First time home buyers just can’t wait to get a mortgage and are so excited when they do. Homeowners just can’t wait to pay off their mortgage. Just can’t seem to keep everyone happy.
If the Canadian Dream is home ownership, than part of that dream evolves to paying off the mortgage as quickly as possible. Paying down extra principal by whatever means and amounts possible will shorten the life of your mortgage and can dramatically reduce the interest you will pay in the long term.
Here are some tips that will help achieve this.
- Base all your forecasting and calculations on your Net Income, not your Gross income. Pre-paying your mortgage can only be done with after tax dollars. So, if you get a raise, or have a savings plan, ensure you budget with your Net, After Tax Income.
- Prepayments usually provide a great Return on Investment - If compare a mortgage pre-payment to typical investment rates (savings, GIC’s, bond, etc.) you will usually earn a greater if not competitive return on your investment by pre-paying your mortgage. Essentially, if you pay your mortgage down by say $1,000 vs. investing that same $1,000 in a typical fixed return investment, you would be much better off.
- Start with the end in mind. Pick a date each calendar year to re-visit your mortgage and Increase your payment annually to the most you can afford. This should be based on a time of year you get a raise, bonus, tax refund, etc. Again, based the increased payment on after tax dollars. Most lenders will allow you to reduce the payment back to the original amount if times get tough.
- Use your tax savings and credits to make an annual pre-payment. If you receive a tax refund or have invested into RRSP’s, plan to use the rebate, or part of it, towards an annual pre-payment against the mortgage. Make sure these funds or part of them are set aside for that purpose.
- Make accelerated bi-weekly payments or accelerated weekly payments and automatically get one full mortgage payment every year with little or no effort and nominal effect on your budgeting. Not a fan of weekly accelerated payments unless you are paid weekly. There is no additional benefit to you from the bi-weekly accelerated payment.
- Some lenders have double up privileges. Even if they don’t, make your own. Double up a payment or two a year. Give yourself a payment holiday if you ever need it. If you don’t, the money is being put to good use by allowing for a principal pre-payment on your mortgage.
- Add to your payment or shorten the amortization. Been approved for a 25 year amortization? Can you afford 24 years, 23 years, etc.? Or, how about adding $10, $25, $50 to each payment. The extra money is relatively painless but the impact on your mortgage balance is amazing.
- Lump sum payments whenever possible. Decreasing your balance by the amount of the lump sum is obvious. However, the impact is far greater. Each and every subsequent payment results in lower interest due to the lower balance.
- Go for savings not cash flow. If your renewal rate or refinance rate is lower than your original rate, keep the payments the same as they were by tweaking the amortization.
The sooner you pay off your mortgage, the better. This will allow you financial freedom and afford you the opportunity to capture other investments, build your net worth and enjoy a much better quality of life.
VERICO The Financial Forum Ltd.
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