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Tips to pay off your mortgage early

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“In the end, paying off your mortgage early really boils down to your short-term and long-term financial priorities" - File

Tips from the experts on how to pay off your mortgage quickly

Many homeowners dream of being mortgage free and look forward to the day when they make their final repayment on a home loan. But short of a big lottery win or an unexpected inheritance, the chances of paying off a mortgage overnight are slim for most people.However, it is possible to reduce the time it takes to pay off a mortgage by following a few tips from the experts. First, check your mortgage contract or contact your mortgage lender to determine the terms and conditions for increased payments, including what additional amounts are allowed and when, and what penalties may arise for early repayment.

Next, consider your options. David Lee, a financial adviser at BlueShore Financial credit union, says apart from saving money, paying off a mortgage early provides financial peace of mind and gives you more control of your financial affairs.

“Your monthly expenses are lower, and you have more cash flow to use for other expenditures such as travel, buying another property or investing for retirement,” he says.

Lee also points out that increased monthly payments or a lump sum provides, in effect, a guaranteed rate of return on the payments equal to the interest rate you are being charged on the mortgage.

The Financial Consumer Agency of Canada (FCAC) says increasing regular payments, even by a small amount, may help you pay off your mortgage faster. Many lenders allow borrowers to increase their regular payments by a certain amount each year and the amount is written into the mortgage contract. Be careful not to increase payments by more than permitted or you could incur a penalty.

Typically, you will not be able to reduce your payments again during the term of the mortgage contract so make sure the increased amount is manageable within your budget.

As an example, FCAC says paying just $100 a month more on a $350,000 mortgage over 25 years at an interest rate of four per cent could save you more than $19,000 and let you pay off your mortgage two years sooner.

A lump-sum payment is another option written into some mortgage contracts. Using the same loan amount, term and interest rate as in the FPSC example, a one-time lump sum payment of $10,000 could save you $15,000 and reduce the mortgage term by a year.

FCAC also suggests that if you secure a lower interest rate when you renew your mortgage, you should consider keeping your regular payments the same even though you may have the option to reduce them. This could help pay off the loan early and save you money.

Lee says another option is to make accelerated bi-weekly payments. A regular bi-weekly payment is the monthly payment multiplied by 12 and then divided by 26 weeks. The accelerated bi-weekly payment is the monthly payment divided by two and spread over 26 weeks, which means the payment over the full year is higher and the mortgage term is reduced.

While younger homeowners may not have the financial means to pay down their mortgages quickly, extra cash from a tax refund can be a way to make a lump-sum payment, he says. However, people approaching retirement tend to have lower expenses and a goal, as part of their financial plan, to pay off their mortgage before they retire.

“In the end, paying off your mortgage early really boils down to your short-term and long-term financial priorities,” says Lee. “It’s also important to consider protecting yourself with an emergency plan in case of unexpected expenses. While paying off your mortgage sounds great, it could defeat the purpose if you put all your money into your house and then have to borrow it back again when interest rates may be higher.”

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