5 Ways to Pay Off Your Mortgage Faster

From the moment we sign on the dotted line, it’s a race against the clock. Some of us spend every waking moment thinking about how to get rid of our mortgages as fast as possible. Some people are so focused on repaying their mortgages that they do some pretty weird stuff. I’ve worked with people who have ramped up their mortgage payments and then been pushed to their lines of credit or, worse, their credit cards to make ends meets. They’ve effectively moved their debt from their cheapest to their most expensive lender.

While we salivate over our American cousins’ tax-deductible mortgages, here in the great while north our mortgage interest isn’t tax-deductible, which makes our mortgages very expensive. On a $100,000 at 7% amortized over 25 years, we’ll pay more than $110,000 in interest. That’s right. The cost of your home more than doubles.

But putting mortgage repayment above all other goals isn’t the most sensible way to manage your money. Sure, your mortgage interest is expensive, but setting aside the ever-important emergency fund or delaying retirement planning can come with big costs too. If you want to have a solid and stable financial foundation, you must put a little into each pot to achieve the long-term goal.

I heartily approve (what a surprise) of looking for ways to repay your mortgage faster, as long as you’ve got a solid plan in place and aren’t just knee-jerking to the idea of your mortgage debt. Every penny you save in interest is a penny and some that you don’t have to earn. But doing it slowly and steadily makes far more sense than putting your whole financial plan at risk because of a single-minded desire to be mortgage-free.

Here are five sensible ways to get to your mortgage burning party faster:

Increase the frequency of your payments: If you use the accelerated weekly or bi-weekly payments options, you end up making one extra monthly payment a year. And that extra payment goes directly to pay off your mortgage principal. On a $100,000 mortgage at 7%, just one extra monthly payment made each year will save you $24,000 in interest and have you celebrating in just over 20 years. And since that extra payment is spread over the whole year, your cash flow never feels pinched.
Round your payments up: This is another relatively painless way to get mortgage-free faster. By adding even a nominal amount to each payment, you’ll reduce the amount of interest you pay over the long term. Add $25 a month – that’s just five fewer lattés – to your monthly mortgage payment and you’ll save over $10,000 in interest. Will that be a coffee each afternoon, or would you rather save $10,000 in interest?
Pre-pay your mortgage to save big-time: Anything you throw against your mortgage above and beyond your regular payments will make a huge impact, particularly in the very early years. Put one extra $1,000 prepayment against your mortgage principal, and over the life of your $100,000 mortgage you’ll save $4,000 in interest. Do it every year and you’re in the money to the tune of almost $29,000. So where are you going to find an extra $1,000 a year? Why not…
Contribute to an RRSP and use your refund to pay down your mortgage: Yes, contrary to all those clichés your mother filled your head with, you can have your cake and eat it too. If you’re in the 30% tax bracket and you make a $3000 contribution to an RRSP, the taxman will refund you $900, which you can then use to pre-pay your mortgage. This is one of the smartest strategies you can use to achieve two objectives – retirement saving and mortgage-free home-ownership – with one pool of cash.
Increase your payment annually to the most you can afford: Whether you just got a raise or just finished paying off a whack of debt, if you’ve got some extra money in your cash flow, it’s time to increase your mortgage payment. No, I’m not talking about refinancing. I’m referring to the feature on many mortgages that allows you to up the amount you pay monthly, with the entire increase going to pay off your principal. If you’re holding off because you’re not sure you’ll be able to sustain the increase, don’t. Just make sure your mortgage will let you go back to your previous level if your circumstances change. Or pile up the money in a high-interest savings account so you can max out your annual prepayment option.