Paying Down the Mortgage
Reducing consumer debt has been the name of game – from the Bank of Canada warnings of increasing household debt to the Government of Canada tightening mortgage rules. A recent survey by the Bank of Montreal said that 51% of Canadian homeowners are expecting to carry their mortgage into their retirement years. Wow!
The good news is that you don’t have to be a part of the majority. There are plenty of ways to help pay off your mortgage faster, leaving you time to enjoy the things you love most.
Paying a Bit More Each Time
Increasing your regular payments really helps to pay down your principal and reduce the amount of interest you have to pay in the long run. Paying a little extra means you don’t have to worry about saving for a large lump sum payment each year.
Consider the example in the chart below. If have a $300,000 mortgage with a 25 year amortization, you would be paying $1433.63 a month (based on today’s 5 year fixed mortgage rate of 3.09%). If you increased your monthly payments by $100, you would save you over $13,000 in interest.
| Monthly payments at $1434 | Monthly payments at $1534 | |
| Principal | $300,000 | $300,000 |
| Total Interest Paid | $130,087 | $116,603 |
| Total Amount Paid | $430,087 | $416,603 |
| Interest Savings | — | $13,484 |
| Years to Pay Mortgage Off | 25 | 22.7 |
Accelerated Payments
Paying a little more with a little more frequency is another way to you can save big. Paying a little more twice a month instead of one monthly payment can shorten your amortization period and save on interest.
Again, taking the same conditions as the example above: $300,000 mortgage with 25 year amortization and a 5 year fixed at 3.09%. If you pay an extra $119 a month and make 2 payments a month, you can end up saving over $16,000 in interest over the lifetime of your mortgage.
| Monthly | Accelerated Bi-weekly | Accelerated Weekly | |
| Cost Per Payment | $1434 | $717 | $358 |
| Monthly Payment Increase | — | $119 | $119 |
| Total Interest Paid | $130,087 | $113.895 | $113,720 |
| Total Interest savings | — | $16,192 | $16,367 |
| Years to Pay Mortgage Off | 25 | 22.2 | 22.2 |
Yearly Lump Sum
A lump sum payment that you make in addition to your regular mortgage payments is called a “Prepayment”. This option is great to consider if you receive some extra money from a bonus or income tax return for example.
If you contribute a lump sum to your mortgage on a yearly basis, the benefits can be significant. Again, taking the same scenario as above, this chart will show you how much savings you could have with this payment option.
| Yearly Lum Sum Payment | $500 | $1500 | $10,000 |
| Total Interest Paid | $123,846 | $113,002 | $63,399 |
| Total Interest Savings | $6,241 | $17,085 | $65,688 |
Make More Payments
When you get a mortgage, you’re able to choose how often you want to pay for your mortgage: monthly, semi-monthly, bi-weekly, weekly, etc. There’s no difference in how much you pay in a year, but the frequency in which you pay helps to save.
Just increasing your payments doesn’t equal a lot of savings in the long run, but every little bit can help.
| Monthly | Bi-weekly | Weekly | |
| Cost Per Payment | $1434 | $661 | $331 |
| Total Interest Paid | $130,087 | $129,792 | $129,667 |
| Total Interest Savings | — | $296 | $421 |
Not all mortgages give you the flexibility to pay off your mortgage faster. Make sure you review your mortgage agreement to understand the limitations on your mortgage. There may be minimum and maximum payments with any of these options, so know your mortgage product before decide on a mortgage.
Contact us at CENTUM and we can help you figure out a strategy to get you debt-free faster.
*all calculations stated above are approximate, based on the CENTUM mortgage calculators on www.centum.ca.
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