Strategies for paying off your mortgage faster
Paying off their mortgage is a key goal for many Canadian homeowners. And paying down their mortgage faster often becomes a priority, given the financial freedom it represents.
There are typically five reasons why people want to pay off their mortgage faster:
- To reduce the amount of interest paid.
- For the sense of freedom and peace of mind that come with owning your home outright.
- To be able to dedicate more money towards other financial goals, such as retirement savings.
- For homeowners about to retire (or already in retirement), being mortgage-free effectively increases your retirement income and makes for a better quality of life.
- To increase your monthly cash flow.
These tips can all help when you’re looking into how to pay off your mortgage faster and, ultimately, pay considerably less in mortgage interest.
Pay off your mortgage faster with accelerated mortgage payments
Some people pay monthly mortgage payments (12 times a year), without realizing that if they increase the number of payments they make, they can pay less interest and pay down their mortgage faster.
If you’re looking at how to pay off your mortgage faster, you could ask your lender to change your payment schedule to semi-monthly (24 times a year), bi-weekly (26 times a year) or weekly (52 times a year). By accelerating your payment schedule, you could add the equivalent of one extra monthly payment per year; these additional payments add up over time, reducing your principal faster.
It’s important to realize that if your mortgage payment schedule doesn’t mirror how you receive your salary, you’ll need to be strict with your budgeting. For example, if you’re paid semi-monthly (twice a month), making bi-weekly mortgage payments (every two weeks) could be tricky, as there would be two more mortgage payments per year than there are pay days. It could make budgeting easier to match your mortgage payment schedule with your salary payments.
Increase your mortgage payment amounts
When you originally sign your mortgage agreement and receive the details of your mortgage term (the length of time your mortgage contract lasts), you’ll receive a repayment schedule. This outlines how much you’ll pay every payment period (which could be monthly, bi-weekly, etc.).
Part of the payment goes towards the principal, while part of it pays the interest owed. Many mortgage lenders allow you to increase your payments, often by as much as double the initial amount. For example, if your monthly mortgage payment is $1,800, you could increase the amount to as much as $3,600; the extra amounts would all go towards reducing the principal (the sum of money you owe on the mortgage). Reducing your principal amount by even a few hundred dollars per payment period would mean you’d pay considerably less in interest and pay off your mortgage faster.
The exact amount you can increase your mortgage payments by will depend on your lender and your mortgage contract. Also, some lenders let you make increased payments as often as you like, while others only allow one change to the payment amount, which you’ll have to stick to for the rest of the year. You also need to be careful not to increase your payments by too much; if you pay more than your contract allows, you could be charged a penalty.
Make a one-time lump sum mortgage payment
Most mortgage lenders allow you to make a large, one-off payment that will go towards your mortgage’s principal amount, every year. Depending on your lender, this could be anywhere between 10% and 20% of the original amount that you borrowed.
This is a great option for mortgage holders who come into a windfall, such as a work bonus, inheritance or even a lottery win. Let’s say your original mortgage amount was $320,000, and your lender allows a one-time lump sum mortgage payment of 15% per year; you could pay off up to $48,000 extra every year.
As with increased mortgage payments, one-off lump sum mortgage payments will go towards the principal of the mortgage, reducing the amount you owe and the amount of interest you’ll be charged, and shortening the amount of time it will take to pay off your mortgage.
Options for paying off your mortgage faster when you renew
A good time to consider how to pay off your mortgage faster is when it comes up for renewal (meaning when it’s time to sign a new mortgage contract, which is typically between one and five years in length). At this point, you have a lot more freedom to change the conditions of your mortgage.
For example, you can negotiate for a lower rate, switch from a fixed to a variable rate (or vice versa) or even switch lenders, all with no penalty. You can also change the amount of principal that will be on your mortgage. For example, if you just got an inheritance, you could reduce the amount you owe by that amount.
Conversely, you could also increase the amount you owe by refinancing; for example, many people refinance their mortgage when it comes up for renewal and use the additional money to pay off high-interest debt, such as credit cards or car loans. You could then use your improved cash flow and the money you save on interest payments to make lump sum or increased payments to help pay off your mortgage faster.
One other key aspect of your mortgage that you can change when the time comes to renew is the mortgage amortization period. This is the length of time, in years, that it will take to pay off your entire mortgage (read more about mortgage terms vs. mortgage amortization periods). Most people renew their mortgage in line with their original amortization period. For example, let’s say you took out a mortgage with a 25-year amortization period and a five-year contract. Once those five years are up and it’s time to renew, most people would then sign up for a mortgage amortization period of 20 years.
However, if you’re able to, you can reduce that amortization period, and doing this can really help you to pay off your mortgage early.
Shortened amortization periods = significant interest savings
The following examples show how much extra you’d have to pay in monthly mortgage payments if you reduced the amortization period by five years, along with how much interest you’d save. We’ve assumed a mortgage interest rate of 4.89% and included four different sizes of mortgage, from $150,000 to $450,000.
| Mortgage loan |
Amortization period |
Years saved |
Monthly mortgage payment* |
Total interest paid |
Interest saved** |
|
$450,000 $450,000 |
25 20 |
- 5 |
$2,589 $2,930 |
$326,735 $253,295 |
- $73,440 |
|
$350,000 $350,000 |
20 years 15 years |
-
5 |
$2,279 $2,739 |
197,007 $142,995 |
- $54,012 |
|
$250,000 $250,000 |
15 years 10 years |
-
5 |
$1,956 $2,632 |
$102,139 $65,869 |
- $36,270 |
|
$150,000 $150,000 |
10 years 5 years |
- 5 |
$1,579 $2,820 |
$39,521 $19,186 |
- $20,335 |
* Using IG’s mortgage payment calculator.
** Interest saved over the entire amortization period.
As you can see, when the mortgage amortization period is quite long, a reduction of five years doesn’t add a huge amount to the monthly mortgage payment. A mortgage of $450,000 can reduce its amortization by five years, from 25 to 20, with an increase in monthly mortgage payments of only $341. For that fairly modest increase, you get to pay off your mortgage five years faster and save $73,440 in interest.
When you have shorter mortgage amortization periods, however, this becomes a little more expensive. Reducing a $250,000 mortgage from 15 to 10 years would require a monthly increase in mortgage payments of $676. While this may be affordable for some, it could be too much of an increase for many.
Also, being able to reduce your amortization period also depends on your income and any debts you might have. It will be up to your mortgage lender to decide if you can afford to reduce your amortization period, based on what are called debt service ratios. These are the formulas lenders use to work out how much you can borrow.
Shorter amortization periods mean higher monthly mortgage payments, which can skew your debt service ratios to the point that the lender refuses the application. Therefore, don’t set your heart on reducing your amortization period until your lender has confirmed that it’s possible.
Should you pay off your mortgage faster?
Being able to pay off your mortgage early doesn’t necessarily mean that you should. As with any major financial decision, you should consider it in the context of your overall financial plan. For certain people, paying off your mortgage faster might be unwise if:
- You have high-interest debt — you should consider paying this off before anything else.
- You don’t have an emergency fund (this is essential to keep any financial plan on track).
- You’re self-employed and use part of your home as an office (you can claim some of the mortgage interest as an expense that can reduce your taxes).
- You have no retirement savings (this should be a priority before paying off your mortgage).
- You have no savings for your kids’ education.
If none of these situations applies to you, paying off your mortgage faster may still not be the best decision from a purely financial point of view. For example, some investors, who have a long timeframe for investing and moderate-to-high risk tolerance, may prefer to invest that extra money in the stock market. They could potentially get considerably higher returns than the interest they would save by paying off their mortgages early.
If you’re considering how to pay off your mortgage faster, it pays to get advice first. Bay & Associates will be able to run the figures and consider a range of scenarios so that you can make an informed choice that is the best one for your situation and which also fits in with your overall financial plan. These scenarios could include comparing how much you would save by paying off your mortgage faster with how much you could earn by investing that money instead. Book an initial consultation now.
Written and published by IG Wealth Management as a general source of information only. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on your specific circumstances from an IG Wealth Management Consultant.
Mortgages are offered by Investors Group Trust Co. Ltd., a federally regulated trust company, and brokered by nesto Inc. Licences: Mortgage Brokerage Ontario #13044, Saskatchewan #316917, New Brunswick #180045101, Nova Scotia #202507230; Mortgage Brokerage Firm Quebec #605058; British Columbia, Alberta, Manitoba, Newfoundland/Labrador, PEI, Yukon, Nunavut, Northwest Territories.
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