Expiration Date Unknown: How to Tackle Paying off Your Mortgage Faster

The word mortgage (mort-gage) is a term from French law that literally translates to “death pledge” because it’s a contract that lasts beyond the grave.  But it doesn’t have to be a morbid sentence as there are many strategies that you can employ to ensure that you aren’t mortgaged well into the after life.

A few key strategies to help pay your mortgage off faster:

1)      Choose Accelerated Bi-weekly payments – these work simply because of the number of bi-weekly periods in a calendar year.  With accelerated bi-weekly, the monthly mortgage payment gets cut in half, and because of the 26 periods you’re getting an additional 2 payments in a year (equivalent to one additional monthly payment per year) compared to say a semi-monthly (24 periods).  This simple strategy can knock anywhere from 3-4 years of the total life of your mortgage and save you interest in the process.  Accelerated Weekly Payments also have the same effect.  *A note of caution – some lenders offer True Bi-weekly Payments which actually spread the equivalent monthly payments over 26 weeks so there is no direct benefit from this.  This would be an ideal choice only if you prefer bi-weekly payments and need to keep your payments as low as possible for cash flow reasons. *

Confused?  It’s a lot to process so I’ve included an example below:

·         Monthly payment is $2000, your accelerated bi-weekly will be $1000 (monthly divided by 2 x 26 )

·         Monthly payments are $2000, your true bi-weekly will be $923 ($2000 x 12 months divided by 26)

2)      Take advantage of the features the lender offers such as Double Up Payments and Payment Increases.  Specific benefits vary from lender to lender, but with a double ups you can have the bank take your mortgage payment 2 times for that period, and in some cases you can even do partial double up payments (check with your lender for their unique prepayment policies). 

Payment Increases allow you to increase your regular payment by a certain percentage, say 10% per year.  It doesn’t sound like much, but small changes lead to big results.  For example, a mortgage with $1500/month payments where you increase the payment by 10% ($150/month) means that you’ll have paid thousands less in interest by the time your 5 Year Term is up.

3)      Another lender advantage is Lump Sum Payments.  It’s common in the industry for the lender to offer this feature allowing prepayment of anywhere between 10% and 20-25% of the original mortgage balance as a yearly lump sum.  Some lenders allow you to make this only on the anniversary date, other’s once per calendar year, but I do think this is one of the most misunderstood features.  I’ve had a lot of clients laugh and say “yeah right where am I going to get 20% of my $500,000 mortgage in any given year” but it should be noted that the feature is allowing you to make a payment up to this amount, and just because you haven’t hit the upper ceiling doesn’t mean putting some cash toward your mortgage isn’t a good idea.  Even if it’s a few thousand dollars that money still goes directly towards the principal balance and in the long term will reduce both the interest costs and length of your mortgage. 

If you have extra cash flow every month, then double up payments or payment increases are probably the way to go, but if you receive funds at different times during the year (regular bonuses at work, your tax return, maybe even that Christmas cheque from Grandma) then the lump sum option is probably your best bet.

4)      Finally, it pays to keep a close eye on any mortgage secured lines of credit that you may have.   An equity line of credit is an open, revolving credit account that is registered against your property.  It’s advantageous in that it gives you a source of low-cost borrowing and low interest-only payments, but on the flip side it’s still technically part of the mortgage so you want to ensure that you have a repayment strategy in place for the future so it doesn’t turn into a never-never plan.

In short, there are lots of different ways to say adios to that mortgage sooner than planned, but you want to make sure that you’re not sacrificing in other areas or pushing yourself to the limit.  What do I mean by that?  Well, if putting your company bonus down as a lump sum means leaving a balance on a high-interest credit card then as nice as a lower mortgage balance is that may not be the best use of your funds.  Or, if that tax return would be better as an RRSP contribution to help get you into a different tax bracket then putting it on the mortgage may not best serve your long-term needs.  Prepayment features aside, mortgage rates are still among the lowest cost of borrowing out there, so you want to make sure that whatever strategy you employ considers your full financial picture and goals.

Questions?  Let’s talk.