For most people, purchasing a home is the most expensive investment of their life. It is also the one which drags on the longest, as most folks don’t tend to have $500,000 hidden under their mattress to buy a property in cash.
It’s a heavy debt to carry around for such a prolonged period. Add to that the fact that most people will purchase more than one property over the course of their life – most likely moving up in size and price – and chances are you will be carrying a mortgage into our retirement years.
Which, I’m sure you’ll agree, is not something to look forward to. This might explain why the internet is filled with stories of folks who have gone to extremes to pay off their mortgage much quicker than the average homeowner.
You may not have to go to such extremes to pay off your mortgage faster, however. There are plenty of simple and effective strategies you can apply to become mortgage-free before you kick up your feet and call it a career.
Let’s have a look at a few of them.
It’s All About Your Budget
If you want to pay off your mortgage faster, you’ll need to free up some capital.
The best place to start with is your monthly budget.
Take a look at your expenses to figure out which ones you can reduce – or eliminate entirely – to free up cash that you will use to repay your mortgage.
Can you use the Snowball Method to get rid of your debt? Can you live without cable TV? How about cutting back to one trip to Starbucks a day? Maybe you’d rather generate more income by getting a second job. That’s another viable option.
Paying off your mortgage faster is a tall order. Sacrifices are tough, but necessary. It’s up to you to decide which ones you choose.
Can You Get a Better ROI Elsewhere?
So, you’ve gotten your monthly budget in order, have paid off your debt, and have learned to live with less. Now, you have some extra cash available. Do you treat yourself to a nice vacation? Do you buy that new couch you’ve been drooling on forever?
Maybe you’d rather invest it. Not a bad choice. But where? In an RRSP? A TFSA?
Or on your mortgage?
What is the best vehicle to get the best return on your investment?
In Canada, consumers are constantly being reminded of how important it is to save money for their retirement – by investing in an RRSP, for example. Such an investment is fantastic, as it comes with some tax advantages. However, the money you invest in an RRSP will be taxable when the funds are taken out, which could greatly diminish the return on your investment.
There are a few reasons why investing your extra capital on your mortgage in order to pay it off faster is such a great investment vehicle.
- Your ROI is guaranteed: if you put down an extra $5,000 per year on a mortgage which carries a 3% interest rate, you’re saving 3% in interest. This represents a 3% guaranteed rate of return, which is better than a lot of GICs currently offered by major Canadian banks and financial institutions.
- Rates are trending upwards: borrowing money is getting more expensive. Central banks have been raising their interest rates slowly for more than a year now. Although it is highly unlikely that interest rates will hit double digits like they did some 30 years ago, it seems more and more probable that they will climb to 5% or higher in the not-so-distant future. Hence, the more you pay off your mortgage now, the less this rate hike will affect you down the road.
Change the Frequency of Your Payments
When purchasing a mortgage loan, you’ll be asked to decide on the frequency of your payments. You must make a minimum of one payment per month for the duration of your term. But other options are available. You can choose to make bi-weekly payments, accelerated bi-weekly payments, weekly payments, or accelerated weekly payments.
By choosing either one of the accelerated options (bi-weekly or weekly), you are in effect paying an additional month every year. In the long run, this will save you a lot of interest, and help you pay off your mortgage faster.
For example, let’s take a $300,000 mortgage loan, amortized over 25 years, on a 5-year fixed term at 3% interest.
On a monthly payment frequency, you will pay $1,419.74 per month ($17,036.88 per year).
While this is highly unlikely, let’s assume the terms remain unchanged for 25 years: you will have paid a total of $425,920 for your property.
Now, let’s look at an accelerated bi-weekly payment. Under these terms, you will pay $709.87 every 2 weeks, 26 times a year ($18,456.62 per year). Over 25 years, your new total will be $410,449.
By paying slightly more each year ($1,419.74, or just over $100 a month), you will have saved a total of $15,471 in interest fees.
That’s a nice chunk of change. 💸
Maximize down payment
It’s a no-brainer : the more money you put down on your property, the lower your mortgage loan will be, making it easier to pay it off quickly.
So, if you can afford it, put down 20% (or more) of the purchase price of your property. This will also help you avoid having to purchase private mortgage loan insurance.
No Wrong Choice
As you can see, there are multiple ways you can go about paying off your mortgage faster.
None of them are wrong. A mortgage is expensive, even when you have a low interest rate.
It also takes a long time to pay it off if you only make the minimum payments every month. Think about it: 25 years represent about 60 to 70% of your working life.
Deciding that you don’t want to spend two thirds of your working life paying for your home is a wise decision.