There’s a reason why we’re so anxious. On a $100,000 mortgage at seven per cent amortized over 25 years, you’ll pay more than $110,000 in interest. That’s in after-tax dollars. In gross terms—and I mean that in every way possible—your mortgage can actually more than double the cost of your home. And unlike our U.S. cousins, who get to deduct their mortgage interest on their tax return, we’re stuck paying tax on every penny, which makes our mortgages very, very expensive.
Want to burn through your mortgage faster? Your best bet is to pay more now to save big later on. Here are some easy ways to fast-track your payments and save money:
If you use the accelerated weekly or bi-weekly payment options available through most lenders, you end up making one extra monthly payment a year. This means more of the principal is repaid sooner, leaving you with less interest to pay in the long run. What does that mean in real money? Well, on your $100,000 mortgage at seven per cent, that one extra payment a year will save you almost $24,000 in interest and have you celebrating in about 20 years instead of 25. And since that extra payment is spread over the whole year, your cash flow never feels pinched.
To make the biggest impact, particularly in the early years, you can pre-pay your mortgage. Some policies even have a “double up” feature that lets you put extra money against your principal. Put an extra one-time payment of $1,000 against your mortgage and, over the life of your $100,000 mortgage, you can save more than $4,100 in interest. Do it every year and you’re in the money to the tune of about $28,000. So, where do you find an extra $1,000 a year? Take a gander at Easy money.
So, you’ve negotiated an interest rate two per cent lower than your last mortgage. Now, instead of having to ante up $700 a month, you’re only on the hook for about $585. Instead of reallocating that to restaurant meals, why not keep humming along with the same payment? That additional $115 every month can save you $23,000 in interest on your five per cent mortgage and gets you mortgage-free almost seven years sooner. Now, that’s smart!
With a little foresight, fast-tracking your mortgage can be relatively painless. So, start planning your mortgage-burning party now!
Where to find extra dough:
Cut back on the lattes By adding even a nominal amount to each payment, you’ll reduce the amount of interest you pay over the long term. An additional $25 a month, for example, will save about $11,000 in interest down the road.
Contribute to your RRSP If you’re in the 40 per cent tax bracket and you make a $2,500 contribution to an RRSP, the taxman could refund you $1,000—money you can use to prepay your mortgage.
Pay off a loan and swing the payment to your mortgage Whether you just got a raise or finished paying off your student loan, if you’ve just got some extra money in your cash flow, it’s time to increase your mortgage payment. 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. Just make sure your mortgage lender will let you go back to your previous level if your circumstances change.