Accelerating your journey to a mortgage-free life

SPM Financial |
Categories
Mortgage

Many Canadians dream of owning their own home. And after the papers are signed and the keys are in-hand, one of the next dreams is often having that house paid off and enjoying the mortgage-free life. While there isn’t a magic formula for eliminating mortgage debt overnight, taking a thoughtful and strategic approach can put you on the fast track to paying off your mortgage and enjoying the financial freedom that comes with it.

Here are some things you can do to pay down your mortgage as fast as possible:

1. Opt for a shorter amortization period

The amortization period is the length of time it takes to pay off a mortgage in full. If your down payment is less than 20% of the price of your home, the longest allowable amortization period is 25 years, and the Government of Canada is raising this to 30 years for certain homebuyers. But you can choose a shorter amortization period—say, 20 years. By doing this, you commit to higher regular payments, but will be mortgage-free in less time. This is a balancing act: ensure your payments align with what you can comfortably afford without stretching your budget too tight.

2. Increase your payment frequency

Switching from monthly to weekly or biweekly payments not only speeds up your mortgage repayment but also cuts down the total interest paid over the life of the loan, since you’re paying off some of the principal more frequently.

3. Increase your payment amount

Whenever possible, pay more than your minimum payment. Even $20 extra per payment can shave time off your amortization period and reduce interest costs.

4. Make the most of lump-sum payments

If your mortgage allows, take advantage of prepayment privileges and make extra lump-sum payments. Depending on your mortgage, you may be able to pay up to 20% of your mortgage each year. The best part? Many mortgage lenders allow prepayments to go directly to the principal. Consider saving those annual bonuses, tax refunds, or unexpected windfalls – they can be powerful tools when it comes to paying down your mortgage.

5. Hunt for competitive interest rates

A higher interest rate can prolong your mortgage journey. Do some research to see what different lenders are offering so you're informed for your discussion with your advisor.

Fixed-rate vs. variable-rate mortgages: Which one can be paid off faster?

With a variable-rate mortgage, the interest rate can go down, which means more of your payment can go towards paying off your principal. However, what comes down can also go back up. If your interest rate increases, less of your payment will go towards your principal, which effectively extends your payment period.

If you prize predictability, a fixed-rate mortgage might be the way to go. With fixed-rate mortgages, your payment will always stay the same, regardless of mortgage rates rising or falling. Whatever type of mortgage you get, make sure it’s within your comfort level and fits your unique financial situation.

The trade-offs of aggressively paying down your mortgage 

Focusing on paying off your mortgage as quickly as possible means you’ll have to make some sacrifices. This might look like less eating out, vacations, or big purchases. Yet for many Canadians, the satisfaction and security that come with a fully paid-off home are worth it. You just have to decide what’s right for you.

To pay off your mortgage, or invest? 

If you can, try to do both.

For instance, saving for retirement with a registered retirement savings plan (RRSP) is a great compromise. It allows you to invest and save for the future, while also giving you a tax refund that you can use to help pay down your mortgage. Or using a tax-free savings account (TFSA) can help you save for a sizable lump-sum prepayment.

Next steps: Create a plan

Your financial situation is unique to you, and your mortgage should be too. By now, you should have some food for thought when it comes to your mortgage.

We can work with you to determine the mortgage that best meets your needs, while allowing you to pay it down as fast as possible, if that’s important you. We can also develop a plan that will help you balance home ownership with your other financial goals.