Do you want to be debt free? Who doesn’t, right?
There are not many Canadians who own their home outright. In fact, according to a study conducted by Stats Can in 2008, only 13% of homeowners across the country were mortgage-free. This means that out of 36.7 million people, and 63% who own homes, over 50% have mortgage debt. That's quite a lot of mortgage people. The good news: it doesn’t have to be this way.
Most people have to take out a mortgage to purchase their home as they don't have 100% of the purchase price in cash. And, although mortgage rates have been lower in the last decade, borrowers will still pay hundreds of thousands in interest over the life of their mortgage debt which is often 25 years.
Helpful suggestion: You don't need to pay your mortgage for 25 years!
Can I Pay Off My Mortgage Early?
Thankfully, in Canada, most lenders allow you to prepay your mortgage sooner through lump sum payments. When it comes to personal finance, taking an approach that will save you from making high interest payments and having a mortgage for 30 years is critical if you want to enjoy financial freedom while you're still young.
Here are the steps you should take to pay off your mortgage sooner by using privileges built into your mortgage contract:
1. Verify how much of a prepayment you are allowed. Lenders usually allow between 5 to 25% of the original mortgage balance to be prepaid without penalty each year. If you pay more than the allowed privilege within the year or pay off your mortgage completely, you will have to pay a prepayment penalty if you are still within mortgage term. Usually, the penalty is based on either three months worth of interest or the Interest Rate Differential (IRD).
2. Increase Your Mortgage Payment: Any amount of extra money you add in addition to you set principal and interest monthly payment will automatically go towards reducing your outstanding principal balance interest-free. For example, increasing your payment by $100 can reduce your amortization period up to four years or more depending on your mortgage balance. In the long term, this makes for an excellent approach to be debt free sooner than your friends and neighbours.
3. Change Your Payment Frequency: The less time in between mortgage payments, the faster you will pay your mortgage down. The best payment frequency to choose to make your regular payments, which will also shave down your amortization schedule, is both accelerated bi-weekly and weekly payments.
Bi-Weekly, Accelerated Payments mean making a payment every two weeks or 26 times a year instead of 24. This results in one extra mortgage payment going towards reducing your principal mortgage balance every year without interest.
By changing your payments to an accelerated frequency you will drastically reduce your mortgages’ amortization period.
How To Change Your Mortgage Frequency:
Contact your mortgage provider or mortgage broker to learn how to change your payment frequency. Most times, there is no fee to do so. You may have to make an interest adjustment payment prior to your mortgage frequency taking effect, however, your lender will explain this to you in more detail once you phone in.
It’s important to understand that every single payment you put towards your mortgage that is over and above your current set principal and interest payment will go towards reducing your principal balance. You don’t have to add astronomically large mortgage payments - just adding a few extra payments a year can significantly lower your principal outstanding balance.
Examples include tax refunds, $100 a month which would have gone towards purchased lunches, inheritance etc.
If your in the market to buy a home, please do not hesitate to contact me to discuss your mortgage options.
By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929