In Canada, most mortgage amortization period are 25 to 30 years, it could be a lifelong liability to many homeowners.
Fortunately, there are a few ways to allow you pay off mortgage faster and saving big on interests.
Here is FIVE WAYS to pay off your mortgage earlier
1. Shorter Amortization
The most popular amortizations for home loans are 25 or 30 years. Lenders also offer shorter amortization ranging from 5 to 15 years.
The shorter repayment period means higher mortgage payments, with less interest charged over the life of loan.
Before you pull the trigger on choosing shorter amortization, please note that amortization is non-extendable. Once a mortgage is registered, you cannot extend the amortization unless refinance the mortgage.
Moreover, since amortization is non-extendable, the mortgage payment is also fixed. The higher mortgage payments could have negative impact on your future borrowing ability, especially when purchasing an investment property or 2nd home.
2. Increase Payments
Your lender calls this a prepayment or prepayment privilege, it may allow you to increase the regular payments from 15% to 100%. Increasing your payment, even a small amount, helps to pay off mortgage faster over years.
Unlike shorter amortization with fixed higher mortgage payment option, prepayment privilege allows you to adjust payment amount without charges, you can increase the payment at anytime and switch back to the original amount when needed.
3. Make Lump-Sum Payments
Lump-sum payment could be the easiest and most popular option to pay off mortgage faster. Any extra money you have set aside could be used toward reducing the principal by exercising the lump-sum payment option.
Most mortgages allow a lump-sum payment of 10% to 20% of the original mortgage amount every year.
If you have a $500K mortgage and lender allows 20% lump-sum payment per year without penalty, you could possibly pay off the entire mortgage in first 5 years contract.
4. Choose Accelerated Payment Option
An accelerated payment option allows you to make weekly or bi-weekly payments. With this option, you are putting more money toward mortgage than regular monthly payment option.
How does an accelerated payment option work? Let’s use accelerated biweekly payment as an example, it simply splits your monthly payment amount in half and pay in every two weeks. By end of the year, you would have made the equivalent of 13 monthly payments - one extra month worth of payment in a year!
5. Re-Assess Mortgage at Maturity
When your current mortgage term is coming up for renewal, it’s a perfect time to make some adjustments to suite your current financial situation.
You can shorten the remaining amortization to pay off mortgage faster.
You can also make additional payments to principal and reduce mortgage balance without penalty. It’s similar to lump-sum payment option, but no limitation on payment amount, if the extra payments were made on mortgage maturity date.