May 26, 2017

Get rid of your mortgage faster


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It pays to shop for flexible mortgage options

By Kevin Lutz

Many customers focus only on low interest rates when obtaining their new mortgage. While your interest rate is important, considering flexible options to help you pay off your mortgage quicker is equally important. You should be diligent and ask about these options when obtaining a new mortgage, and then diligent about utilizing them once you have a mortgage! If you use all of your flexible payment options to their maximum, you could prepay as much as 20 per cent or more of your original mortgage balance each year and save a substantial amount of interest.

Each of the following options can help you build your home equity faster.

Accelerated bi-weekly payments. You can save a lot of interest and cut years off of your mortgage by increasing your payment frequency. When you select an accelerated weekly or bi-weekly payment option, you are essentially making the equivalent of one additional monthly payment each year. Tip: Make sure you ask about, and understand the difference between regular bi-weekly and accelerated bi-weekly payments. There is minimal benefit unless you choose an accelerated payment.

Double up your payments. When you double up a payment, your extra payment goes directly toward reducing the principal balance of your mortgage. A common option allows you to pay up to the equivalent of your regular monthly mortgage payment, whether it’s weekly, biweekly or monthly.

Make extra principal prepayments. Applying extra prepayments directly to your mortgage principal allows you to prepay a certain amount (usually 10 per cent) of the original amount of your mortgage once in every 12-month period. Note: When your mortgage is up for renewal, you can make a principal prepayment for any amount you wish, including paying off your whole mortgage. Tip: A lump sum payment of even $1,000 a year can make a sizeable difference in the time it takes to pay off your mortgage.

Increase your payment amount. Some mortgages allow you to increase your regular mortgage payment by as much as 10 per cent each year. The increased amount goes directly toward your principal, thus taking an extra bite out of your principal balance each month.

Save more—make a larger down payment. Simply put, paying off your mortgage faster starts with you saving for a larger down payment. This can be a difficult choice because buying a home sooner is often a market timing issue.

Increase your RRSP contributions. Under the federal government’s Home Buyers’ Plan, first-time home buyers are eligible to use up to $25,000 in RRSP savings per person ($50,000 for couples) for a down payment on a home.  If you’re planning to buy your first home, keep loading up your RRSPs.

Choose a shorter amortization period. A shorter amortization period means higher regular payments, but it also means that you’ll pay significantly less interest over the life of your mortgage. You can choose a shorter period when you set up your mortgage or when you renew it.

Paying off your mortgage faster takes some discipline and is not easy, but remember that every little bit helps. When you make an extra payment against your mortgage, the interest is now calculated on a lower principal balance. Most of these transactions can be done via online banking now, making it very convenient for you.

Kevin Lutz is RBC Regional Sales Manager,
Residential Mortgages
Twitter: @RBCKevinLutz

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