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Yikes, fewer Canadians are paying off their mortgages faster according to a poll done by CIBC.  Only 55% of us with mortgages plan to make extra payments compared to 68% polled last year.

Okay, I suppose it’s possible that homeowners are taking advantage of the low interest rates and we’re investing their extra money instead of paying off our mortgages but if you recall we’re terrible investors so what exactly are we doing with our money?

We’re picking up more debt of course! The same poll found that Canadians are spending more on home renovations and vacations.  When money is cheap, we love to borrow more of it!

I’m going to assume some of us don’t like debt so here are 7 ways to pay off your mortgage faster.

Accelerate those payments

The easiest way to pay off your mortgage faster is to set your payment cycle to accelerated bi-weekly. With monthly payments we’re making 12 payments a year, but with accelerated bi-weekly we make 26 payments.

Real-life example:  A mortgage of $350,000 amortized over 25 years at a 3% interest rate will cost us $1656.36 a month.  However, by switching to accelerated bi-weekly payments we’ll pay $828.18 or $1794.35 monthly. ($828.18 X 26 payments, then dividend by 12 months)

The difference is only an additional $137.99 a month but that extra payment will cut almost 3 years off our mortgage.

Increase your payments

Every dollar we put down above our minimum payment goes directly towards the principal of our mortgage.  I would much rather pay off the principal than paying my lender interest.

Let’s use the exact same numbers as before; A mortgage of $350,000 amortized over 25 years at a 3% interest rate with an accelerated bi-weekly payment schedule will cost us $828.18.  We decide to add an additional $100 to every payment making our payments a total of $928.18.  This extra payment combined with our bi-weekly payments has now shaved almost 6 years off our mortgage!

An easy way to increase your payments without ever feeling it is to simply increase your payment whenever you get a raise.

Make a lump-sum payment

Most mortgages allow a lump sum payment once or twice a year up to a certain amount, this is a perfect opportunity to reduce your mortgage further.

But where can we find this extra money?  How about our tax refund, work bonus, employee stock plan or even cash gifts from family.  It doesn’t matter where we get the money, just find some!

Take a shorter amortization

Choosing a shorter amortization is an obvious way to reduce the years on your mortgage but it’s often overlooked.  There’s nothing stopping you from taking a 19-year amortization vs. a 20 year one, you can set it to whatever you want.  Your payments will be higher but you’ll also pay off your mortgage faster.

Renegotiate

Mortgage rates are at an all-time low but it doesn’t just benefit those of us who are currently in the market for a home.  If you’re a few years into your mortgage it’s still possible to take advantage of these low rates by re-negotiating.

Yes, we’ll have to pay a penalty fee to break our mortgage but we could potentially end up saving tens of thousands of dollars in the long run.  There are tons of lenders out there that would be happy to take our business. . . err money, so work with a mortgage broker to find the best rate and term.

Skip the renovation

If your goal is to pay down your mortgage, doing renovations can set you back. I get that people want to update their homes but just understand, but it comes at a cost. If you have a bunch of money lying around, doing renovations could immediately increase the value of your home. However, if you need to borrow cash to do those renos, you’re just increasing your debt.

Borrow less

Lenders are more than happy to lend us an insane amount but just because they offer to lend us $700,000 dollars or whatever should we take it?  NO, never take the maximum amount offered.

I don’t care what the lenders say or how much they say we can afford, this is what we need to know. Lenders don’t care about how we plan to pay for our children’s education, how we will fund our retirements, where we’ll get the money to make home repairs, or how we’ll be able to afford a vacation; they only care about us making our monthly payments.

Final thoughts

Interest rates are at historic lows and they can only go up; if you can only afford a home with a long amortization at these rates then it’s a good sign that you probably can’t afford a home.

Think carefully about how much you want to borrow.  This ain’t Trading Spaces, This is real life!

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About Barry Choi

Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog Money We Have is one of Canada’s most trusted sources when it comes to money and travel. You can find him on Twitter:@barrychoi

5 Comments

  1. […] Barry Choi provided some tips to kill your mortgage sooner.  We use a combination of these things. […]

  2. Avatar Alex on August 24, 2014 at 4:27 PM

    Barry what a great post on how these simple things we can do to shorten our mortgage debt through simply switching to bi-weekly payments and paying a bit more towards the principal. Living within our means and taking on loan that we only need is also important thing to do. I have been using some your tips and have cut down my amortization by at least 10 years so far and look to keep doing these simple things. Thanks for sharing these.

    • Avatar Barry Choi on August 24, 2014 at 4:31 PM

      Hey Alex,

      Thanks for the feedback, I’m actually in shock that many people have no idea that a simple change can shave years off their mortgages.

  3. Avatar MakintheBacon on August 30, 2014 at 2:47 PM

    I don’t think you need to skip the home renovations completely. Just be financially smart about them. Not everything needs to be super high end and done right away. Oh and the obvious part, make sure you set aside money for it. 😛

    • Avatar Barry Choi on August 30, 2014 at 2:55 PM

      MakintheBacon,

      Of course you don’t need to skip them completely but at the same time I don’t think using the excuse “it’ll up the value of my home” justifies the extra renos. Definitely if you have the budget for then by all means do it, I’m more concerned about people who are tapping into their equity to do renos.

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