 year terms. While this seems like a long time, it doesn’t 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.
• When your income increases, increase the amount of your mortgage payments. Let’s say you get a 5% raise each year at work. If you put that extra 5% of your income into your mortgage, your mortgage balance will drop much faster without feeling like you are changing your spending habits.
• 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 or even part of it to your mortgage as a lump-sum payment towards your mortgage and watch the results.
If making lump payments or increasing your payments during the term of your mortgage isn't something you think you'll do, it's important to let your mortgage professional know that upfront. Lenders have started to offer products with names like "No Frills", which offer lower prepayment privileges (eg. 5% per year as opposed to 20%) in return for a lower rate. So, that little bit of planning can save you money even without having to to make any extra payments.
By applying these strategies consistently over time, you will save money, pay less interest and pay off your mortgage years earlier!
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