A mortgage will not only be the largest sum of debt in your life, but also the longest. The most common amortization period is 25 years and considering the average Canadian will live to about 80 years of age, paying off a 25-year mortgage will occupy a third of their lives! Reaching the light at the end of the tunnel might seem too distant to grasp, but there is hope.
A recent poll commissioned by the CIBC revealed that Canadians expect to be mortgage-free by the age of 55. Time for the shocker, are you sitting down? Good. Canadians from the poll who had fully paid off their mortgage – did so by the age of 48!
What’s their secret?
These Canadians used their prepayment options to accelerate their debt repayment. The numbers are:
52% made lump sum payments when they could
42% increased the amount of their mortgage payment
40% increased the frequency of their regular mortgage payments
Most lenders will allow you to make lump sum payments annually, anywhere from 10 to 25 per cent of the original mortgage amount. Making lump sum payments are ideal when you come into large inflows of cash over a short period such as an inheritance or a work bonus. The monthly prepayment provision will allow you to increase your monthly payment, anywhere from 50 to 100 per cent of your regular contribution.
Typically, mortgage holders opt to make their mortgage payments monthly, i.e. 12 payments a year. However, an effective means to reduce your debt faster is to increase the frequency of your payments. A bi-weekly payment schedule has 24 payments in a year. An accelerated bi-weekly payment schedule requires two more payments for a total of 26 in a year. Here’s an example of the difference using Ratehub’s mortgage payment calculator:
Rob and Anna have just purchased their first home at the age of 30, with a mortgage amount of $330,000 amortized over 25 years at a 4.0% interest rate. If they make minimum monthly payments of $1,736, they’ll have paid off their mortgage at 55 – the age at which Canadians in the poll expect themselves to be mortgage-free.
However, if they increased their monthly payment by only $100 – their amortization length would shrink by approximately three years. Plus, they would pay less overall interest to their bank.
If Rob and Anna decided to switch their original mortgage payment schedule from monthly to accelerated bi-weekly, they could save $27,000 in interest over the life of their mortgage!
After acquiring the lowest mortgage rate possible, you’d want to find a mortgage product with good prepayment options to take advantage of. The road to mortgage freedom is possible before the age of 50, but requires careful planning and budgeting.