Finding you the best financial practices is what gets us up in the morning. And our staff is a great resource for these ideas. So we polled the staff in our office to ask one simple question: What mortgage hacks do you use to speed up your mortgage payments?
Here are their best tips for getting out of debt early:
Get a Head Start
The Down Payment
Find acceptable sacrifices to save a bigger down payment. If you have RRSP funds, leverage the RRSP homebuyers plan. If you can amass a 20 percent down payment, you’ll save thousands in mandatory mortgage insurance premiums. (Mortgage default insurance is required when your down payment is below 20 percent).
Compare Mortgage Rates
Make sure you are fully aware of all the mortgage options available to you, and compare mortgage rates at RateSupermarket.ca. Saving just 1/4 percent off your rate could save you thousands – and if you use those savings to make extra payments you’ll pay down principal even faster, compounding the interest you save.
Managing Your Payments
Set payments to automatically pay a slightly higher amount per month than the minimum payment on your mortgage. Increase your payments by 5 to 10 percent of the original mortgage every mortgage anniversary, thereafter. You will barely notice the change in your discretionary income, but it will potentially shave years off your mortgage.
Weekly or Bi-Weekly Payments
Choose “accelerated” weekly or bi-weekly payments to shave more off your principal. Doing this results in you making the equivalent of one extra monthly payment a year. But it’s spread out over 26 or 52 weeks so you feel it less.
Tip: Accelerated bi-weekly payments can decrease your 25-year amortization period by up to three years.
Lump Sum Pre-Payments
Make lump sum pre-payments (if your mortgage allows) to slash principle and reduce the balance your lender bases its interest charges on. Combining accelerated bi-weekly payments with a 1 percent lump-sum payment each year, can decrease your amortization by seven years.
Bonuses and Tax Returns
Use your year-end bonus and tax return to add a large lump sum payment towards your loan.
A balloon payment is a lump sum paid at the end of the mortgage term, that is substantially larger than the regular payments, equaling the entire balance of the loan. This might be a good option in the final stages of your mortgage, when your mortgage matures and your loan balance is relatively low. If you have savings in a TFSA or a Guaranteed Investment Certificate, and it’s earning a lower return after taxes than your mortgage rate, it might pay to withdraw it and make one final lump-sum to clear that mortgage once and for all.
Use Your House to Your Advantage
Rent it out
This option isn’t for everybody but renting out your property can dramatically reduce your mortgage balance in just a few years. Just remember that rental income must be reported to CRA and may somewhat affect your principal residence exemption.
Put your yard to work
Think of ways to use your property to generate extra income, and then put that income back into your mortgage. Maybe you can rent out storage space in your detached garage, maybe you can rent a parking spot on Kijiji. As long as your local laws allow, your property could help pay for itself.
Use varying rates to your advantage
If rates plunge and you have a combination mortgage, split between a fixed-rate mortgage and a home equity line of credit (HELOC), you can use the varying interest rates to your advantage.
“The HELOC rate started to get quite a bit cheaper than the fixed side so I started taking money out of my HELOC to pay off the fixed side of the mortgage,” said one RateSupermarket.ca team member.
“I maxed every pre-payment option either with extra cash or taking money out of HELOC. Then with any extra cash, paid off some of the HELOC.”
Naturally this works best in a falling rate environment. That’s important because you’re trading fixed-rate payment certainly for a floating rate payment.
Use a HELOC to save interest
If you have a HELOC that doubles as a bank account (an “All-in-One” style account), have your wages paid directly into it. Then only draw from it when you absolutely must for household expenses. Because interest on the HELOC portion is calculated daily, having your pay stay in the account for even a few days can add up to material interest savings over time. But if you don’t need that flexibility, and the HELOC has a balance, you might save more by rolling your HELOC borrowing back into your regular variable or fixed-rate mortgage.
Speak With a Financial Advisor
Financial Advisors often have bespoke plans they can help you set up. That can increase your savings and your mortgage payments. By speaking candidly about your goals and financial habits, a financial advisor can help guide you towards greater financial success.
“My financial advisor helps me invest my savings in the mutual funds market in order to yield more return in the long term. I redeem the mutual funds to pay off more of my home loan before my fixed rate mortgage matures,” explained one of our team. (Consult a financial professional about the tax implications of this.)
No Need to Go Overboard – Even Little Steps Help
Changing Financial Habits
Minimize spending beyond necessities, and schedule “treats” (discretionary spending on life’s luxuries). By sticking to a budget religiously, you save more money that can be slapped against your mortgage.
Use Cheat Days
If you buy your lunch every day, that can add up to $10 and $20 a day. Instead, cook big dinners and make a plan to bring in leftovers. Pack a lunch daily.
Of course – working lunches are all part of life’s joy, so don’t go cold turkey. Assign one day of the week (ie: Friday) as a cheat day. If you spend $100 on lunches each week, but reduce that to $20, that’s over $4,000 a year you keep in your pocket.
Even if you limit lunching out to just half the days a month. You’d still save about $2,000 a year. If you paid that as a lump sum each year for 10 years, on a 25-year mortgage of $500,000 with a 2.79 percent interest rate you could save over $30,000 in interest and pay off your loan one full year early.
Use your spending to your advantage
You don’t have to reduce your spending to realize benefits. Simply changing how you spend can work to your advantage and pay your loan quicker.
Maybe it’s a rewards card that allows you cashback on spending. Whenever you redeem a cash-back reward, simply kick that money into your mortgage (assuming you have no higher interest debt).
The KOHO prepaid card has some innovative features, including RoundUps that could help you pay down your mortgage. You can choose to round up to the nearest $1, $5, or $10. So every time you pay for something a small amount is added to your savings account.
Example: Let’s say you always buy a coffee for $4.45. Your roundup is $5. Each day, 55 cents is added to your savings total. Apply that across all your spending and you could end up with hundreds at the end of the year—without even trying. Then, plop that money onto your mortgage.
Be mindful, not miserly
There are plenty of tips out there for extreme savings, but you don’t need to be a miser – merely mindful. By putting time and thought into optimizing your finances, using cash windfalls more efficiently, and maximizing everyday rewards, you can knock down your mortgage faster and save piles of interest. Every little bit adds up.