A mortgage is the single largest debt the average Canadian or American will have to pay. How about paying off your mortgage in 5 years… or 10 years? Well, that’s a goal many homeowners have…mainly in their dreams.
The fact is that most people with mortgages will continue to carry some level of mortgage debt into retirement, and the reason for this is not far-fetched. Average mortgage debt is simply too high at a huge price. $201,811 in the US Y $198,781 in Canada.
Compare this to the median household income of $59,039 in the US and $70,336 in Canada, and you can see why mortgage debt is often a lifelong burden. Not surprisingly, the most common mortgage amortization of choice for homebuyers is the 30-year (US) or 25-year (Canada) mortgage.
So what options do you have as a homeowner if you want to pay off your mortgage early? Actually, there are a few, and they’re particularly attractive now as mortgage rates start to rise.
For the sake of simplicity, let’s start with assuming you have a $400,000 mortgage. This amount is below the median price of single-family homes in Canada ($568,000) and more than the median price of $304,500 In the USA
How to pay off your mortgage early
Let’s go over some mortgage payment calculations and scenarios.
Scenario #1: Increase the frequency of your payments
This is also known as the expedited payment option. For example, instead of making your mortgage payments once a month, you can choose a ‘fast biweekly‘ Payment option that splits your monthly payment in half, with each half paid every 2 weeks.
When you make these 26 biweekly payments for 1 year (calculated as 52 weeks/2), you have essentially made 1 additional month of mortgage payments.
Using our $400,000 25-year mortgage scenario, your monthly payments are $1,892.98 (at 3% interest rate). When you start paying half this amount every 2 weeks to speed up your payments, that means you pay $946.49/biweekly (calculated as $1,892.98/2).
Leave: Just by making an additional monthly payment spread throughout the year with the accelerated payment strategy, you will have:
- Saved $20,628 in interest costs
- You paid your mortgage on 3 years earlier
Scenario #2: Increase your payment amount
You can get out of the mortgage faster than you expect if you can simply top up your biweekly or monthly payments. Using the same $400,000 25-year 3% mortgage, let’s say you can add $100 to your normal monthly payment (of $1,892.98).
Leave: By simply adding $100 each month in additional mortgage payments (for a total of $1,200 over the course of the year), you will have:
- Saved $13,349 in interest costs
- He almost paid off his mortgage 2 years earlier
Strategies #1 and #2 are great. Accelerated payments eliminate $20,628 and approximately 3 years of mortgage debt. Topping up with an extra $100 each month ends up saving you over $13,000 and gets you out of the mortgage 2 years sooner!
So how about the big savings mentioned in the title, huh? How can you save over $70,000 and be mortgage free 10 years sooner?
We will get there. In the meantime, let’s see how you can get out of your mortgage 6 years sooner while saving $46,000 in interest payments.
Strategy #3: Make Lump Sum Deposits Every Year
This is where the numbers get very interesting! Using the same example above of a $400,000 25-year mortgage. Let’s say you make an extra payment of $5,000 each year!
Leave: By depositing an additional $5,000, you will have:
- Saved $46,000 in interest costs
- Reduce the term of your mortgage by more than 6 years (74 months to be exact)!!
All of this is possible by using the power of compounding to your advantage. Your lump sum payments reduce your principal debt and significantly reduce the amount of interest you must pay over time.
You may be wondering, “where do I find the extra $5,000?” Some possibilities include:
1) Tax Refund: The annual average the tax refund in Canada is $1,650 and in the United States, is $2,895. So instead of going to the mall, think about paying off your mortgage debt.
2) Salary Increase: Your annual salary increase or bonus can go a long way.
3) Cash or inheritance donations
4) Secondary activities to earn more money or passive income.
Now to everyone’s big stage. Let’s see what the numbers say when you add $10,000 a year in mortgage payments!
Leave: Using the same 25-year $400,000 mortgage at a rate of 3%, you will have:
- Saved $72,423.96 in interest costs
- Free of mortgage approximately 10 years before!
This is a great stage!!
The question many people may be asking right now is, “How the heck can I get an extra $10,000 every year on top of my other expenses?” I hear you and I know the fight is real!
I’ve put together a pretty detailed list of 100 practical ways to save an extra $20,000 per year here. These are creative ways to save money on your purchases, investments, around your home, and really easy ways to save dollars every day.
These are just a few highlights:
- Buy insurance (auto, home and life)
- save hundreds of dollars
- Cancel unused subscriptions
- learn to negotiate
- Earn cash back on groceries and general purchases
- Do comparison shopping
- Reduce your investment fees
- Choose a variable mortgage
- Reduce your water bill
- Decline Mortgage Life Insurance
- Prepare your house for winter
- Avoid extended warranties
- Don’t keep up with the Joneses. To save thousands of dollars. You can read my full guide to saving money here.
Strategy #3 of paying a lump sum shows us that you can save $46,000 Y shorten your mortgage in 6 yearsor even shoot the moon and save $72,000 plus 10 years of additional mortgage freedom.
Suppose there is absolutely no way you can think of:
- An additional $100 per month (ie strategy #2), or
- An additional $5k to $10k per year (strategy #3)
There is one more strategy to save money on your mortgage. It’s painless.
Strategy #4: Round up your payments
Using our now famous example of a $400,000 25-year mortgage at a rate of 3% and $873.10 in normal biweekly payments. Let’s say you can round up the biweekly payments to $900 (ie $873.29 + $26.71).
This means that every 2 weeks you will find an additional $26.71 to add to your basic mortgage payment (eg, skipping some lattes, packing your lunch, etc.).
Leave: By making an additional payment of $26.71 every 2 weeks, you will have:
- Saved $8,262.88 in interest costs
- Reduce your mortgage term by 13 months (more than 1 year!)
What we can see from this last example is that even small additional payments make a big difference. Savings of over $8,000 are nothing to play with.
You don’t need a big windfall to start your journey to mortgage freedom. Start early, start now, and you will reach your goals.