By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929
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When the bank sets your amortization to 25 years, it’s not necessarily to help YOU.
Having a mortgage, unfortunately, is not an asset. No matter what type of house you own and no matter what type of equity you believe you have, if you have a mortgage you’re in the liability column.
And, it’s going to be the biggest liability you’ll have over your lifetime.
Unless you’ve signed up for an open mortgage product like a line of credit, for example, most mortgages in Canada are closed. This means that you are locked into whatever your interest rate is for the term of your mortgage. If you’ve amortized your mortgage over 25 years as most borrowers do, then it is safe to say With today’s interest rate climate you will pay almost double your mortgage balance in interest. That’s quite a lot of money, isn’t it?
And why is this important?
Compounding interest is one of those tools that has assisted regular borrowers with average salaries to become rich. Unfortunately, when most people are paying liabilities with the income they are generating through employment, for example, they are not giving themselves an opportunity to save and earn compounding interest through some form of investment. They are not “free” to pursue any other ventures.
That’s why if you have a mortgage, it’s essential to take steps every day to remove this liability from your life and move into the asset column.
Just because it’s amortized over 25 years does not mean your mortgage should stick around that long by any means. The 25-year number is often used as a subconscious dictation of how long someone should have a mortgage but it doesn’t necessarily serve you.
What should you do to get out of mortgage debt quickly?
If you pay your mortgage off, within the closed term, you will be subjected to penalties. However, your lender, whoever it is, most likely has provided privileges within the mortgage that act as loopholes where money becomes free to borrow.
Most commitments that I present to my clients have a very generous prepayment privilege of 20% per year. They also have double up payments which means you can increase your monthly payment without penalty. Anything you pay towards your mortgage above and beyond your set principal and interest payment will automatically go towards reducing principle only and drastically reducing your amortization period.
Most people actually don’t do this and I’m not sure why. When I meet with my clients I look at their overall financial picture and if they’re serious about paying off their mortgage, I recommend that they increase their monthly payment even by as little as $200. That couple hundred of dollars every month can mean being mortgage-free as much as five years earlier.
If they’re paying credit cards at 19.99% interest, then absolutely, of course, it makes sense to consolidate into their mortgage and use the money they would have been paying towards their credit cards to pay principal towards their mortgage at 0%. This is a no brainer.
Getting tax returns, a couple thousand here and a couple thousand there. Instead of buying a brand new TV or some other electronic, use it to buy yourself six more years of financial freedom.
Only when borrowers truly understand how to take advantage of the privileges that are set in their mortgage contracts, can they actually take steps to move towards financial freedom...
Freeing up money quickly to invest in something like compounding interest, which means building their own infrastructure in other investments, will help accelerate growth rapidly.
The alternative: being stuck in mortgage debt for a lifetime, never having any disposable income (or not as much) to live the life of their dreams.
I can help you. For a free consultation, please do not hesitate to call my office at 647-773-4849