Most Canadians want to pay their mortgages off as fast as they can. Since the payment of principal and interest is typically not tax deductible as it is the U.S., we are paying the bill with after-tax dollars and for many, it’s an awfully big chunk of our monthly expenses.
There are many things you can do to pay off your mortgage more quickly. Let’s use an example of a $200,000 mortgage bearing an interest rate of 5.8%.
Shorten Your Amortization Period. Instead of taking the most common 25 year amortization period, consider reducing it. For example, the monthly payment on this $200,000 mortgage amortized over 25 years would be $1256.00 per month. If you shortened it to 20 years, the monthly payment would increase to just $1402.00 per month and, you would save more than $40,000 in interest over the amortization period of the mortgage! Even shortening it to 22 years would save you over $20,000 in interest while only increasing your payments by $79.00 per month.
Pay More Frequently. Instead of paying your mortgage once a month, pay it on what is called an accelerated bi-weekly basis. Essentially, you take your monthly mortgage payment and divide it in two. Then you pay this amount every two weeks which you could even tie to your pay periods. Since there are 26, two-week periods in the year, you will have effectively paid one extra month that year. But look what happens: If you had a $200,000 at 5.8%, amortized over 25 years, and paid it bi-weekly, you will have it paid off in 21.15 years and, you will have saved over $22,000 in interest.
Make another extra payment a year. At the end of the year, consider using your RRSP tax return to make one extra bonus payment on your mortgage. The effect is dramatic. On that 25 year mortgage, paid accelerated bi-weekly with one top up payment of $1256.00, look what happens. The mortgage is now paid off in 18.5 years and you’ll save about $52,000 in interest! This is clearly the single best thing you can do.
When you term is over, decrease your amortization period again.
To recap, if you take out a $200,000 mortgage today at 5.8%, amortized over 22 years, pay it on an accelerated bi-weekly plan and make just one extra monthly payment a year, your mortgage will be paid off in 16 years and 8 months and, you will have saved over $65,000 in interest. If you shorten the amortization once or twice during that time, you can pay it off relatively painlessly in 10-15 years. Pretty neat, isn’t it? If you’d like to play with your own scenarios, try this website and click on “amortization” in the third drop down menu or, check your local lenders website.
Marg Scheben-Edey is a Broker with RE/MAX four seasons realty limited, Brokerage in beautiful Collingwood, ON. With three decades of experience, Marg is a leader in the local real estate marketplace and is ready to help guide both Buyers and Sellers in achieving their real estate goals. Email Marg