3 Easy Ways to Save Money on your Mortgage
Your mortgage is likely the single largest debt you’ll every take on. And if you take a mortgage for $300,000 at an average rate of 5% and pay it off over 35 years you’ll end up paying $331,789.91 in interest. Wow!
There are ways to significantly reduce the amount of interest it costs and the time it takes to get to mortgage-free.
1. Choose an accelerated payment frequency. Most mortgages come with a vanilla-flavoured monthly payment. If you want to speed things along, choose the caramel-almond version: an accelerated weekly payment. Since you end up making an extra payment directly against your mortgage each year, you’ll save $70,003.63 in interest. That’s gotta be worth the extra thirty bucks or so you’ll have to come up with each week, dontcha think?
2. Shorten your amortization. The shorter your amortization, the more you have to come up with for each payment, but the less you’ll pay in interest overall. If you shorten a 35-year amortization to 30 years, you’ll save $55,430.90 in interest. Go with a 25-year amortization and save $108,345.42. Can’t swing the higher monthly payments every month? Then…
3. Make a principal prepayment against your mortgage. Most mortgages come with the flexibility to make an annual prepayment each year. It usually runs somewhere between 10 and 20% of the original mortgage amount. So on a $300,000 mortgage you could make somewhere between $30,000 and $60,000 principal pre-payment, assuming you could come up with the money. Hey, that’s what you can use a least a part of that bonus you’re getting for! But you don’t have to come up with a huge amount for the principal prepayment to work for you. You know that RRSP contribution you made that resulted in the $3,200 tax refund. Slap that sucker against your mortgage each year and you’ll save $112,348.58 in interest on that 35-year mortgage.
The Financial Consumer Agency of Canada has a terrific mortgage calculator tool that you can use to run your own scenarios to see just how much you can save on your mortgage. Spend a few minutes playing with the numbers. It might help you focus on a goal that will see your mortgage paid off up to ten years sooner! Invest a little time now and save a lot of time making mortgage payments, and scads of money too.