Paying off your mortgage early isn’t easy, but it’s certainly worth it.
Of course, tightening up your spending belt is a core tactic for freeing yourself from mortgage debt, but it’s not the only way. There are other tricks that won’t cost you a dime but will save you a ton. Here’s some foolproof guidance.
Start by cleaning up your credit score
If you’ve always paid off your debts on time, your credit score should be really good, but you might be surprised what turns up when you dig in.
We’ve had clients who religiously paid off debts but somehow they had a lone unpaid cell bill in their payment history, and that had a surprising impact on their ability to get the best rate for a mortgage. It can happen to anyone. It took this client several months to repair their credit rating. Of course, a single errant payment won’t prevent anyone from getting qualified for a mortgage, but the lesson here is that when you clean up your credit rating, you get yourself approved for a better mortgage rate.
Tip: Pull and analyze your credit rating as far ahead of your mortgage search as you can. That way, if you find any oddities, you can clean them up before you go for your mortgage. It’ll save you a bunch over the life of your mortgage.
Make your down payment as big as you can
In Canada, mortgages require you to come up with a minimum 5% down payment for any homes valued up to $500,000…and 10% down payment for the balance of any homes valued above that amount. One of the biggest money savers you can find is to come up with the largest down payment you can manage. Not only will you owe your lender less principal and interest, but critically you will also get to avoid paying (CMHC) insurance premiums that just add money to your mortgage. And just to be clear, CMHC mortgage loan insurance isn’t to protect you; it’s to protect your lender if you default on your loan. In Canada it’s mandatory for down payments from 5% right up to 19.99%.
So, if you’re in Ottawa where the average home price is approximately $350,000 and you put down $17,500 (5%) the CMHC premium will be whopping $11,970…3.6% of the mortgage balance. But don’t worry. If you can’t afford 20% down (many can’t), there are still opportunities to reduce your insurance if you can hit certain deposit levels. Your mortgage broker can clearly layout your options and show you where those trigger points are.
Buying less home now can pay big dividends later
Depending on your market, you might also be able to avoid mortgage default insurance premiums by buying less home now. We all want to move into our ideal home, but sometimes buying less house can get you into the market faster and if that allows you to avoid default insurance premiums, you’re that much further along in paying down your mortgage, building equity faster, and setting yourself up for your next home. Again, it’s another option that might work for you.
You have to look around for the best rate
Many Canadians stick with their financial institutions when applying for mortgages. It’s just a habit, but the truth is that it almost always pays to shop your mortgage business around. When lenders compete for your business, you win. Here again is where a great mortgage broker – one with a solid reputation and a deep network of lenders – can pay off, big time.
And for those folks who worry about getting a mortgage from a lender they don’t instantly recognize the name of, don’t forget that you’re borrowing money not investing it. Money is money, so name familiarity doesn’t make your mortgage any risker than getting a mortgage from a major bank. Of course, like all mortgages, the devil is always in the terms and details. This is an area where if you aren’t entirely comfortable, a mortgage broker will be your best friend and protector. And just to be clear about it, mortgage brokers don’t cost you money. They are paid a finder’s fee by the lender. Their help to you is free of charge, and that means no charge for a pre-approval and no obligation to sign on with them. The best part is that while most of us hate to haggle, haggling on your behalf is exactly what mortgage brokers live to do!
We always say the devil is in the details
While getting a low interest rate can knock years off your mortgage, the terms of that mortgage can be just as important. For example, we’ve seen instances where an institution offers a great low rate, but with terms that completely preventing you from breaking or moving that mortgage to a different lender. That eliminates competition and that’s never going to the benefit of you. Once again, here’s where an experienced, professional mortgage broker can be worth their weight in gold. They will deep dive into all terms and restrictions and show you just how much that lower rate might end up costing you in the long run.
Here’s a perfect example: The right prepayment privileges can go a long way toward helping you pay off your mortgage much faster, but many mortgages put limits on your ability to prepay throughout your mortgage, mostly because it will cost them interest revenue. Many mortgages do allow borrowers to make no fee annual prepayments to the loan principal – but not all mortgages. Getting the right prepayment terms can save you ten’s of thousands of dollars in interest, but you have to pay attention to those details before you sign your mortgage.
Amortization: how long?
Choosing the shortest length of amortization you can afford will knock years off of your mortgage. It’ll mean a much higher mortgage payment, but you’ll pay off your mortgage in fewer, dramatically lower your interest costs and realize big savings.
Your payment schedule can also make a difference. Payments options include paying every month, twice a month, every two weeks or even weekly. Paying weekly or every two weeks accelerates your payments by an adding two weeks of payments every year. Using our Ottawa home example, if your amortization period is 25 years on a $350,000 home at 3% mortgage rate would save you close to $20,000 in interest using a biweekly plan. That’s a lot of money.
Supercharge your mortgage
So, we’ve clearly shown that maximizing your down payment and finding the best rate and terms can save you plenty. But the real silver bullet when it comes to eliminating your mortgage as fast as possible is making extra payments. For most borrowers, it comes down to making some serious choices about lifestyle. You can’t eliminate a mortgage quickly without a serious plan; a plan that includes a lot of discipline to cut out non-essential luxury or casual spending. This might even include putting a temporary hold on saving for retirement.
The level you commit to is entirely up to you, but remember: eliminating debt is just as powerful (probably more) than saving, and once debt is eliminated, you can supercharge your disposable income to easily surpass what you lost by putting other things on hold. We all hope that our investments continue to grow over time, but as the market has shown us, timing isn’t always fair. Of course, the return on eliminating interest as fast as possible is a bon-a-fide win by any measure.
Want to learn how you can cut your mortgage term by a decade? Want to see what a truly customized plan for your specific goals looks like? You won’t find it on a website, but we can show you how.
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