Building a path to paying off your mortgage
An accelerated weekly fee is one of three ways to reduce the interest on your home
In these days of record-high housing prices, there’s no doubt that your mortgage is likely the single largest debt you’ll ever take on. And if you take a mortgage for $300,000 at an average rate of 5 per cent and pay it off over 35 years you’ll end up paying $331,789.91 in interest. Wow!
There are three easy ways to significantly reduce the amount of interest you end up paying and the time it takes to get to mortgage-free. First, choose an accelerated payment frequency. Most mortgages come with a vanilla-flavoured monthly payment. If you want to speed things along, choose the mocha version: an accelerated weekly payment. Using this option, you’ll end up making one extra payment directly against your mortgage each year. One extra payment? What’s the big deal? The big deal is that’ll save you $70,003.63 in interest. That’s gotta be worth the extra 30 bucks or so you’ll have to come up with each week, dontcha think? Second, shorten your amortization. The shorter your amortization, the more you have to come up with for each payment, but the less you’ll pay in interest overall. If you shorten a 35-year amortization to 30 years, you’ll save $55,430.90 in interest. Go with a 25-year amortization and save $108,345.42. But that’ll mean higher monthly (or accelerated weekly) payments. If you can’t swing the higher monthly payments every month? Then . . .
Third, make a principal prepayment against your mortgage.
Most mortgages come with the flexibility to make an annual prepayment each year. It usually runs somewhere between 10 and 20 per cent of the original mortgage amount. So on a $300,000 mortgage you could make somewhere be- tween $30,000 and $60,000 principal pre-payment, assuming you could come up with the money.
Getting a bonus? Just got a raise? Inherited some money? Now you know what to do with your windfall!
But you don’t have to come up with a huge amount for the principal prepayment to work for you. You know that RRSP contribution you made that resulted in the $3,200 tax refund? Slap that sucker against your mortgage each year and you’ll save $112,348.58 in interest on that 35-year mortgage.
The next time you “save” money on anything you buy (you are such a smart consumer!) put the money you saved in a jar. When you get to $25, deposit it to a high-interest savings account. Then, when you’re closing in on your mortgage anniversary, make a prepayment.
By the way, when your mortgage comes up for renewal, that’s the perfect time to slap some extra money against your principal and save in the long run. While you’re at it, consider rounding up your payment from the weird $1,473.82 to a nice, even $1,480 or even $1,500.
The Financial Consumer Agency of Canada has a mortgage calculator tool that you can use to run your own scenarios to see just how much you can save on your mortgage. Spending a few minutes playing with the numbers might help you focus on a goal that will see your mortgage paid off sooner. Gail Vaz-Oxlade writes every Tuesday for Smart Money.