Pay your mortgage sooner

By making thoughtful decisions and small changes, you can reduce the amount of interest you pay on your mortgage and pay it off years sooner.

Work with your mortgage specialist/banker to compare different interest rates, payment schedules, and amortizations to help you decide which options best suit your budget. 

If your plan is to pay down your mortgage as quickly as possible, there are three key areas you can adjust to help achieve this goal.

Amortization

Amortization refers to the gradual repayment of a debt by means of partial payments on the principal at regular intervals. The amortization period is the length of time required to repay your mortgage in full.

The amortization period you choose can have a significant effect on the amount of interest you pay over the life of your mortgage. Consider the following example:

$400,000 mortgage with an interest rate of 2.99 per cent (monthly payments):

• With a 25-year amortization, the monthly payments are $1,890.93; balance remaining after five years is $341,832.69, 20 years remaining amortization
• With a 20-year amortization, the monthly payments are $2,212.70; balance remaining after five years is $321,046.17, 15 years remaining amortization

In this example, assuming a constant interest rate over the life of the mortgage, by choosing a 20-year amortization you save yourself about $36,230 and have your mortgage paid off five years sooner.

Have your mortgage specialist prepare comparisons for you to show you the difference a slightly higher payment can make.

Prepayment options

Most lenders offer clients the ability to increase their payments once a year. I generally suggest that my clients choose a 25-year amortization to start, and have them increase the payment after, based on what they feel they can afford.

This way, if the higher payment proves to be more than they are comfortable with they can reduce the payment without having to pay fees to rewrite their mortgage.

As a general rule, the following prepayment provisions are available to you each year of the term of your mortgage, provided your mortgage is in good standing:

• Increased payment – once per year, you can increase the amount of the regularly scheduled payment to a maximum predetermined by your lender. This amount is generally either 15-20 per cent. The maximum for each payment increase is usually calculated using the amount of the current payment.
• Lump sum payment – again, this depends on your lender. In many cases you can make lump sum payments of $100 or more on any regularly scheduled payment date, provided the total of these prepayments made throughout the year does not exceed 15-20 per cent (whatever the amount allowed by the lender) of the original principal amount of your mortgage.

Payment schedules

Most lenders offer very flexible payment options. Weekly, bi-weekly, or monthly payments are most common. These choices also have a significant effect on the overall interest payments.

Consider the following example: 

$400,000 mortgage at 2.99 per cent interest over a five-year term, 25-year amortization 

SCHEDULE        PAYMENT           BALANCE (at end of term)       INTEREST SAVINGS (five year term)

Weekly                 $472.73               $331,527.79                                  $850.90

Bi-weekly             $945.47                $331,564.30                                 $813.09

Monthly                $1890.93              $341,527.79

In this example. by choosing either weekly or bi-weekly payments, you will have paid down approximately $10,000 more than if you had chosen monthly payments.

You will likely find it most convenient to choose a payment schedule that follows your pay dates.

As you can see, there are many ways that you can pay your mortgage off ahead of schedule. By working closely with your mortgage professional you can be mortgage-free years sooner. 

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.