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Save Thousands in Interest by Increasing Your Mortgage Payment

Save Thousands in Interest by Increasing Your Mortgage Payment

Many Canadian consumers make it a goal to pay of their mortgages as soon as possible. This makes sense because, no matter how favorably society views mortgage debt, the reality is that debt is still debt.

One of the best ways to achieve a truly debt free lifestyle is to increase your mortgage payment. You can make use of accelerated bi-weekly mortgage payments to pay your mortgage off sooner.

Take this example: If you have a $200,000 mortgage, amortized for 25 years @ 5%, and bi-weekly accelerated payments, you would pay $124,095 in interest and will have the mortgage paid off in 22 years. The bi-weekly payment would be $582. The total savings in interest is $25,000. That’s not bad.

But what if you want to do more than knock three years off your mortgage term?

Boost Your Mortgage Payment

It’s nice to reduce what you will pay over time by any amount, and $25,000 isn’t anything to sneeze at. But you can do better. Rather than simple arrange a bi-weekly payment schedule, consider increasing the amount you pay each month. Many banks will allow you to pay up to twice the amount of your set mortgage payment.

Consider the same mortgage from our example above. Increase your bi-weekly payment to an even $700 (adding $118 to the original amount of your bi-weekly payment. Now, your total paid in interest will be $88,346, and you will pay off your mortgage in 16 years. This saves you almost $36,000 in interest on top of the savings seen from your bi-weekly, and reduces the life of the mortgage by 6 more years.

So, your total benefit with the bi-weekly payment and increased payment amount is that the interest is reduced by over $60,000 and the mortgage is paid off 9 years earlier than what you would see with a regular monthly payment!

If you don’t think you have the available money to increase your payment that much, even rounding up to $600, an $18 increase in this example, would save almost $7,500  over the set bi-weekly payments and pay the mortgage off in 21 years.

How to Find the Money for Extra Payments

If you want to make extra payments, you will need to find the extra money. Adding $118 to your bi-weekly payment means coming up with $236 a month (or $354 on months where you make three payments). That’s fairly significant. You’ll need to plan to make sure you can afford the payments.

The simplest way to free up money to increase your bi-weekly payment might be to fill out a T1213 or a TD1 and reduce the amount you pay in taxes instead of waiting for your tax refund. That way, instead of giving the government an interest free loan, you are using your own money to better your situation and pay down debt.

You can also find the money through a combination of cutting back on unnecessary expenses and earning more money. Start a side hustle or look for ways to earn money online. That way, you have extra money that you can use to make extra mortgage payments without breaking the bank.

Comments

  1. Gregg

    My wife and I have debated the choice between investing and paying off the mortgage.
    In our case we have a $220,000 mortgage at 4.5% fixed, amortized over 40 years with payments of $1000 per month. He have no other debt. We invest $900 per month in two different programs, RESPs, and the Employer Deferred Profit Sharing Plan (RRSP). We practise a zero balance budget system and all our money is allocated, so there isn’t money left over at the end of the month. The RESP makes 20% plus what the market returns and the RRSP makes 100%(because of matching) plus the market return.
    Does it make sense to stop investing and pay off the mortgage?

  2. Tom Drake

    Gregg,

    This depends on a couple things. I wouldn’t put more than $2,500 a year into RESPs per child since the Canada Education Savings Grant doesn’t apply beyond that. With the employer plan, some have a limit where you can put more in but they don’t match it, do you put the maximum in that the employer matches and not any more?

    Assuming you are only contributing up to $2,500 into the RESP and only contributing up to the limit that the employer matches in your RRSPs, I’d keep doing that. The free money that you get from that beats any benefit you’d get from paying down your mortgage.

    If however, you are paying over the limits on either of these, you might be better off taking that extra amount and decreasing the principle on your mortgage.

    And of course, using your tax refund and paying down your mortgage lets you do all three.

  3. Don

    Especially after the finance crisis banks are being careful with offering mortgages to buyers and are making sure they can afford what they are borrowing so if something does happen like a job increase and more money is available then the smart move would be to pay your mortgage off quicker by paying in more money a month which as well will reduce the interest you pay overall and the banks will not totally mind as they get their investment back fully and at lease with some profit for it.

  4. Chantal Marr

    Good tips Tom. I think the idea of rounding your mortgage payment is a good one. An extra $25 to $50 a month is pretty much available to everyone. Big savings can be had with a lot of small changes like brown bagging it to work or creating some fun family projects at home.

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