5 Ways to Pay Off Your Mortgage Faster

12-07-2018 | Borche Stefanov |

5 Ways to Pay Off Your Mortgage Faster

A change is brewing in the Canadian mortgage market as things hot up in 2018.  Central banks have a way of shaking things up when it comes to interest rate hikes.

Even just the expectation of an increased overnight rate sends shockwaves through homeowners and banks alike.

TD Bank (Canada) responded to the federal government’s new mortgage rules in 2016 by raising their variable-mortgage rates for all mortgage holders.

Their exposure to residential mortgage market placed the bank in a tricky position, especially under the expectation that fixed mortgage rates would rise.

New and existing mortgage holders bore the brunt of this rate hike, not only with TD Bank, but its competitors, too. There is serious discussion of likely hikes among key financial players for late 2018.

The Bank of Canada has been fairly stable with the overnight rate in the past few years, however.

Understandably, the central bank’s actions affect the mortgage market in two primary ways:

  • Firstly, the overnight rate determines how and what interest rates lenders are willing to offer mortgage payers, for both fixed and variable-mortgage rates.  An increased trend-setting rate in 2018, for example, resulted in a healthy bump in competition between the major market lenders offering variable-rate mortgages.
  • Secondly, mortgage lenders will need to recoup their losses if the overnight rate increases.  Higher central bank rates are therefore filtered down to the mortgage holders through higher mortgage lending rates in general.

With all the fuss, us mortgage holders need some savvy financial skills to navigate the markets.  Negotiating a favorable mortgage rate from the get-go is even more important in this volatile mortgage climate.  Listed below are six effective strategies for paying off your mortgage faster:

1. Begin well: Rates Matter

Negotiating a favorable rate is key to success in a long-term financial commitment.  Mortgages eat away at disposable income month-to-month, year after year.

Why not start with the best possible situation then?  This does not necessarily mean choosing the lowest rate, either.

It is best to think of a mortgage payment rate as an ongoing, hopefully decreasing amount on your financial life plan.  Bigger payoffs now may reduce future commitment faster, for example.

Fluctuating interest rates may turn in your favor if the economy is moving a certain direction, but can also lock you in to unexpected increases in monthly repayments.

Mortgage payers are currently able to find extremely favorable variable-mortgage rates being offered in lieu of the anticipation of another rate hike in the near future.

These rates may even be more favourable than traditional fixed-rate mortgages as the central bank seems unlikely to raise rates enough in the next decade to put the variable-mortgage rates on par with the fixed rates.

To make the process easier, there are websites like CompareMyRates where you can compare the best mortgage rates available today. You can compare all rates with a couple of clicks, without having to do much manual research.

It may seem cliché, but reading the fine print is highly recommend before signing on a mortgage deal.  The big bold promises at the top of the flyer are there to catch your attention, but be assured, this is not the whole story for the 20-year liability.

Renegotiating mortgages based on a “no-frills” new product, for instance, may seem like a good move until the final push locks you in to an expensive, and regret-filled repayment plan.

2. An extra payment here and there

A simple way to reduce the time on your loan, especially a large mortgage, is to pay in an extra bit of cash any time you are able to spare it.  Make it a part of your monthly budget plan, over and above the regular mortgage payments required by the contract.

This might be a small amount on the face of things, but every dollar counts towards reducing the interest repayments faster.

An extra $50 repayment per week on an average $450,000 mortgage may save you over $7300 over the entire 25-year amortization period (assuming a 2.85% fixed rate).  Additionally, as with any liability, the quicker you pay off the pesky interest portion, the sooner you can start chipping away at the bulk principal repayment.

As an aside, consider your emergency funds, savings, retirement annuities and credit card debt before offering to pay extra into the mortgage.  Debt is an overall picture and balance is key to great personal financial management.

3. Apply a tax refund

Tax refunds are wonderful surprises for most, but think of these as a bonus to be put towards reducing your overall debt.

A greater reduction in your principal amount will also make renegotiation of a more favorable rate that much easier. Think of it as an investment in your future.

By paying your tax refund into your mortgage as an extra, you are one step closer to achieving financial freedom.

4. Surrender investment returns to it

Any investment strategy is only as good as its overall guaranteed returns.  There is no point in earning fixed income or returns on dividends, stocks, bonds or other tools – like Guaranteed Investment Certificates (GICs) – when you still have a looming mortgage holding you ransom.

Use the returns gained from investments as an extra repayment tool on the mortgage.  It is “free” money after all, with no added risk to your overall portfolio and no harm to your future earning potential.

5. Be Smart about Career Development

The same principle applies to a rise in salary, or annual bonus stipend.  We tend to increase our standard of living (and consequently our debt obligations) after a salary increase, or promotional move.  This often stretches us beyond our means by bringing on greater debt commitments while the mortgage repayments still linger on in the background.

Be smart about it.  Increased disposable income is the perfect way to reduce existing debt first.  As we’ve seen, every cent off the mortgage takes you one step closer to financial independence.  A mortgage is easily out of sight, out of mind, ticking off the bank balance each month. It is like any other financial commitment, however, requiring regular reassessment.

Keep informed about changes to rates, regulations and your lender’s policies. Enquire about new financial products and research ways to reduce your mortgage faster. Your future self will thank you for it.

Financial products are continuously changing to meet the dynamic demands of well-informed users.  Banks and other lenders will not generally advertise to existing clients, especially if the product may reduce your time and money commitment to them.

It is up to us to investigate, and to ask questions. Being aware of the penalties for breaking a mortgage agreement in favor of a lower rate, for example, might save you thousands of dollars (and a headache or two) as you realise it is not worth pursuing.

A different mortgage agreement may not be right for you, for example, but you never know until you explore what’s out there.  Comparing new and innovative mortgage options and understanding competitive products at similar institutions may be the best kept secret to faster mortgage repayment.

Financial freedom is possible for regular Canadians like you and me.  All it takes is a level head and wise financial decisions like paying off the mortgage faster.

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