Paying off your mortgage means that you will own your home. It moves you closer to financial independence, freeing up more money to invest for a secure retirement.
By shortening your mortgage payment period, you pay much less interest over time, effectively reducing the total cost of purchasing a home. It makes sense that paying it off is an important goal within a financial plan for all homeowners.
As your mortgage advisor, I can run comparisons of paying off your mortgage 5, 7 or 10 years early to see just how much interest you will save. Establish a period with a payment you can afford within your budget.
Maximize your down payment
Paying 20% down on your home will cut costs, as you will owe the financial institution less principal and interest. You’ll avoid needing to pay Canada Mortgage and Housing Corporation (CMHC) insurance premiums that can add thousands of dollars to your mortgage. CMHC mortgage loan insurance protects the financial institution if you default and is mandatory for down payments of up to 19.99% (other private mortgage insurance may be available).
Putting down 10%, 15% or 20% will still save a lot of interest. Consider tapping into the Home Buyers’ Plan to withdraw money from your RRSP to increase your down payment. Also, by reducing the home’s size and value, you may be much closer to paying 20% down.
Prepayment privileges can, in some circumstances, help you pay off a mortgage faster.
As mortgage brokers, we can shop the market to find the right mortgage for you. Though you may be tempted to stay with your financial institution, it pays to shop around.
How is mortgage interest compounded?
The less often that interest on the mortgage is compounded, such as semi-annual compounding versus monthly, it can save hundreds of dollars in interest per year.
As a mortgage broker, I will negotiate your mortgage rate and develop a plan for you. We will not charge for a pre-approval, and there is no obligation.
Understanding amortization periods
A typical amortization period is 25 years, which can be shortened to 15 years with a substantial down payment or lengthened with a larger down payment. Disciplining yourself to pay off the mortgage in fewer years saves interest costs. The downside is that the payments will be higher, so make sure they fit comfortably into your budget.
Consider taking a longer amortization while raising your regular payments, utilizing prepayment privileges. You can switch back to smaller installments if you experience difficulty paying, yet this gives you some flexibility to shorten your payment amortization period.
Also, by paying your mortgage weekly or every two weeks, you can accelerate your payments by up to 2 weeks per year. For illustration purposes, a 25-year amortization period on a $500,000 home with a 3% rate, you would save more than $25,714 in interest by going with an accelerated bi-weekly plan.
Paying off debt has the same impact as saving, as both add to your net worth. Money paid towards your mortgage gives you a guaranteed return by saving you accumulated interest. And the upside is that once your home is paid off, you will have more money to invest in your retirement plan.