How You Can Own Your Home Sooner
By Lucas on Nov 15, 2012
A recent Scotiabank poll found that nearly three-quarters (72 per cent) of Canadians are taking at least one step to becoming mortgage-free sooner. The biggest advantage of paying your mortgage off sooner is the amount of interest you would save. A $350,000 mortgage can produce as much as $150,000 in interest charges over a 25-year amortization period! Who wouldn’t want to cut into that amount? There are three steps you can take to pay your mortgage off faster:
Accelerate the frequency of your mortgage payments
Mortgage payments are typically paid on a monthly basis, which necessitates 12 payments a year. However, most lenders also give you the option of increasing your payment frequency to either bi-weekly or accelerated bi-weekly. A bi-weekly mortgage payment multiplies your regular monthly mortgage payment by 12 months of the year and divides the outcome by 26 bi-weekly payments. An accelerated bi-weekly mortgage payment takes your monthly mortgage payment and divides it by 2; paying this amount 26 times means you’re making one extra monthly mortgage payment each year.
Here is a chart detailing the payment differences using a $350,000 home, with a 25-year amortization period and a 2.94 per cent 5-year fixed rate.
| Payment schedule | Monthly | Bi-weekly | Accelerated bi-weekly |
| Number of mortgage payments in a year | 12 | 26 | 26 |
| Mortgage payment amount | $1,646 | $759 | $823 |
| Total interest paid after 5-year term | $47,552 | $47,487 | $46,856 |
| Remaining mortgage balance after 5-year term | $298,815 | $298,815 | $289,892 |
Increase your monthly mortgage payment
Some lenders will also allow you to increase your monthly mortgage payment. This can range anywhere from a 10 per cent increase to a full 100 per cent increase (also called a “double-up payment”). For example, the $350,000 home from the example above has a monthly payment of $1,646. If you were to increase the regular payment by 20 per cent every month for one year, you would save $32,055 in interest over the life of your mortgage. Perhaps the most rewarding aspect of increased mortgage payments is the reduction of the amortization period, which, in this example, changes from 25 years down to 20.
Original mortgage numbers:
Mortgage payment: $1,646 per month
Amortization period: 25 years
After a 20 per cent monthly mortgage payment increase:
New mortgage payment: $1,975 per month
New amortization period: 19.75 years
Amortization years saved: 5.25 years
Use the lump sum prepayment option
Another prepayment provision allows you to put a large sum of money directly towards the principal. Lenders will allow the lump sum prepayment to occur annually; however, the lump sum amount is capped as a percentage of the mortgage. The range is usually between 10 to 25 per cent of the original mortgage amount. If you require a lump sum payment greater than 25 per cent, you could consider an open mortgage rate which has no prepayment restrictions. For example, one 20 per cent lump sum payment of $70,000 on a $350,000 mortgage amortized over 25 years would save $116,697 of interest over the life of your mortgage. The original 25-year amortization reduces by 5 years after the lump sum payment is made.
Original amortization period: 25 years
Lump sum payment: 20 per cent of mortgage principal
New amortization period: 20 years
Amortization years saved: 5 years
According to the Scotiabank poll, accelerating the frequency of mortgage payments is the most common action taken by Canadians who want to own their homes sooner (29 per cent).
