How To Pay Off Your Mortgage Faster

Owning a home is one of the cornerstones of building financial assets for most Canadians.  However, making mortgage payments for 20 to 35 years can take quite a bite out of your budget, even with low interest rates.

It’s surprisingly easy to reduce the amortization – and the amount of interest paid.  When you pay off your mortgage faster, a big part of your household budget will become available to help you achieve your other financial goals.

Make a lump sum payment

A lump sum payment, or prepayment, is an amount you pay in addition to your regular mortgage payments within the mortgage term.  The prepayment reduces your outstanding principal balance.  The sooner you can make the prepayment, the less interest you will pay over the long term, and the sooner you will be mortgage-free.

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Your mortgage agreement will specify the maximum amount you can prepay each year (usually 10% – 25%) and how often (usually once per calendar year) without penalty.  The prepayment option is not cumulative, so if you don’t take advantage of it one year, you can’t double the payment the next year.

Coming up with such a large lump sum (up to $75,000 on a $300,000 mortgage) is next to impossible for most mortgage holders unless you’re lucky enough to receive a windfall.  Keep in mind though that even small lump sums – from a bonus or tax refund, for example – can still reduce your overall interest amount.

One thing to note, if you pay off your mortgage and are facing a penalty for doing so, the lender is obligated to reduce the mortgage balance by the allowable prepayment amount before calculating the penalty.

Increase the amount of your payments

One of the ways to pay off your mortgage faster is to increase the amount of your regular payment.  This option is easier for most people than coming up with a large lump sum.  Most mortgage lenders will allow you increase your payment by 10% to 100%, but there may be a fee if you change it again during the calendar year.

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Paying $100 extra a month on a $300,000 mortgage at 3.29% over 30 years will give you an interest savings of over $11,000 and reduce the amortization by 3 ½ years.

Make more frequent payments

Most financial institutions offer a number of payment frequency options.  The standard options are:  monthly, semi-monthly, biweekly and weekly.

Many people like to match the frequency to their pay periods for ease in budgeting.

If you decide to make more frequent payments, make sure you choose an accelerated option.  Accelerated weekly and biweekly payments can save you thousands, if not tens of thousands, in interest charges because you’ll pay off your mortgage much faster.  The reason is that you make the equivalent of one extra monthly payment each year.

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There is very little extra savings if you just switch to a more frequent payment without taking the “accelerated” option.

On the same $300,000 mortgage as above, a biweekly payment will save just $289 in interest.  On the other hand, an accelerated biweekly payment (an extra $50 per payment) will save over $18,000 over the life of the mortgage.

Keep your payments the same if you renew at a lower rate

When you renew your mortgage, if the interest rate is lower than what you were paying previously, your regular payment will be less.  You could pay off your mortgage faster by simply keeping the amount of your payments the same.

Conclusion

You can save thousands of dollars in interest by paying off your mortgage as fast as your household budget allows.  Choose any one, all, or a combination of the prepayment options available to you.

Contact your mortgage lender for your payment options and any penalties and fees you may be required to pay.


12 Responses to How To Pay Off Your Mortgage Faster

  1. Last fall we refinanced from a 30-year to a 15-year mortgage. I actually did consider going with the 30-year rate and just making the same payment that I would have with the 15-year or that we had been paying, but in the end I went with the absolute lowest rate and the 15-year.

    Oh, just a request, please consider removing the pop-over that appears and rather abruptly causes your reader to get interrupted from their comment.

    • @Money Beagle – That’s a good way to save thousands in interest payments.

      One advantage with making larger mortgage payments on a 30 year amortization is that a person can go back to the years left on the mortgage if they run into any financial difficulties and need to reduce their payments. This could be a consideration for some.

      Regarding the pop-up, I’ll advise my tech support (aka Echo). :)

      • That’s the approach I take. I generally set the payments when I sign the mortgage at the 25 year rate, and then at my FI we can make “double-up” payments (extra principal on each payment). If money gets tight, I can just make my regular payment, but as long as things are normal, I usually pay an extra 20-30% on every payment. The great thing about this is that I never have to call the bank, or pay any fees, to adjust my payments. I can do it on-line, and I can do it as many times per year as I want (I could make every payment different if that was my thing). This lets me pay my mortgage down as quickly as possible, but gives me cash-flow flexibility in case I really need it.

  2. My wife and I are currently looking at downsizing our home so we can get on a 15-year mortgage. When we bought 3 years ago it was when I was making close to $100k/year and now that I’ve taken a rather large paycut we need to downsize in order to ensure we can afford the 15-year mortgage.

    It will be nice knowing that I will be completely debt free by the time I’m 43!

    • @Jason – It’s fantastic that you have a well thought out financial plan at your age. Not many can hope to be debt free in their forties. Keep up the good work!

    • @krantcents – It’s wise to be debt free going in to retirement. Who wants to make all those interest payments to the bank when you could be having some fun with the money instead?

  3. Another good tip is to pay off all monthly accumulated interest at the end of the month when it is charged. This has the effect of reducing the principle still owed by each regular payment when made. Psychologically, it looks and feels good when you see the principle being lowered regularly at set intervals with no increase. Financial institutions can set this up as part of a mortgage or HELOC as long as it doesn’t create a penalty situation.

  4. Ok. I’ll say it. I hate the bi-weekly. Hate it. In mast cases, it works by starting with a 30 year amortization, paying half the monthly payment every 2 weeks and then noting that the payoff drops to 22 years or so.
    I hate it because the rate on a 15 year mortgage is about .5% lower than 30. But the bank doesn’t give you a break on the rate, it’s still the 30 year rate.
    One would be best off (if they can’t afford the 15) to go with a 30 and start to prepay. At some point a number of years in, a refinance to a 20 or 15 would make sense.
    Last – with rates so low, I’d think twice about focusing so much on the mortgage. I’d prioritize retirement savings, college savings, and having an adequate emergency fund, liquid. Does a 30 year CD paying only 3.5% sound appealing to you? In effect, that’s what the prepayments are.

  5. In my case i took the 30 years mortgage time because if for any reason somethings happen like losing job i could afford paying a lower quote for several months without having any problem but for sure the idea is to pay this mortgage as soon as possible.

    Its not Healthy to sleep knowing you need to pay mortgage your entire life.

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