Most people who own a home also own a mortgage. Mortgage financing gives us the ability to purchase our ideal home long before we actually have enough money to pay for it. With today’s low interest rates, many people have stretched their purchasing power to buy a home, but are well aware that low borrowing rates may not last forever. Paying off your mortgage aggressively while money is cheap will put you in a favourable position with less mortgage debt once it's time to renew, potentially, at a higher rate.
Not sure where to start? There are a few simple strategies that are allowed within the terms of the most traditional financing. Keep in mind that all additional money you put toward your mortgage goes straight to the principle. What may really come as a surprise is the thousands of dollars you will save in interest over the course of your 25-year amortization.
Consider this. A home worth $500,000 with a 20% down payment will require you to obtain a mortgage of $400,000. If your mortgage is amortized over 25 years at an average interest rate of 4%, you will actually pay over $200,000 in interest over the course of your mortgage. This is in addition to your purchase price of $400,000.
Prepayments are the simplest and most valuable feature that you can take advantage of. Most banks allow a 20% prepayment on your principle balance each year. If you made an additional $3000 payment once per year, using the example mortgage above, you would pay your home off 4 years sooner and save over $40,000 in interest.
Increasing your monthly payment is another smart option. Many homeowners practice this strategy because they barely notice a difference in their monthly budget. If you increased your payments by just $100 per month using the mortgage scenario discussed previously, you would save nearly $25,000 in interest and pay your home off 2 years sooner.
Need a mortgage solution to suit your individual situation? Speak to your mortgage professional about your options. Many people don’t take advantage of their prepayment options or increased payments because they don’t realize they can, or simply don’t realize how much they can save. A smart strategy, and some disciplined money management could put thousands of dollars back into your pocket, where it belongs.