- What is a Mortgage?
- How does Your Mortgage Rate Affect the Price You Pay for a Home?
- Get the Best Mortgage Interest Rates in Canada. It only takes 5 Minutes!
- How to Pay Off Your Mortgage Faster: Why Should You?
- How to Pay Off Mortgage Faster, Canada
- 1. Choose an Accelerated Payment Option
- 2. Increase How Much You Pay
- 3. Round-Up Your Payment
- 4. Make a Lump Sum Mortgage Payment
- 5. Maintain the Same Payment Amount When You Renew Your Mortgage
- 6. Shorten Your Amortization Period
- Additional Tips on How to Pay Off Mortgage Faster
- 7. Diversify Your Mortgage
- 8. Pay Your Other Debts First
- 9. Select a Flexible-Term Mortgage
- Factors to Consider Before You Pay Off Your Mortgage Faster
- Do You Need Mortgage Payment Protection?
- BONUS: How to Pay Off Mortgage in 5 Years
- Should You Pay Off Your Mortgage or Invest?
- FAQs on How to Pay Off Mortgage Faster – Canada
- Final Takeaway on How to Pay Off Mortgage Faster in Canada
A mortgage is the single most significant debt that most Canadians will ever carry. Many people are under the misconception that paying off your mortgage early is impossible, but it is possible! How?
This article contains nine proven strategies on how to pay off mortgage faster Canada and make your mortgage payments more manageable.
In this article, we’ll cover 9 ways on how to pay off your mortgage faster with real-life scenarios. We’ll also discuss how to pay off your mortgage five years faster. But first, let’s start with the basics.
What is a Mortgage?
A mortgage in Canada is a loan taken out by an individual to buy property. The lender (in this case, a financial institution such as a bank) takes security over the property, and charges interest on the borrowed money, usually at a higher rate than prime, to compensate for the additional risk.
To buy a property in Canada, you must first put down at least five percent of the purchase price (but it may be more). These funds are generally accumulated over time and can be amplified with initiatives such as The Federal Government’s First Time Home Buyer Incentive and the First-Time Homebuyer Plan.
The balance owing on the house is financed with a mortgage loan. This loan is amortized over several years (usually 25 years for first-time homebuyers) with mortgage terms renegotiated after a set period (usually five years, though the term can range anywhere from 6 months to 10 years).
The total amount borrowed is broken down into monthly or bi weekly payments over the lifespan of the loan.
How does Your Mortgage Rate Affect the Price You Pay for a Home?
The interest rate you can get on your mortgage is probably the most crucial factor when shopping for a house. It’s also one of the most significant variables, as rates change constantly.
A percentage of each payment you make goes toward paying down the home’s principal loan (the final purchase price) and a portion of it to the lender as interest on your loan.
The lender makes more money when interest rates are higher. The greater your interest rate, the more money goes to the lender rather than paying down your principal loan. It’s in the best interests to obtain a mortgage loan at the lowest feasible rate.
Mortgages come in 2 interest rate categories: fixed and variable.
- With a fixed-rate mortgage, your interest rate remains the same until you renegotiate or repay the mortgage. Your payment will be lower than with a variable-rate loan since more of it goes toward paying down principal instead of interest.
- Variable-rate loans have no set rates for the life of the loan; your interest rate might be higher or lower depending on the market. However, lowering interest rates means you pay out more money towards principal and complete your mortgage sooner.
The interest rates on various mortgages vary depending on their characteristics. You’ll pay a higher interest rate on cash-back mortgages, for example.
In addition to the mortgage principal, you receive a percentage of the mortgage amount in cash with a cash-back mortgage. This extra money may be used to purchase assets, fund a special occasion, or renovate your home. However, not all financial institutions offer cash-back mortgages.
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How to Pay Off Your Mortgage Faster: Why Should You?
To save money on interest charges
The lesser the time you take to pay off your mortgage, the less money you will have to pay in interest over time. You may potentially save hundreds or even thousands of dollars in interest throughout your mortgage by paying it off faster.
To reduce stress
Your mortgage is a substantial financial commitment, and the last thing you need is more money to squeeze out of your budget every month. The sooner you pay off your mortgage, the less time you have to think about it.
To be financially free
Once you’ve paid off your mortgage, you’ll have a lot of money freed up in your budget. You may then invest that sum however you choose – saving more for long-term investments (such as retirement or an RESP) or short-term objectives (such as travel).
To provide financial security for your family
By paying the mortgage (or through regular contributions if you’ve negotiated this in advance), you should be able to leave enough money for your loved ones to live on in the event of your death. In this way, you can help ensure that they are financially secure.
To get a better return on investment
After paying off your mortgage, you’ll have more money to invest for the long term — instead of living paycheck to paycheck and saving up every month to pay off an enormous debt obligation. Investing your money in stocks, bonds, mutual funds — or doing it yourself by buying the assets you want directly – can help make you wealthier.
You’ll be able to buy more houses
Once you’ve paid off a mortgage on a piece of real estate, there’s no tying up that much cash in a down payment for the next time you buy. You have more cash available to invest and grow your assets or acquire new property.
How to Pay Off Mortgage Faster, Canada
1. Choose an Accelerated Payment Option
An accelerated payment option allows you to make bi-weekly or weekly payments. Instead of making your mortgage payments once a month, you might choose an ‘accelerated bi-weekly’ option that divides your monthly payment in half and pays each half every two weeks.
When you make these 26 bi-weekly payments for a year (calculated as 52 weeks divided by two), you’re essentially paying one extra month’s worth of mortgage installments.
As a result, you’re putting more money toward your mortgage each month than if you made monthly mortgage payments. Accelerated payments can help you save money on interest costs.
Example: If you took out a 25-year $300,000 mortgage. Your monthly payments are $1,343.90 (at a 2.5% interest rate) and total interest costs is $103,169.61. When you begin paying half of this amount every two weeks to speed up your payments, you will pay $671.95 bi-weekly (calculated as $1,343.90/2) and incur a total interest cost of $91,378.66.
The Result: You will pay off your mortgage two years earlier and save $11,790.95 in interest charges by making just one more monthly payment spread out over the year.
TRY -> A Simple Mortgage Payment Calculator
2. Increase How Much You Pay
Increasing your payments, even by a bit of amount, will help you pay off your mortgage faster.
Let’s assume that your mortgage is $2,000 per month but that you can afford to spend an additional $200 without strain. Doing so will result in lower interest payments and save you years of mortgage installments.
One pro tip of how to pay off mortgage faster – Canada is to pay what you’re comfortable with rather than just making minimum payments.
You may only be able to raise your payments by a certain amount each year. Your mortgage agreement should state it. If you increase your payments by more than the prepayment privilege allows, you may have to pay the penalty. Usually, once you raise your payments, you can’t reduce them until the end of the mortgage term.
Example: Let us assume that you can increase your regular monthly payment (of $1,343.90) by $200 each year from the sixth year onwards, using the same 25-year $300,000 mortgage at 2.5%.
The Result: You will save $11,717 in interest costs and pay off your mortgage three years and two months earlier
3. Round-Up Your Payment
Each time you make a regular monthly payment, you can round up to the nearest dollar. You can use any spare cash that you have leftover at the end of the month to increase your mortgage payments. Taking this route will result in a considerable difference in the interest cost incurred on your mortgage.
Example: If you are making $1,343.90 payments monthly under a 25-year $300,000 mortgage at 2.5% interest, and round up the amount to $1,350 by making an extra payment each time you pay your mortgage.
The Result: Even the slight increase of $7 will save you money on interest charges and help you pay off earlier.
4. Make a Lump Sum Mortgage Payment
You can also make a lump sum mortgage payment on top of your regular mortgage payments. It might be from your tax refund, year-end bonus, salary raise, inheritance, or any other extra source of money that comes your way.
You can make lump sum payments before your term ends, on particular dates set out in your contract, at specific intervals, or at the end of your term.
Example: Using the same 25-year $300,000 mortgage example as before. Assume you make a lump-sum payment of $30,000 after the fifth year.
The Result: You would have saved $17,572 in interest charges and shortened your mortgage term by two years and eleven months by paying an extra $30,000.
Pro Tips: If you want to put money away each year toward your lump-sum payment, here are some ideas for generating additional income:
- Cancel any subscriptions you are not using
- Shop for the best insurance rates (car, home, and life)
- Learn how to negotiate
- Opt for a variable mortgage
- Earn cashback on groceries and your other general and recurring expenses
- Consider using a robo advisor instead of a financial advisor to manage your investment as this will help reduce your investment fees
- Consider comparing prices when shopping
- Save on banking with a no-fee bank account and an online bank in Canada
- Winter-proof your home. This will help reduce your costs such as heating
- Start a side hustle. Explore easy ways to make money from home in Canada
Remember that you may only be able to put a limited amount of money on your mortgage. Check your mortgage agreement to see what it says to avoid prepayment penalty.
5. Maintain the Same Payment Amount When You Renew Your Mortgage
When your mortgage comes up for renewal, you may be able to negotiate a cheaper rate. However, instead of making smaller payments, you should continue to make the same amount. In the long run, you’ll pay less interest and have a mortgage that is paid off sooner.
6. Shorten Your Amortization Period
The amortization period is the time taken to pay off a mortgage, including interest. The shorter your amortization period, the less interest you’ll pay throughout the term of your loan. By increasing your regular payment amount, you may decrease your amortization period.
Your monthly payments will be somewhat higher, but you’ll be debt-free sooner. A mortgage amortization period is usually 25 years, but you may reduce it to five, 10, 15, or 20 years.
Example: We’ll use the same example above (a $300,000 mortgage with a 2.5% mortgage rate, and change the amortization period to 20 years.
|Amortization Period||Total Mortgage Amount Paid||Monthly Payment||Interest Paid|
While you’ll pay just $22,093 less in interest, you’ll put $244 more towards the principal monthly.
Additional Tips on How to Pay Off Mortgage Faster
7. Diversify Your Mortgage
Consider mortgage alternatives that can save you money and give you some flexibility. You may also combine and match your mortgage conditions to select from fixed and variable rates, much like you would with your investments.
8. Pay Your Other Debts First
It may be surprising or appear to be counterintuitive, but one of the simplest methods to pay off your mortgage is first to clear all of your other obligations. A mortgage is a long-term obligation with a low-interest rate. Credit cards and personal loans, on the other hand, are short-term obligations with high-interest rates.
While focusing on your mortgage may be more beneficial in the long run, a credit card or personal loan debt would do much more harm in the short term. The payments are more challenging to fulfill, the penalties are more severe, and if you struggle and those debts are prolonged, they will be far more harmful than a mortgage.
If you have outstanding debt or credit cards with any penalties or high-interest rates, your first concern should be to pay it off. You can then apply the money you save by not paying interest on these debts to your mortgage payments.
9. Select a Flexible-Term Mortgage
Although 15- and 30-year mortgages are most prevalent, they are not the only alternatives available. Consider whether you can make a short amortization term work for you. Look for a lender that offers adjustable-term loans if you wish to refinance.
Shorter terms mean lower interest payments over time. If you’re not sure which term to pick, an independent mortgage broker can assist you in determining how short a term you can comfortably pay back.
MORE -> Open vs Closed Mortgage: All You Need to Know
Factors to Consider Before You Pay Off Your Mortgage Faster
Now that you know how to pay off your mortgage faster, remember, if you pay off your mortgage sooner, you will have less money to spend on other expenses. That’s why financial experts advise homeowners to double-check that they fulfill the following criteria before opting for accelerated payments:
- You have other forms of savings.
- To cover yourself in the event of an emergency, you should have a cash reserve of at least three to six months’ worth of expenses.
- Check to see whether you have any debt with a higher interest rate than your mortgages, such as a personal loan or credit card. To save money, pay off your debts with the ones with the highest interest rates first.
- Accelerating your mortgage payment should not jeopardize your other financial objectives, such as paying for your children’s education or acquiring a second home (among others).
Do You Need Mortgage Payment Protection?
Mortgage Payment Protection Insurance offers coverage for a set period if you become ill, find yourself unemployed or otherwise unable to make your monthly payments.
It is recommended for all home owners with high-interest rate mortgages, but it may also be necessary for younger homeowners who have a family and other financial obligations. Your insurance protects you for a set period, or until the end of the term on your mortgage.
It won’t cover any other debt that you have, and it only pays out one lump sum if all of your bills become too much for you to handle. You can get mortgage protection whether you’re a homeowner with a mortgage or a first-time homebuyer.
BONUS: How to Pay Off Mortgage in 5 Years
Set a Due Date
Set an actual date when you’d like to retire your mortgage. Setting a goal of five years is reasonable, but if you have a strict deadline, it’s easier to achieve. Keep track of your target date and place it somewhere visible, so you don’t forget about the objective you’re aiming for.
You could also use a countdown calendar to keep you on track. For instance, make a note of the day when you should have half or three-quarters of your mortgage pay off. Once you’ve set a target date, you may figure out how much you’ll need to pay each month and year.
Your lender may provide an amortization schedule that shows how much each mortgage payment is devoted to the principle and interest. You may also use a mortgage calculator to figure out how much you should pay each month or year.
Make Bigger or More Frequent Payments
This is a major strategy on how to pay off mortgage faster Canada. If you already have a mortgage, consider making additional monthly payments. Make a payment each time you get paid if you’re paid twice a month. At the end of the year, you may also make an extra lump-sum payment.
Put down a 20% Down Payment
If you don’t have a mortgage, consider making a 20% down payment. If you make a smaller down payment, private mortgage lenders will want to charge you with private mortgage insurance (PMI). The extra premium will only increase the amount of time it takes to pay off your loan.
If you can’t come up with a 20% down payment, double-check that you can afford the home. The simplest method that answers how to pay off mortgage faster Canada is to have a smaller mortgage.
Reduce Your Other Expenditures
If you put more money down on your mortgage, you’ll have less money available to spend on other things. So help yourself by reducing other monthly expenditures. Cutting expenses does not have to be a permanent condition, either.
Once you’ve paid off your mortgage, you may choose to resume spending on the things you eliminated. This is only a brief approach to help you focus on repaying your loan.
Stick to a Spending Plan
Start a budget to help you avoid overspending. Budgeting allows you to keep track of your money and helps you only spend money on items you want to spend money on. You may be shocked when you first log how much money you’ve spent in a month. But simply creating a budget isn’t enough. You must also follow through.
Increase Your Monthly Income
Instead of drastically curtailing your expenditures, you might wish to explore potential methods to make a little more money. That might include starting a side hustle, for example.
Should You Pay Off Your Mortgage or Invest?
One approach to get a lump-sum payment towards your mortgage payment is to invest. You might put your money in a tax-free savings account (TFSA) as an example. Then, once your investment has increased in value, pay a fixed sum.
Compare the rates on your potential investment and your mortgage to see which option makes more sense for you.
Put your money in an investment and watch it grow if investing pays a better rate of return than your mortgage. You may, for example, use this time to set up an emergency fund to handle unanticipated events and provide you peace of mind.
You could also invest in a TFSA or RRSP to enjoy the benefits of these plans and finance another project. If you feel a mortgage offers you a better return, put a lump sum on your mortgage instead.
FAQs on How to Pay Off Mortgage Faster – Canada
Final Takeaway on How to Pay Off Mortgage Faster in Canada
In this article, we’ve covered nine strategies on how to pay off mortgage faster Canada. We also discussed strategies for paying off your mortgage five years sooner than you thought possible. If all of these tips sound interesting and practical to you, the next step is deciding which ones will work best in your situation. Good luck!
And if you need help figuring out what strategy would suit your needs best, don’t hesitate to comment below. We’re happy to provide helpful advice as needed!
TRY -> Pay Off Mortgage Faster Calculator, Canada
Charity (Charee) Oisamoje is the founder of TheFinanceKey - TFK. She leads the editorial team, which is comprised of subject-matter experts.
Her professional competencies and expertise make her qualified on this topic. She is an expert at collecting details, verifying facts, and making complex subjects easy to understand.
Backed by Solid Credentials: MBA in Finance Canadian Investment Funds (IFIC) Graduate Masters Degree in International Business Chartered Professional Accountant (CPA) Candidate ✔️Chartered Insurance Professional (CIP) ✔️BSc Accounting
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