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Three Tips to Pay Your Mortgage Off, Faster!
By Jane Barrow
One of the highest financial priorities of Canadian homeowners should be to pay off their mortgage as quickly as possible. However, it's quite shocking as to how many Canadians these days, actually are retiring with mortgages still on their homes and only meager pension income to make the payments. Somewhere along the way they missed out on opportunities to take advantage of a few simple strategies that would have had them mortgage-free, years ago. Any consumer taking out a mortgage today without an easy-to-implement mortgage reduction plan is missing the opportunity of a lifetime. Let's say you took out a $100,000 mortgage today, at 6.00%, amortized over 25 years. Your monthly payment will be $639.81. In 25 years, you would have to repay over $190,000 for the mortgage including principal and interest before you can invite your friends and family to the mortgage burning party. That's almost double the amount of the original loan. More importantly, it's the additional time- time spent having to work, time not spent relaxing, traveling and doing those things that you enjoy the most. Well, here are three, easy-to-use tactics on paying your mortgage down faster. They won't hurt your pocket book in the short term but will help you retire mortgage-free in the long run.
Tip # 1: Using the example mortgage scenario above, tip #1 is to increase your monthly payments by just $60.19 per month, effectively rounding up the mortgage payment to an even $700 over the lifetime of the mortgage. The immediate result will be that you will pay off your mortgage in 20 years and 8 months. You would realize a total interest saving of over $18,000 over the life of the mortgage. Most of us spend $60 a month, a toonie-a-day, without even knowing it. Skip the large-double-double on your way into work. Not only will you escape the dreaded, donut shop drive-thru and get to work faster; you'll also be well on your way to being mortgage-free, faster.
Tip # 2: After you've put tip #1 in to play, you can start working on tip #2. Now that your amortization is down to 20 years and 8 months, let's take the same situation and put a principal pre-payment plan in to motion. Simply put, a pre-payment is making an additional lump-sum payment to lower your outstanding principal. If you're like many Canadians and take out an RRSP loan to get the maximum tax refund due to you, tip # 2 is a simple exercise to implement. When applied to the mortgage principal, the tax refund is a "gift that keeps on giving". Combining the refund with the tax-free interest earned on the RRSP over the subsequent years will quickly outpace the short-term interest costs of the RRSP loan which is usually at prime rate. In our example, a tax refund of just $1200 applied to the mortgage principal once a year, will reduce your amortization down to 16.5 years; an interest savings of over $35,000. Not only are you paying your mortgage down faster but you're also topping up your RRSP at the same time. A double benefit! Imagine the savings if you could pay more than $1200, a year against the principal!
Tip # 3: Most people get paid on a weekly or biweekly basis. Nowadays, very few individuals get paid monthly. Therefore, it makes good sense to make your mortgage payments as often as you are paid. Making weekly or biweekly payments also has a dramatic effect on how fast you pay off your mortgage. In our example, so far, we have taken the original mortgage from a 25 year amortization down to 16.5 years.
Now let's take the same monthly mortgage payment of $700 per month and divide by two, for a biweekly payment of $350. By paying your mortgage biweekly, you will effectively reduce the amortization even further and pay off this mortgage in 14 years and 8 months with a total interest savings from all three tips of over $41,000 over the life of the mortgage. A bonus, simply because you were smart and coordinated your mortgage payment day with your pay day!
There you have it! Three, easy to implement tips that will reduce your mortgage by over 10 years, save you thousands of dollars in interest costs and disposable income, and top up your RRSP at the same time. You've effectively given yourself an opportunity to enjoy a greater life style for a longer period and peace of mind at retirement. After all, isn't that what we're all working for, today? Doesn't it make sense then, that when you take out a mortgage that you also have an easy-to-implement, mortgage reduction plan, in place? I highly recommend that you set 20 minutes aside, confer with your spouse and figure out what you can afford, to implement Tip # 1. Once you put that in motion, Tips 2 and 3 will come easily.
Good Luck!
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