Debt loads in Canada are at all-time highs and nearing the peak levels reached in the US before their meltdown. Although there’s been a lot of debate over the seriousness of the statistics and what steps should be taken, there is no question that each of us would like less debt. Banks have been asking for tighter lending rules and Ottawa has been telling the banks to manage their own businesses. What seems to be the missing piece is someone to help borrowers lower their own debt levels. Here in 4 easy steps is a primer on how to pay off any mortgage in only 10 years.
Step 1 – Start with a 25 year amortization
The government and banks have the ability to restrict the length of a mortgage amortization but rarely do they set a minimum. Currently the maximum is 30 years for most mortgages, but if your objective is to pay it off fast, then you should pay a little extra each month by starting with a 25 year amortization. For a $300,000 mortgage at a mortgage rate of 3.29% you’ll be paying $1,465/mth, only $156 more than the 30 year option.
Step 2 – Go Bi-weekly Accelerated
Rather than pay the $1,465 just once a month, split your mortgage payment in 2 and pay bi-weekly. By paying $732.50 every other Friday you’ll lower your amortization by almost 3 more years!
Step 3 – Make an Annual Lump Sum Payment
Most mortgages come with an annual lump sum payment allowance. This pre-payment privilege allows you to pay down your mortgage much faster without incurring any penalties. These privileges usually range from 10% to 20% of the original mortgage amount. By using just 5% of that allowance or $15,000 in our example you’ll knock down your mortgage amortization to just less than 11 years. This strategy isn’t reserved just for lottery winners but works well with borrower where one or both earn an annual bonus.
Step 4 – Increase your Regular Payments Annually
Another helpful pre-payment privilege many mortgages have is the ability to increase your regular payments each year without penalty. Typically this privilege is set-up to allow you to increase your payments by 10% to 20% each year. If you were paying rent you would expect it to go up over time with the cost of inflation. Similarly you can increase your payments as your income increases to shorten your mortgage. Increasing your payments by only 3% each year along with the strategies listed above will lower your amortization to only 10 years.
There you have it! You can pay-off that mortgage before you retire, and don’t worry if this strategy isn’t for you. By working with an accredited mortgage professional (AMP), you can customize a practical strategy to meet your objectives.