A mortgage is the single largest debt the average Canadian or American will ever have to pay off. How about paying off your mortgage in 5 years…or 10 years? Well, that’s a goal many a homeowner has…mostly in their dreams.
The fact is that a majority of people with mortgages will still carry some level of mortgage debt into retirement, and the reason for this is not far-fetched. Average mortgage debts are simply too high at a whopping $201,811 in the U.S. and $198,781 in Canada.
Compare this to the average household income of $59,039 in the U.S. and $70,336 in Canada, and you can see why mortgage debt is often a lifelong burden. No wonder the most common mortgage amortization chosen by home buyers is the 30 years (U.S.) or 25 years (Canada) mortgage.
So, what options do you have as a homeowner if you’d like to pay off your mortgage early? There are actually a few, and they are now particularly attractive as mortgage rates start to rise.
For the sake of simplicity, let’s start by assuming that you have a $400,000 mortgage. This amount is below the average price of single-family homes in Canada ($568,000) and more than the average price of $304,500 in the U.S.
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How To Pay Off Your Mortgage Early
Let us go through some mortgage payment calculations and scenarios.
Scenario #1 – Increase The Frequency of Your Payments
This is also known as the accelerated payment option. For example, instead of making your mortgage payments once a month, you can choose an ‘accelerated bi-weekly‘ payment option that cuts your monthly payment into two, with each half payable every 2 weeks.
When you make these 26 bi-weekly payments for 1 year (calculated as 52 weeks/2), you have essentially made 1 additional month of mortgage payments.
Using our 25-year $400,000 mortgage scenario, your monthly payments are $1,892.98 (at a 3% interest rate). When you start paying half of this amount every 2 weeks in order to accelerate your payments, it means you pay $946.49/bi-weekly (calculated as $1,892.98/2).
Outcome: By simply making one additional monthly payment spread over the year with the accelerated payments strategy, you will have:
- Saved $20,628 in interest costs
- Paid off your mortgage about 3 years earlier
Scenario #2 – Increase Your Payment Amount
You can become mortgage-free faster than you expect if you are able to simply top-up your bi-weekly or monthly payments. Using the same 25-year $400,000 mortgage at 3%, let us assume you are able to top-up your normal monthly payment (of $1,892.98), with $100.
Outcome: By simply adding $100 every month in additional mortgage payments (for a total of $1,200 over the course of the year), you will have:
- Saved $13,349 in interest costs
- Paid off your mortgage almost 2 years earlier
Strategies #1 and #2 are great. Accelerated payments shave off $20,628 and approximately 3 years of mortgage debt. Topping up with an additional $100 every month ends up saving you over $13,000 and gets you mortgage freedom 2 years early!
So, how about the big savings mentioned in the title, eh? How can you save over $70,000 and become mortgage-free 10 years early?
We will get there. In the meantime, let us look at how you can become mortgage-free 6 years early while saving $46,000 in interest payments.
Read: Best Mortgage Rates in Canada
Strategy #3: Make Lump-sum Deposits Every Year
This is where the numbers get very interesting! Using the same 25-year $400,000 mortgage example above. Let us assume you make an additional payment of $5,000 every year!
Outcome: By putting down an extra $5,000, you will have:
- Saved $46,000 in interest costs
- Cut your mortgage term by more than 6 years (74 months, to be precise)!!
This is all made possible by using the power of compounding to your benefit. Your lump-sum payments cut into your principal debt and significantly lowers the amount of interest you need to pay over time.
You may ask: “where do I find the extra $5,000?” Some possibilities include:
1) Tax Refund: The average annual tax refund in Canada is $1,650, and in the U.S., it is $2,895. So, instead of hitting the shopping mall, think about paying down mortgage debt.
2) Salary Increase: Your annual salary raise or bonus can go a long way.
3) Cash gifts or inheritance
4) Side hustles to make more money or passive income.
Now to the big-baller scenario of all. Let us see what the numbers say when you add $10,000 annually in mortgage payments!
Outcome: Using the same 25-year $400,000 mortgage and a 3% rate, you will have:
- Saved $72,423.96 in interest costs
- Become mortgage-free approximately 10 years earlier!
This is a big deal scenario!!
The question a lot of people may ask at this point is: “How the heck can I come up with an additional $10,000 every year on top of my other expenses?” I hear ya, and know that the struggle is real!
I have put together a pretty detailed list of 100 practical ways to save up an extra $20,000 per year.
Here are just a few highlights:
- Shop for insurance (car, home, and life)
- Save hundreds of dollars
- Cancel unused subscriptions
- Learn to negotiate
- Earn cash-back on groceries and general shopping
- Do comparison-shopping
- Cut your investment fees
- Choose a variable mortgage
- Cut your water bill
- Decline mortgage life insurance
- Winter-proof your home
- Avoid extended warranties
- Don’t keep up with the Joneses. To save thousands of dollars. You can read my complete guide to saving money here.
Strategy #3 of paying down a lump sum shows us that you can save $46,000 and shorten your mortgage by 6 years, or even shoot for the moon and save $72,000 plus 10 years of additional mortgage freedom.
Bonus
Let us assume there is absolutely no way you can come up with:
- An extra $100 per month (i.e. strategy #2), or
- An extra $5k to $10k per year (strategy #3)
There is one more strategy to save money on your mortgage. It is pain-free.
Strategy #4: Round Up Your Payments
Using our now famous example of a 25-year $400,000 mortgage at a 3% rate and $873.10 in normal bi-weekly payments. Let us say you are able to round up the bi-weekly payments to $900 (i.e. $873.29 + $26.71).
This means that every 2 weeks, you find an extra $26.71 to add to your basic mortgage payment (for example, by skipping a few lattes, packing your lunch, etc.).
Outcome: By making an additional payment of $26.71 every 2 weeks, you will have:
- Saved $8,262.88 in interest costs
- Cut your mortgage term by 13 months (over 1 year!!)
What we can see from this last example is that even little additional payments make a massive difference. Savings of over $8,000 is nothing to play with.
You do not need a massive windfall to start your journey toward mortgage freedom. Start early, start now, and you will reach your goals.
Other Related Posts:
- 20 Smart Ways To Save Money Around Your House
- 29 Ways To Save Money On a Daily Basis
- 12 Best Financial Apps To Automate Your Savings and Investing
- How To Use Your RRSP To Buy A Home
The mortgage payment scenarios were computed using this calculator hereprovided by the Financial Consumer Agency of Canada.
