Paying off a mortgage can take a long time, depending on your amortization. And you just want to pay off your mortgage quickly to relieve the stress. It is one of the financial goals to pay off mortgage faster in Canada that can bring you closer to financial freedom.
Unfortunately, this is not an easy task, especially if you don’t know where to start. But on the brighter side, there are several strategies that you can use to pay off your mortgage faster in Canada.
Strategies To Pay Off Mortgage Faster
• Make Bi-weekly payments.
Bi-weekly payments are making payments every two weeks instead of once a month. This is one of the most effective strategies for paying your mortgage faster. By doing so, you’ll make 26 payments per year instead of 12. The extra payments you make can help reduce your mortgage term, and you’ll save a lot of money on interest payments.
For example, let’s say you have a $300,000 mortgage with a 25-year amortization period and a 3% interest rate. If you make monthly payments, you’ll pay off your mortgage in 25 years and pay $138,123.85 in interest. However, if you make bi-weekly payments, you’ll pay off your mortgage in 21.9 years and pay only $107,874.65 in interest. That’s a savings of $30,249.20!
• Increase Your Payment Amount.
If you increase your payments every month more than the supposed payments and pay lump-sum payments once every year, it will help reduce the principal, which can reduce the interest also.
For example, if you have a $300,000 mortgage with a 25-year amortization period and a 3% interest rate, increasing your payment by $100 per month would save you $22,161.61 in interest and reduce your mortgage term by 2.8 years.
• Take Advantage of Prepayment Privileges.
Most mortgages in Canada allow you to make prepayments on your mortgage without penalty. If you can get extra cash on hand, you can use that to pay extra on your mortgage.
For example, if you have a $300,000 mortgage with a 25-year amortization period and a 3% interest rate, making a $10,000 prepayment in the first year would save you $16,180.83 in interest and reduce your mortgage term by 1.5 years.
• Refinance Your Mortgage.
Refinancing can help you pay off your mortgage faster by lowering your interest rate or shortening your amortization period. You can do the refinancing on your current lender or refinance with a new lender, whoever offers a greater deal.
For example, if you have a $300,000 mortgage with a 25-year amortization period and a 3% interest rate, refinancing your mortgage to a 20-year amortization period at a 2.5% interest rate would save you $47,979.85 in interest and reduce your mortgage term by 5 years.
If you’re new to mortgage, you can be confused about what amortization period you chose or where you can save more. Choosing your amortization period will determine how long you need to pay off your mortgage and, at the same time, save money.
Benefits and drawbacks of Longer and shorter Amortization periods:
Benefits of having a mortgage with a longer amortization period
Lower monthly payments. If you have a mortgage with a longer amortization period, you will have lower monthly payments, which may help you afford it. You might be able to manage your money better and have more money left over.
Enhanced borrowing capacity can also be achieved through longer amortization terms. Lenders may be willing to lend you more money if you have lower monthly payments, enabling you to purchase a more expensive property.
Greater adaptability. Longer amortization periods can give you greater adaptability to deal with incredible monetary difficulties. You can use the lower monthly payment to manage your finances if an unexpected expense or income decreases.
Drawback of the Longer Mortgage Amortization Period
Higher interest costs. The longer the amortization period, the higher the interest rate you will accumulate. This will make mortgages more expensive.
Slower Equity Build. The longer the amortization period, the slower you’ll build up equity. This can limit your ability to access home equity for other purposes.
Benefits of having a mortgage with a shorter amortization period
Less expensive interest. Having a mortgage with a shorter amortization period means paying less interest over the life of the loan. You could save money and pay off your mortgage sooner with this.
Increase equity more quickly. With shorter amortization terms, you will increase equity in your property more quickly. Thanks to this, you may be able to use your home equity more quickly and for other purposes.
Pay off your mortgage sooner. If your mortgage has a shorter amortization period, you’ll be able to pay it off sooner, giving you more control over your finances and peace of mind.
Drawbacks of Shorter Mortgage Amortization Periods
Higher monthly payments. With shorter amortization periods, you’ll have higher monthly payments, which can make your mortgage less affordable. This can limit your ability to manage unexpected financial challenges.
Lower borrowing power – Shorter amortization periods can also lower your borrowing power. With higher monthly payments, lenders may be less willing to lend you money, which can limit your ability to purchase a more expensive property.
Paying a mortgage can be stressful and challenging, so we wish to finish it sooner. By weighing the benefits and drawbacks of the amortization period and following the mentioned strategies above, you’ll get to pay your mortgage faster and be more financially secure.
Connect with us at Private Mortgage Canada. Call us at +1 416-825-0142 or message us via email.