Expert advice on how to pay off your mortgage early
By Ryan Starr, Toronto Star
We consulted mortgage experts for tips to help readers become mortgage-free faster.
Budget for it first.
There are a number of strategies to help homeowners pay off mortgages quicker; all involve ponying up more dough.
Your first step should be to determine if you have the flexibility in your budget to put more money toward your mortgage.
“Make sure you’re balancing everything off,” says Sean Vanzante, a mortgage specialist at National Bank of Canada. “You want to be setting yourself up for a strong financial future, putting money away for things like your retirement and your kids’ education.”
Accelerate your payments.
If you do have the extra budget room, consider adjusting your payment plan.
For example, if you go on a bi-weekly accelerated schedule, making a payment every 14 days, instead of twice a month, you’ll have made the equivalent of 26 payments, by the end of the year.
“Smaller, more frequent payments will reduce your interest costs and get you mortgage-free faster,” says Farhaneh Haque, director of mortgage advice with TD Canada Trust. “And, if you tie it in to your payroll, you don’t even miss it.”
Increase your monthly payments.
Most financial institutions let homeowners make additional mortgage payments alongside their regular monthly payments.
Depending on the lender, a homeowner may be allowed to pay between 10 to 100 per cent of the mortgage payment and have it go directly toward paying down the principal, not the interest.
Make a lump sum payment.
Say you get a bonus at work or receive an inheritance – putting a chunk of that windfall toward your mortgage can make a difference.
Most lenders let clients pay lump sums between 10 to 20 per cent of the original mortgage, or the remaining balance, Vanzante notes. The full amount can be paid in one go or it can be made in instalments.
(Note: the lump sum contribution is over and above the amount you are allowed to contribute in additional bi-weekly payments.)
Reduce your amortization.
The principal-to-interest ratio on a mortgage leans more heavily toward interest in the first part of the mortgage term, Haque explains.
“So if you’re taking a shorter amortization, you’re tipping the scale a little bit so that a bigger portion of your payment is going towards your principal for that portion.”
The strategies outlined earlier – making accelerated, additional and lump sum payments – can effectively reduce your amortization period, while still giving you financial flexibility.