Buying a home and acquiring a mortgage is probably the biggest financial decision most Canadians will make in their lifetimes.
According to a poll conducted by Scotiabank this month, 81 per cent of Canadians agree it is important to become mortgage-free as soon as possible, and almost three-quarters of Canadian mortgage holders are taking at least one step to becoming mortgage-free faster.
Paying your mortgage off quickly can add up to big savings. Check out our expert advice to help you get there.
1. Use rate comparison sites: First things first, do your research.
“Use comparison sites to determine market rates and pre-payment priviledge,”
“Then use those rates and products as negotiating leverage with your mortgage broker or lender of choice, or use them as reference.
2. Increase your payments by 2 per cent annually: the same rate as long-term inflation.
By doing this, the payment increase is minuscule. “About $16 a month after the first year on the average Canadian mortgage of $170,000. Most people’s pay raises should easily cover that,” he says. “The benefit is sizeable: a 5.25-year reduction on the average 25-year mortgage, with $12,340 in saved interest.”
However, you’ll want to compare the after-tax benefit of prepayments to your other available investment opportunities.
3. Double-up payments: If you are interested in paying your mortgage down fast many lenders allow you to double-up payments every month.
Double-Up payment feature allows you to chip away at your principal.
A $400,000 mortgage amortized over 25 years at an interest of 3.09 per cent for a five-year fixed has a principal and interest payment of $1,911.51.
The customer has an option to pay an additional $1,911.51, or anything above $100, each and every month, and the payment is applied directly to the principal.
The Double-Up feature is applied to the principal of your mortgage. So, if you exercise these double-ups they’re eating right into your principal.
4. Don’t overlook flexibility: Over one-half of Canadian mortgagors refinance or early renew before maturity.
“For these folks, mortgage contract terms can be crucial. A costly penalty calculation, a bad lender porting policy, refinance restrictions and/or an inflexible mortgage increase policy can cost you big-time fees and penalties. Those costs could easily negate what you thought was a great rate.”
But saving mortgage interest isn’t always the most important thing.
“Having a diversified retirement portfolio and maximizing risk-adjusted after-tax returns should be the paramount goals,” says McLister.
“For example, for some it may make more sense to (a) minimize payments with a 35-year amortization, (b) divert the freed-up cash to their RRSP, (c) get a tax refund and (d) apply that refund as a principal prepayment.”
With each individual client, his or her needs are different. “What is your goal? Do you want to be mortgage-free or do you want money also to grow for you? Is it wise to pay down your mortgage or is it wise to put some money aside as a little nest egg for miscellaneous? It all depends on the client.”
