Making a mortgage payment is often more desirable than paying rent. Homeownership helps you build equity and offers financial (and personal) stability. But the thought of carrying a mortgage for decades can be daunting.
Whether at the beginning of your bank loan or you’ve been making payments for years, here are four ways to help you get out of debt quicker so that you’re eventually mortgage-free.
1. If making monthly payments, switch to biweekly. In doing so, you’ll make one extra monthly payment each year. For example, if you pay $2,000 once per month, you’re currently making monthly mortgage payments of $24,000 per year. When you change to a biweekly schedule, you’ll pay $1,000 every two weeks instead. Because some months are longer than others, you’ll end up paying $26,000 per year. While the extra payment of $2,000 doesn’t seem like much, it is an effective way to reduce the total amortization by multiple years over the long run.
2. Increase your monthly mortgage payments, even by a small amount. Every year (or over a 12-month period), lenders typically allow you to add to the amount of your original mortgage payments by 10% to 20% without being penalized. This increased payment goes directly to your principal to help reduce the mortgage balance. If increasing your mortgage payments is not financially feasible at this time, then consider taking advantage of this opportunity when your mortgage term is up for renewal, especially when interest rates have dropped. You can simply continue to make the same regular payments after you renew at a lower interest rate. Less of your monies will go toward interest, so you’ll be paying off more of the principal.
3. Negotiate a better rate at renewal time with your existing lender (or a new one that’s offering a lower rate) to reduce your overall mortgage payments and monies going to interest. With the Bank of Canada having halted hikes, at least for the time being, interest rates are slowly creeping downward — a five-year fixed rate mortgage can now be had for 4.29%, down from 4.59%. This trend is occurring in spite of no plans by the central bank to cut rates in the near future; it has more to do with the fact that bond yields in Canada have fallen.
4. Refinance to a shorter amortization period, if your mortgage is up for renewal and it’s financially feasible. While this will lead to higher monthly/biweekly payments, you will pay down more of your mortgage principal sooner and save considerably on interest over the life of the loan. What’s more, you’ll be mortgage-free ahead of time.