As Canadians become more informed about their mortgage more and more people are looking at taking advantage of their prepayment options to pay off their mortgage sooner and in return save thousands of dollars on interest.
Although some are quite happy making the minimum payments, others are keen on making the most of their payments and being mortgage free sooner, or as well call it on Lava Rates, burning through their mortgage.
People are usually really surprised on what simple steps can lead to great savings. You have probably looked at your pre payment options, if you even bothered to find out what they were and thought to yourself, sure it would be great to pay off 10-20% of my mortgage in a year but who could ever afford that?
Well, there are other ways of contributing aside from the one time hefty payment.
Let me demonstrate how easily it can be to pay off and burn your mortgage sooner with just 3 simple steps.
How to save lots of money on interest and cut the life of your mortgage (3 steps)
For the purpose of this scenario let’s take a mortgage of $350,000, interest rate at today’s rate of 3.5% and amortization at 25 years.
STEP 1: Change your monthly payments to accelerated bi weekly or even better accelerated weekly. With accelerated bi-weekly you get one extra payment in in the year so you make 26 payments instead of 25. With both, every time you make a payment your principle goes down therefore you pay less interest on what is remaining meaning more of your next payment will go towards principle.
Monthly payments: $1,797
Accelerated Bi weekly payments: $874 bi-weekly
* Your extra payments saved you $23,679 off your mortgage and 3 years off your amortization.
Accelerated weekly: $437 weekly
*Your extra payments saved you $23,928 off your mortgage and 3 years off your amortization.
How was that for a simple change? Savings of just shy of $24,000 and 3 year less mortgage payments!
STEP 2: Increase your payments by $50 (or the equivalent of 10 fancy daily coffees)
Accelerated Bi-Weekly payments: $924
*Your extra payments saved you $36,718 off your mortgage and 5 years off your amortization.
Accelerated Weekly Payments: $487
*Your extra payments saved you $47,853 off your mortgage and 6 years off your amortization.
Who knew a $50 change could make such a difference! Approx. $37-48 000 in savings and up to 6 years off your mortgage!
STEP 3: Make a lump sump payment. Again keeping figures reasonable, and nothing drastic. Let’s make a $1,000 contribution per year to the mortgage and see how that can change things.
On Accelerated Bi-Weekly Plan: Your extra, annual $1,000 payment saved you $45,716 off your mortgage and 6 years off your amortization.
On Accelerated Weekly Plan: Your extra, annual $1,000 payment saved you $55,516 off your mortgage and 7 years off your amortization.
An additional $1,000 per year as a lump sump payment along with changing your payment to an accelerated plan and making $50 more per payment can save you just over $55,000 and shave off 7 years off your mortgage. The best part is you still managed to live your life and didn’t have to save up for a drastic lump sump payment.
*The Data for this article was calculated using the CIBC Mortgage Payment Calculator. This is for illustration purposes only and should not be taken in consideration without other calculations.