Mortgage Information

From Brenda Bullivant Newsletter May 2023 - How To Pay Off Your Mortgage Faster

When it comes to homeownership, many of us dream of the day we will be mortgage-free.

While most mortgages operate on a 25-year amortization schedule, there are some ways you can pay off your mortgage quicker!

Review Your Payment Schedule: Taking a look at your payment schedule can be an easy way to start paying down your mortgage faster, such as moving to an accelerated bi-weekly payment schedule. While this will lead to slightly higher monthly payments, the overall result is approximately one extra payment on your mortgage per calendar year. This can reduce the total amortization by multiple years, which is an effective way to whittle down your amortization faster.
 
Increase Your Mortgage Payments*: This is another fairly simple change you can execute today to start having more of an impact on your mortgage. Most lenders offer some sort of pre-payment privledge that allows you to increase your payment amount without penalty. This payment increase allowance can range from 10% to 20% payment increase from the original payment amount. If you earned a raise at work, or have come into some money, consider putting those funds right into your mortgage to help reduce your mortgage balance without you feeling like you are having to change your spending habits.
 
Make Extra Payments*: For those of you who have pre-payment privileges on your mortgage, this is a great option for paying it down faster. The extra payment option allows you to do an annual lump-sum payment of 15-20% of the original loan amount to help clear out some of your loan! Some mortgages will allow you to increase your payment by this pre-payment privilege percentage amount as well. This is another great way to utilize any extra money you may have earned, such as from a bonus at work or an inheritance.
 
Negotiate a Better Rate: Depending on whether you have a variable or a fixed mortgage, you may want to consider looking into getting a better rate to reduce your overall mortgage payments and money to interest. This is ideally done when your mortgage term is up for renewal and with rates starting to come back down, it could be a great opportunity to adjust your mortgage and save! This may be done with your existing lender OR moving to a new lender who is offering a lower rate (known as a switch and transfer).
 
Refinance to a Shorter Amortization Period: Lastly, consider the term of your mortgage. If you’re mortgage is coming up for renewal, this is a great time to look at refinancing to a shorter amortization period. While this will lead to higher monthly payments, you will be paying less interest over the life of the loan. Knowing what you can afford and how quickly you want to be mortgage-free can help you determine the best new amortization schedule.

*These options are only available for some mortgage products. Check your mortgage package or reach out to me to ensure these options are available to you and avoid any potential penalties.

If you’re looking to pay your mortgage off quicker, don’t hesitate to reach out to me today! I can help review the above options and assist in choosing the most effective course of action for your situation.

For more information or details, contact Brenda Bullivant:
 

Mortgage basics

Amortization. Fixed rate. Variable rate. High-ratio. Principal. If you’re mystified by mortgage-speak, you’re not alone. Here’s a crash course in mortgage basics to help you make smart decisions about one of the biggest investments you’ll ever make.

Choose a term that works for you.

A term is a period of time (from 6 months to 10+ years) during which you pay your mortgage at a specified interest rate. To figure out what term is right for you, decide how comfortable you are with the volatility of the market and how important a stable mortgage payment is to your budget.

Long term:

Right now, interest rates are low. If you’re afraid they’ll go up and you want to lock in at a low rate, or you want to know exactly how much you’ll be paying every month, go for a longer term like 5, 7 or 10 years.

Short term:

If interest rates look like they’re falling, this may be a better bet. If you’re comfortable with payments that may fluctuate somewhat, your best bet is a shorter-term mortgage (i.e. a 6-month variable rate mortgage) that lets you take advantage of low rates, but also has the flexibility of allowing you to lock in and convert to a longer-term mortgage whenever you want.

Decide on an amortization period.

The amortization is the number of years (15, 20, 25) it would take to pay back the loan based on a fixed payment amount. The longer the amortization, the more interest you’ll pay. You can shorten your amortization by increasing your payments, paying lump sums towards the principal, or renewing your loan at a lower rate.

Decide on a fixed or variable rate.

A fixed-rate mortgage means you pay a set amount every month for the term of your loan. Whether posted interest rates rise or fall, your payments won’t change.

With a variable-rate mortgage, your interest rate fluctuates with your lender’s prime lending rate. It offers more flexibility, but also more risk. Typically, you pay a set amount every month, but when rates fall, more cash goes to principal, which reduces the interest you’ll have to pay in the long term. If rates go up, however, your set payment may not be enough to cover interest and principal, so you could end up having to pay more.

Choose a closed vs. open mortgage.

In an open mortgage, you can repay your loan any time without penalty. So if you sell another property or come into some extra money, you can pay down your principal whenever you want. Interest rates for open mortgages tend to be higher than for closed, and terms are typically shorter.

A closed mortgage is less flexible. If you decide to pay off a big chunk of your principal, you could incur a penalty. However, even closed mortgages have pretty generous prepayment options (usually up to 20% of the principal per year).

Decide how often you’ll make payments.

You can pay monthly, bi-weekly or weekly. Here’s the difference: with monthly payments, you make 12 a year. With bi-weekly payments, it’s 26. That’s the equivalent of 13 payments a year instead of 12. You probably won’t notice much of a difference in your cash flow, but you’ll pay off your mortgage faster, and save yourself thousands in interest.

Will you get a high-ratio or conventional mortgage?

That depends on the size of your down payment. A conventional mortgage is a loan that covers up to 75% of the purchase price, and doesn’t need to be insured against default. A high-ratio mortgage is anything over 75%, and must be insured by the Canada Mortgage and Housing Corporation (CMHC) or GE Capital. You can add your insurance premium (a percentage of your loan amount) to your mortgage or pay it on closing.

Get pre-approved.

Find out how much you’re eligible to borrow before you start looking. You’ll know exactly how much you can afford, and you’ll be guaranteed the interest rate that’s available at the time of your pre-approval for 60-120 days. If rates go up, you won’t have to worry about paying more, and if they go down, you get the lower rate. It’s win-win, free and there’s never an obligation to go with that lender.

Shop smart.

Now that you’re armed with some mortgage knowledge, you’ll be able to choose a loan that best meets your needs. If you need more info, most lenders have helpful information on their websites, or you can always ask your REALTOR® for help understanding the ins and outs of mortgages.

Happy mortgage hunting!

Callout: “If you’re mystified by mortgage-speak, you’re not alone.”

Trademarks owned or controlled by The Canadian Real Estate Association. Used under licence.