Owning a home can be incredibly expensive depending on where you live. Most homeowners must take out a mortgage to finance the purchase of their properties if they are unable to pay for it outright. Although mortgages are common, nobody likes being in debt for an extended time period. This is why some people have found ways to pay off their mortgages much earlier than expected.
Paying off your mortgage early is easier than you might think, and does not require you to enroll in accelerated mortgage payment plans through your lender. By strategically making additional payments throughout the year, you can save thousands of dollars in interest and cut down your mortgage period by years.
Check with your mortgage company first
Even if you can afford to make additional payments on your mortgage right away, be sure to check with your lender ahead of time to see how it handles early repayment. Some lenders will allow you to pay off your mortgage early, while others may impose penalties or only permit additional payments at certain times of the year.
Once you’ve spoken with your mortgage company about the best way to repay your mortgage early, you can begin making additional payments and using other strategies to become debt-free more quickly.
Strategies for repaying your mortgage faster
Many homeowners are surprised to realize that much of their monthly payments go toward paying off mortgage interest rather than the principal balance. You can prevent this from happening by making additional payments that apply directly to the principal. This lowers the interest you owe and allows you to repay the balance earlier than anticipated.
Below are three key strategies to help you repay your principal balance—no matter how large or small it may be:
1.Set up biweekly payments : One of the easiest ways to help you pay off your mortgage faster is to make biweekly mortgage payments. Through this arrangement, you pay half the required monthly amount every two weeks, which should not affect your monthly budget.
The biggest benefit to biweekly payments is that there are 52 weeks in the year (not 48), so you end up making 26 half-payments—or 13 full payments a year. That extra payment can make a significant difference in your principal balance and knock years off your mortgage.
Most Canadian institutional lenders, like the big banks, offer a bi-weekly accelerated payment option as standard on your mortgage terms. Be sure to seek this out where possible!
2.Make additional payments throughout the year: You can also make additional full payments on your mortgage throughout the year. One extra payment will make a big difference, but one every quarter will help you pay down the mortgage fast.
If you’re unable to afford extra full payments, consider adding smaller amounts of money to your monthly payment. One strategy is to round up the payment amount. For example, if your monthly payment is $1,037, round it up to $1,050 or $1,100. That extra $20 to $50 can add up over time, without making a significant difference to your monthly budget. Use a mortgage repayment calculator to see the difference additional payments can make in your mortgage plan.
If you make additional payments, either in full or partial, be sure to include a note that states you want the extra payment applied to your principal balance—not next month’s payment. This helps you pay down the principal amount first and lower the interest you owe over time.
3.Live simply and reduce unnecessary spending: Making small sacrifices in your day-to-day life can help you save additional money that you can apply toward your mortgage. Rather than eating out for lunch, grabbing a cup of coffee in the morning, or otherwise spending frivolously, cut your unnecessary expenses and put that money toward your monthly payments. Reducing these small costs can help reduce your mortgage term by a few years in the long run.
If, for instance, you had a mortgage of $300,000 at an interest rate of 3%, your mortgage payments would be $1,400 over 25 years. Now, if you added only $500 a month to that payment, your mortgage would be paid off in 17 years rather than 25. In this scenario, you’d also save $46,000 in interest alone.
Additionally, you can find ways to boost your income by taking on a part-time or freelance job, selling personal items or cutting down on monthly subscription services like cable or Netflix.
Make a plan and stick to it — even before you buy
One more important tip is to think about your mortgage plan before you buy your home and consider the long-term effects of the mortgage. Try to put down at least 20% of the cost upfront to lower your overall balance and avoid spending more money on private mortgage insurance.
In addition, it’s important to speak to a mortgage professional who can guide you through the process of finding the right mortgage for your situation.
Most homeowners find that if they make a plan to repay their mortgage quickly and stick to their goals, they are more successful and save themselves thousands of dollars in the process. With simple repayment strategies in place, there are very few reasons why you should not be able to repay your mortgage must faster than you originally thought.