For most Canadian homeowners, paying off their mortgage as quickly as possible is a top priority. Paying down extra principal in the early years by whatever means possible can shorten the life of your mortgage – and dramatically lower the interest you'll pay over the long haul. Here are a few tips on how to make this happen:
1. Increase your payment annually to the most you can afford
The upside is that most lenders will allow you to reduce it again to the previous level if it turns out to be too great a burden or your circumstances change.
2. Prepayments give great return on investment
If, for example, you pay an average of 6.0% in mortgage interest, for each $1,000 by which you reduce your mortgage principal, you will save $60 in after tax cash every year.
3. Utilize your RRSP-driven tax rebate as a mortgage prepayment method
Even if you can only prepay annually, make sure tax refunds are set aside for paying down your mortgage. Many Canadians borrow (at prime) to buy an RRSP to ensure the maximum rebate. When applied to the mortgage principal, this refund is a "gift that keeps on giving". Combining the refund with the tax-free interest earned on the RRSP over the subsequent years will quickly outpace the short-term interest costs of the RRSP loan.
4. Increase the frequency of your payments
Make accelerated bi-weekly payments to get a "free" principal reduction equivalent to one full mortgage payment every year — painlessly.
5. Make use of double-up privileges wherever possible
Tell yourself that you will "skip-a-payment" whenever necessary... then skip only when you absolutely must.
6. Round your payments up
By adding even a nominal amount of say, $10 per payment, the amount of interest you are saving will be unbelievable, and the extra money is relatively painless to part with.
7. Pay a lump sum whenever possible
By decreasing the principal of the mortgage, your payments will not be allocated as much to interest, thereby accelerating the end of your mortgage.
8. Keep payments the same when mortgage rates have fallen
If the payment amount has not been a problem so far, then keep it the same when rates fall, thereby paying down the principal faster.
9. Raise payments in line with increased income on an after-tax basis
If your income increases, don't keep your mortgage payments the same. Although the disposable income may be fun to spend on unnecessary luxuries in the short-term, the long-term benefits of being mortgage free faster a far outweighs the short-term sacrifice.
Heather Paterson is an Accredited Mortgage Professional with Invis in Toronto. She practices in the area of Mortgage Financing.
February 5, 2008
Mortgage |