With a young child, and plans to have more in the future, Natalie Dionne and Garret Aubin like to run a tight financial ship. But with Dionne on maternity leave, striking a balance between meeting the bills, saving for the future and paying down the mortgage has been a high-wire act. “Just looking at our bank accounts, it’s like, ‘Eeek! I’ve got to get back to work!’” says the Winnipeg-based agronomist.
Slashing a few years off a mortgage can save a household thousands in interest, and that money can instead be used to for retirement savings, to buy a second property or for travel.
When she does go back, paying down the mortgage at an accelerated pace is top of the to-do list. “That’s something we’ve been talking about a lot lately,” she says. “We’d like to be mortgage-free as soon as possible so we can focus on other needs, like retirement.”
No matter the tax bracket you’re in, paying off a home early is an admirable goal – and a prudent one, too. Slashing a few years off a mortgage can save a household thousands in interest costs, and that money can instead be used for retirement savings, to buy a second property, or for travel. It’s actually not that difficult: Chipping away at your mortgage takes planning and simple, strategic moves.
Read up on your mortgage’s prepayment options, says Jim Clark, director of the Mortgage Planning Specialist Network with Investors Group. “It’s not just about having the lowest rate,” he says. “That’s important, but people also need to understand prepayment options, which can make a big difference.”
Many mortgages come with the ability to make a 10 percent to 20 percent lump-sum annual payment, which can dramatically shorten the life of a mortgage. An RRSP tax refund, a bonus at work or an inheritance can give people the money to make those one-time payments, he says.
Up the frequency
With money committed to so many other places, making a large payment in one fell swoop is challenging – even for high-income households. Consider simply increasing the frequency of your payment from monthly to biweekly, or even weekly, to reduce amortization and interest charges.
Ideally, switch to an accelerated weekly plan. With this option, you’re only paying slightly more every month than you would with a once-a-month payment, but over the course of the whole year, it amounts to one additional monthly payment. By contrast, simply splitting the monthly payment in four does not result in that extra monthly amount, says Clark. And since you’re chipping away at the principal every single week, you’ll pay less interest, too.
Even switching from monthly to biweekly accelerated can save a significant amount. On an $800,000 mortgage over a five-year term and 25-year amortization at an interest rate of 3.29 percent, for example, “you will pay off that mortgage 34 months sooner,” he says. That’s about $49,000 saved in interest charges.
Just pay more
Homeowners can speed up their paydown even further by increasing payments to slightly above what is required by the terms of the mortgage, says Clark.
Borrowers can also take advantage of rules allowing regular payments to increase by 10 percent to 20 percent every year. Clark says this strategy, along with a biweekly payment plan, would reduce a 25-year amortization period by more than 10 years, saving about $170,000 in interest.
Given all the other financial priorities families have, that extra cash can certainly come in handy, especially for one of the most important savings goals of all: retirement. Indeed, Dionne plans on putting more money into her retirement accounts as soon as her mortgage is paid off. “It all adds up to larger savings in the long run,” she says.