If you're a homeowner in Canada, you're probably already aware that a mortgage can be a hefty financial burden, especially when you're trying to pay it off as quickly as possible. But the good news is, there are a few simple steps you can take to get rid of that mortgage debt faster and save yourself some serious money in the long run.
Let's talk about amortization. Essentially, your amortization period is how long it’ll take you to pay off your mortgage over time. It's like a schedule of payments that breaks down the amount you owe into smaller chunks, along with the interest that you'll pay on those chunks over a set period of time.
Now, when it comes to your mortgage in Canada, amortization is a key factor in determining how much you'll pay in total over the life of your mortgage. The longer your amortization period, the lower your monthly payments will be, but the more you'll end up paying in interest over the life of your mortgage.
So, it's important to choose an amortization period that makes sense for your financial situation. If you can afford higher monthly payments, a shorter amortization period might be a better choice for you. But, if you need lower monthly payments, a longer amortization period might be a better option.
If you chose a monthly payment frequency schedule when you first locked in your mortgage, you can speak to your mortgage provider about changing the frequency of your mortgage payments.
Since there are 26 bi-weekly periods in a year, you'll end up making the equivalent of 13 monthly payments instead of 12, which will reduce the amount of interest you pay over the life of your mortgage. This can help you save thousands of dollars in interest over the years and can also reduce the length of your amortization period.
Another simple way to pay off your mortgage faster is to increase your monthly payments. Just a small increase of even an additional $100 can make a big difference in the long run. With this method, you can speed up the amount of the principal you’re paying, while saving dollars in interest and shaving years off the length of your mortgage.
Just make sure to check your mortgage contract first to see what the limit is for increasing payments each year. You don't want to end up paying a penalty for going overboard on your prepayment privilege. But, it’s important to note, that once you crank up your payments, you can’t dial them back down until your mortgage term is up.
So if there’s space in your budget, take some time to consider this option before going all in.
Lump-sum payments are another great way to speed up the repayment of your mortgage. If you have some extra money saved up, consider making a lump-sum payment to your mortgage. This can help reduce the amount of interest you pay over the life of your mortgage and get you to financial freedom faster.
However, just like if you choose to increase your monthly mortgage payments, you’ll also want to look over your mortgage contract to see what the maximum amount of a lump-sum payment you can put towards your mortgage a year to avoid any prepayment penalties.
Similarly, if you’re renewing your mortgage and you have extra money set aside, or come into, you’ll be pleased to know this is the best time to make a lump sum payment. During your mortgage renewal, there is no limit or penalty for how large of a lump sum payment you make.
If for example, you increased your monthly payments but were only able to increase it to a certain amount to avoid penalties–or made one or more lump sum payments up to the amount you were able to without incurring any penalties but wanted to put more toward this purpose–you now have a prime opportunity to pay off even more.
Making a large lump sum payment during your mortgage renewal can significantly shorten the time it takes to pay your mortgage off and reduce the interest you have to pay.
The final way to pay your mortgage off faster is to shorten your amortization period. Shortening your amortization period will shorten how long your mortgage term by increasing your monthly payments.
To shorten your amortization period, you will have to refinance your mortgage with your current provider or with a new one. However, refinancing your mortgage is not as simple as that. Refinancing is like reapplying for a new mortgage with a new set of terms.
Beyond shortening your amortization period, you can potentially have an option to lower your interest rate and increase the percentage of your mortgage that you can pay every year through prepayments/lump sum payments before incurring prepayment penalties when you refinance.
However, this is only possible if you qualify for a mortgage that would let you do so. It’s important to know it’s not a guarantee that refinancing a mortgage will result in a shorter amortization, lower interest rate, or changes to prepayment penalties. In some cases, refinancing would also result in a similar or higher interest rate, the same amortization period you originally had, and no changes to prepayment penalties. Just like when you first applied for your mortgage, the terms of a mortgage are highly dependent on your particular situation and lender.
It’s okay to shop around for mortgages to compare what rates you can get this time around.
Furthermore, if you do refinance your mortgage before your mortgage term is up, you may also face penalties and additional fees for breaking the terms of your agreement before your term is up for renewal. Note that the earliest you can renew your mortgage is 120 days.
If you’re considering refinancing, connect with one of the mortgage advisors at Pine today, and we’ll be happy to help find the best solution for you.