How to pay your mortgage off faster – and save thousands!
Families can save a lot of money over time by paying their mortgage off faster.
Some would argue that because interest rates are so low right now, it is better to invest extra money instead of paying down a mortgage. While I agree in principle, there is also value in eliminating debt efficiently. It really is a personal choice.
Since I am not a financial expert, the purpose of this post is not to give financial advice. I will simply present different options to show that paying your mortgage faster is easier than you may realize.
How to pay your mortgage off faster
Let’s assume that you took out a $300,000 mortgage at 3% for 25 years, since that is an approximate Canadian average. The following scenarios illustrate how small changes can impact the total interest you pay.
Make the typical minimum monthly payments
If you make minimum monthly payments, this will be the result:
- Monthly Payments: $1400/month
- Time Required to Pay off Mortgage: 25 years
- Total Interest Paid: $126,000
Ponder that interest total for a moment. $126,000 in interest. And that is with historically low interest rates!
So what can be done?
Change frequency of payments
Accelerated biweekly payments take advantage of the fact that there are 52 weeks in the year and 12 months. If you pay half your regular mortgage payment every other week, you’ll have made 26 half-payments (which is similar to making 13 monthly payments).
- Monthly Payments: $1400/month + 2 extra biweekly payments each year
- Time it Takes to Pay off Mortgage: 22 years (paid house off 3 years faster)
- Total Interest Paid: $110,000
Make one lump sum payment every year
This is a good option if your monthly budget is tight, but you could manage 1 extra lump sum payment each year. Perhaps put a portion of your annual tax return towards paying your house down faster this way.
- Monthly Payments: $1400/month + $1000 lump sum each year.
- Time it Takes to Pay off Mortgage: 23 years (paid house off 2 years faster)
- Total Interest Paid: $114,000
OR
- Monthly Payments: $1400/month + $2000 lump sum each year.
- Time it Takes to Pay off Mortgage: 21 years (paid house off 4 years faster)
- Total Interest Paid: $104,000
Make one lump sum payment every month
This is a good option if you can fit an extra payment into your monthly budget.
- Monthly Payments: $1400/month + $100 extra monthly payment
- Time it Takes to Pay off Mortgage: 22.5 years (paid house off 2.5 years faster)
- Total Interest Paid: $112,000
OR
- Monthly Payments: $1400/month + $200 extra monthly payment
- Time it Takes to Pay off Mortgage: 21 years (paid house off 4 years faster)
- Total Interest Paid: $102,000
Work backwards from your goal
You might have a goal of paying off your house within a certain time frame. Perhaps before the kids start college. You can use a mortgage calculator to calculate the mortgage payments required. Just enter your interest rate, the time you are aiming for, and your principal owing.
- Target Goal to Pay off Mortgage: 17 years
- Monthly Payments Required: $1875/month
- Total Interest Paid: $100,000 (paid house off 8 years faster)
If your mortgage offers flexibility with payments like this, you can save a lot of money in interest. Consider setting up an automatic transfer from your chequing account to reach these goals. Then paying your mortgage off faster than expected might be within your reach!
Small steps can make a big difference in savings. You just need to know your options and implement a realistic strategy, to become mortgage-free a lot faster.
Do you think it is worth trying to pay your mortgage off faster?
Comments
I find that a lot of people recommend this approach but I cant quite understand why. Yes, its thousands of dollars but its the same amount you would get by putting this in a savings account with 3% interest rate. I am sure if you put it in an RRSP you will get better returns than 3%. And lets not forget the tax rebates. If you want to get out of debt earlier, maybe then increasing your monthly payments might be a good idea. But if we are talking about what best to do with an extra $100 a month or a $1000 a year, you will have much better net worth in the long run by investing in your RRSPs.