How to pay your mortgage faster
Buying a home is one of the best investments you can make and the best way to build equity. Regardless, your 25-year mortgage amortization period can sometimes feel like a life sentence. Many people don’t realize there are several steps you can take to pay it off faster, without sacrificing your other financial and life goals in the meantime. Putting extra money toward your mortgage — which is likely the biggest debt in your life — means huge interest savings and being mortgage-free faster. Set up bi-weekly payments Once you have your monthly mortgage payment figured out, set up biweekly payments rather than monthly payments. By paying every two weeks rather than once a month, you’ll actually end up paying 13 monthly payments a year — which is an extra payment every year. This will cut your 25-year mortgage down by a few years and will save you money in interest.
Put “extra” money toward it If you have a yearly bonus or get money back on your tax return, (and you don’t have other high-interest debt to pay off ) consider putting that amount directly toward your mortgage. Look at your housing situation for opportunities
Consider ways you could supplement your mortgage payments using the property you already own. Do you have a suite you can rent out? Or the potential to build a suite for this purpose? Another way Canadian homeowners, particularly millennials, are curbing their mortgage costs is through Airbnb rentals. In a recent Airbnb study they found more than 50 per cent of the income generated by Airbnb rentals are people who are using it for everyday experiences to pay for things like rent, mortgages, and average utilities.
“If you have a guest room in your house, one great way to chip away at your mortgage principal is to rent out that room on a platform like Airbnb. Every $100,000 of mortgage takes about $450 a month to carry (at 2.5 per cent amortized over 25 years). So if you earned $675 in a month (about two weeks at a conservative $50 a night), you’re carrying $150,000 of mortgage due to those friendly travellers. That’s overstating it a bit as you will pay income tax on those earnings, but on the other hand you’ll also be able to deduct a small portion of your house expenses (utilities, property taxes, mortgage interest) against that,” says Scott Ingram, realtor at Century 21 Regal Realty Inc.
“If you wanted to really make a maximum dent on your mortgage principal from this extra income, I would recommend calculating your average monthly Airbnb revenue once you have a few months under your belt (remember: revenue may vary strongly by season). Many mortgages offer a once-a-year option to increase your regular payments for the remainder of the year. So if you find you are earning an extra $900 a month now, you could increase your regular monthly mortgage payment by $900 (or $450 each payment if you are paying semi-monthly or bi-weekly). That extra amount is going straight to your principal, which could save thousands of dollars of interest over the amortization period of your mortgage, and make you mortgage-free years sooner.”
Make pre-payments Most homeowners don’t take advantage of making prepayments. They may see it as lofty or impossible, or they may not see the huge value in it. “What makes pre-payments so powerful is that unlike a regular mortgage payment, which is split between interest and principal, the full amount goes toward principal. Common pre-payments options offered by lenders include lump-sum payments, increasing your payment and doubling up your payment. Many of us shop for mortgage based solely on the mortgage rate. While the lowest mortgage rate may be the best mortgage, that’s not always the case. If your goal is to be mortgage-free sooner, you’ll want to find a mortgage with a low rate and generous pre-payments,” says Sean Cooper, author of the new book burn Your Mortgage.
“If you’re a first-time homebuyer, you’re probably wondering where you can come up with extra money for pre-payments. One simple way is by tossing ‘found’ money at your mortgage — bonuses, cash gifts, inheritance and tax refunds. You can also look for new ways to save. For instance, instead of going out to lunch every day, considering cutting back to two or three times a week and make a lump-sum payment with the extra $50 or so you’re saving a month. By making pre-payments you can save big bucks in interest and pay off your mortgage years sooner.”
There are mortgage experiences in Canada that focus on paying your mortgage off faster, by showing you the equity you’re building in your home and encouraging pre-payments. Most mortgages allow you to pay 20 per cent off the principal per year, which is quite significant. MogoMortgages is one of those experiences. It’s a digitally-led mortgage product that engages consumers to build their wealth by showing them the value of sticking to their payment schedule and encouraging consumers to make extra monthly payments so they can get on a path to financial freedom. By motivating members to pay off their mortgage faster, Mogo can help lower the overall cost of borrowing for its members.
Mogo will also reward you every year to celebrate getting closer to paying off your mortgage and being financially independent; they send a bottle of champagne when you close your mortgage, and gifts like a dinner out on them when you’ve reached your one year mortgage payment anniversary.