It’s wise to shop around to find the best mortgage. This includes educating yourself on the features and benefits of specific lenders as well as seeking advice from a trusted mortgage professional. Having said all that, the best mortgage is no mortgage at all. If you are looking to have your mortgage burning party sooner rather than later then you need to adopt these 3 strategies.
1) Lower your amortization
Financial advisors have long been preaching to “pay ourselves first”. From the financial planner’s perspective this translates to allocating the first chunk of our pay-cheques for savings. The next bite goes to paying our debt obligations and then we are free to spend the rest. This is great advice and should be equally applied to our debt. If debt is a bigger concern than lack of savings then when you pay yourself first it should be to extra payments on your mortgage. The easiest way to accomplish this is to lower your amortization and set a higher required payment.
For example if you have a $250,000 mortgage with a 25 year amortization, then you’d have a payment of about $1,220 at today’s 5 year fixed rate of 3.29%. Setting a lower amortization of 23 years would increase your payment by only $69 per month. That’s a small price to pay to eliminate 2 full years of mortgage payments.
2) Go Bi-Weekly Accelerated
This works particularly well for employees receiving bi-weekly pay-cheques because you can match up your pay dates with your mortgage payments. A bi-weekly accelerated payment is simply ½ your monthly payment made every 2 weeks. The trick to this is that on 2 months of the year you will be making an extra bi-weekly payment or 1 extra monthly payment per year.
Going back to our example from above, if you took the higher monthly payment of $1,289 and turned it into bi-weekly payments of $645 you’d lower your amortization by another 18 months. Now paying off your mortgage off in 21 ½ years.
3) 1 Extra Monthly Payment
Canadian mortgages typically provide pre-payment privileges allowing you to pay an extra 10% to 25% of your original mortgage balance each year. Making 1 extra monthly payment would amount to approximately 0.5% and is within reach to all if we make it a priority.
Continuing on with our example we would have to come up with an additional $1,289 each year. Adding on this third strategy delivers the dramatic effect of eliminating our mortgage an additional 2 years earlier making our effective amortization 18 ½ years.
Paying off your mortgage early is a worthwhile goal. It allows you to plan for an earlier retirement, create a cushion for the unexpected and it creates a greater sense of security. However, there’s no free lunch. If this is a priority for you, then you need to create the plan that fits your needs and your budget, and then more importantly you need the discipline to carry it through.