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.