Mortgage burning parties used to be a common occurrence. Neighbours and friends would get together to celebrate the final payment on their biggest asset, burning a copy of the mortgage, while trying to avoid actually burning down the house.
But these parties are becoming fewer and farther between, perhaps because people are so much older by the time they clear their debt!
Fortunately, there are ways to get rid of your mortgage before your partying days are done.
1. Make more frequent payments
A very common mortgage repayment strategy is to increase your payments from monthly to fortnightly. For example, the monthly repayments for a $100,000 mortgage at 8% interest amortized over 25 years would be $736.21. Bi-weekly repayments on the same mortgage would be $381.61 – or half the monthly payments. However, over the life of the loan the savings would be $30,464 in interest because in the course of the year, you will make one extra payment.
2. Adopt a high interest mentality
While you should always opt for the best mortgage deal you can get your hands on, there’s no reason to pay back your loan at a cheap interest rate. You’re much better off pretending it is a couple interest points higher, and paying it off at a higher rate. And if rates should increase in the meantime, it won’t come as a shock to the budget.
3. Reduce the amortization period
While the government recently ruled high ratio amortizations must be limited to 30 years, BMO, Scotiabank and TD confirmed they would reduce both high- and low-ratio mortgages from 35 years, to a 30-year maximum. But there’s no reason to stretch your payments out that long. It might be a little more painful to reduce the amortization period to 25 years, but the amount of interest you’ll save over the long run would be worth it. Consider a loan of $300,000 at 6%: If you pay out the loan over a term of 30 years your monthly repayment will be around $1,799. This equates to a total interest repayment of $347,515 over the term of your loan. If you pay the loan out over 25 years rather than 30 your monthly payment will be $1,933 a month. But the total interest amount you will repay over the term of the loan will only be $279,879 – a saving of a whopping $67,644!
4. Shop around
It’s easy to get complacent about your home loan, but there is absolutely no reason to stick with the status quo. It’s imperative you review your mortgage every couple of years to ensure that you are getting the best possible deal for your situation. Even if you set up your loan directly with a bank, there’s no reason not to enlist the services of a mortgage broker to help review your situation. A broker will listen to your financial goals and help you sort through the many loan options that exist.
5. Extra payments
Putting bonuses, salary increases, inheritance money, lotto winnings, and any other extra money you can find towards your mortgage will go a long way to reducing the amount of interest you’ll pay over time. You can also use your RRSP and tax refunds to your advantage. Many of us purchase RRSPs each year to offset our taxes and receive the maximum possible rebate. You can then use your tax refund and the tax-free interest earned on the RRSP to pay down you mortgage.
6. Early Renewal
This is a handy option when interest rates start to rise and you are locked into a mortgage that will not mature for a few more years. A mortgage with an option for early renewal allows you to renew your mortgage before the maturity and lock-in low rates for a new term.
7. Consider a 50/50 mortgage
Hybrid mortgages – also known as 50/50 mortgage products – include an equal mix of fixed-rate and variable-rate components (learn more about fixed and variable rate loans in our compare home loans page) within your single five-year mortgage. This means you get the best of both worlds – the security of fixed repayments with the flexibility of a variable rate.
The ideal candidate for a 50/50 mortgage could include three potential first-time buyer scenarios:
- The knowledgeable person who likes to watch interest rates and the economic market
- The risk-taker who still likes the security associated with a fixed product; and
- The person who may not know too much about the market, interest rate fluctuation or the bond market, but wants to capture some variable and some fixed to diversify their mortgage.
8. Consider an “all in one” account
According to Mike Robinson, principal of Signature Financial Security in Calgary, AB, a type of mortgage account that banks keep fairly quiet about is the “all in one” account.
“Different financial institutions have different names for them, so I use “all in one” generically. Essentially, this is an account that allows you to borrow up to a specific percentage of the value of your home, usually 75%, including your mortgage. This allows you to consolidate your debt and potentially pay a more favourable interest rate on your non-mortgage portion of the debt, if any. The reason the banks and other lenders won’t tell you about this is because there is a tremendous opportunity to save money on interest and potentially pay down your mortgage much faster than the traditional way. It works by directing your regular income into the account and then calculating interest daily. The amount of your income reduces your amount of debt and so your interest calculations are based on a lower debt amount. Over time this can work out to be significant savings and see you retire your debt much faster.
“The potential for trouble with these accounts is that you must be disciplined. Because you have the ability to borrow up to a percentage of the value of your home, when you have equity, it’s easy to go out and purchase items on that credit. So, if you are one who likes to buy toys or live beyond your means, these accounts are not for you and will probably end up hurting you more than helping. However, if you are disciplined and you are interested in paying down your mortgage faster and paying less interest, there’s no better way.
“These accounts can be suitable for first time home buyers so long as they have the minimum amount of equity, which is usually 25%, and if they feel they can be disciplined with their finances.
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