Do you dream of being mortgage-free one day? Who doesn’t? In this video I’m going to share 5 simple, yet powerful ways to pay down your mortgage sooner. You’ll want to stick around until the end, as I save my best mortgage-free tips for last.
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Full Transcript
Hey everyone do you dream of being mortgage free one day who doesn't? In this video, I'm going to share five simple yet powerful ways to pay down your mortgage sooner. And you'll want to stay around till the end because I saved my best tips for last.
For all the numbers that we go over today, we're going to assume that you bought a home for $650,000, which is the price of an average home in Canada these days. We're also going to assume that you made a 10% downpayment or $65,000. That leaves you with a mortgage of about $603,000, which includes Mortgage default insurance.
When it comes to the mortgage numbers, we're assuming that you're going with a five year fixed rate at 5.69%. The mortgage is also being paid on a monthly basis. It's important to note for the examples that they are not cumulative. I'll show you the mortgage savings with each individual example. But there's nothing stopping you from using more than one to reach mortgage freedom even sooner.
The first simple yet powerful way to pay off your mortgage sooner is by accelerating your mortgage payments. What does that mean exactly? Well, there's a common misconception out there that by paying your mortgage payments more frequently, you're going to save yourself 1000s of dollars over the life of your mortgage. And that's simply not true. If we look at the example on screen here, you can see there's very little interest savings to be had when it comes to paying your mortgage payment more frequently. For example, using the example earlier, if you pay your mortgage payments bi weekly over 25 years, you're only saving yourself less than $1,000 $646 to be exact.
And if you pay it on a weekly basis, again, you're saving yourself less than $1,000 You're only saving yourself $924. While paying your mortgage payments weekly or bi weekly may be more convenient from a cash flow perspective versus paying it monthly. We've established that in terms of interest savings is really a drop in the bucket over 25 years, where you get the big savings is by paying your mortgage on an accelerated basis. What is an accelerated basis, an accelerated basis means paying a higher mortgage payment than you normally would. When you pay your mortgage payments accelerated weekly or Accelerated bi weekly, you're paying the equivalent of 13 months worth of mortgage payments in only 12 months. Now I know what you're thinking, there's only 12 months in a year. How is that possible? That's accomplished by as I mentioned earlier, paying a higher mortgage payment than you normally would.
Going back to the example we have on the screen here. If you pay your mortgage payments on a bi weekly basis, as in non accelerated your mortgage payments would be 1729. However, if you paid your mortgage payments on an accelerated bi weekly basis, your mortgage payments would be $145 Higher.
So instead of 1729, you'd be paying 1874. And that $145 Extra bi weekly makes a huge difference in terms of interest savings. Again, comparing a regular bi weekly to accelerated bi weekly over a 25 year mortgage with regular bi weekly you'd be paying $520,000 in mortgage interest. Whereas if you paid your mortgage accelerated bi weekly, you'd only be paying 428,000 in mortgage interest. That's a savings of over $92,000 by simply paying your mortgage accelerated. And you'll also pay off your mortgage nearly four years sooner.
So if you can afford it, definitely pay your mortgage on an accelerated basis because it can mean huge savings over the life of a 25 year mortgage. The second simple yet powerful way to reach mortgage freedom sooner is by making a lump sum payment on your mortgage, but most of us don't have 1000s of dollars laying around. So how do you make that happen? By using what I like to call found money. What's found money found money is money that you perhaps weren't expecting that you don't receive on a regular basis.
Examples include a bonus at work overtime, tax refund inheritance. Heck, even money found in side the cushions in your couch can be used to pay down your mortgage sooner. Let's say you were able to find an extra $2,000 a year in found money and you put that $2,000 against the mortgage as lump sum payments every single year. Let's see what kind of difference it would make to your mortgage.
Now a $600,000 mortgage may seem large by making a $2,000 lump sum payment every single year of your mortgage, you will be saving yourself over $55,000 in mortgage interest, certainly not a drop in the bucket. You'll also pay off your mortgage nearly two and a half years sooner.
What makes the lump sum payments so powerful is unlike a regular mortgage payment that goes towards interest in principle, a lump sum payment goes 100% towards a principal. So if you make a $2,000 lump sum payment on your mortgage, it will reduce your mortgage balance by $2,000. Exactly. Wow, amazing.
The third way to pay off your mortgage sooner is what I like to call rounding up your mortgage payments, you can round it up to closest $10 $50 $100 $500 $1,000. Whatever you can afford, it's similar to rounding up your purchases made on your debit card with the rest going towards savings. Again, using the same example as earlier, if you paid your mortgage payments on a monthly basis, your mortgage payments would be 3748. But what if you rounded it up to the closest $1,000. By doing that your mortgage payment would be $4,000 per month, by paying an extra $252, you would save yourself over $75,000 in mortgage interest, you'd also pay off your mortgage three years sooner, and pastic.
A variation of that is our fourth simple yet powerful way to reach mortgage freedom sooner of what I like to call paying your mortgage as if rates are higher. When you apply for a mortgage, you have to pass the mortgage stress test. I'm sure you're aware of that already. The mortgage stress test was put in place several years back to make sure that borrowers didn't overextend themselves and they could still afford their mortgage payments when their mortgages came up for renewal.
In most cases with a mortgage stress test, you have to prove that you could handle mortgage payments that are 2% higher than the mortgage rate when you signed up for your mortgage. Now you're not required to pay your mortgage as if mortgage rates are 2%. Higher. But what if you did, how much sooner would you pay off your mortgage? Let's find out. In our example, we use a mortgage rate of 5.69%. If we calculate our mortgage payment based on the stress test that we're required to pass, so instead of 5.69% 7.69%, let's see how much sooner we can pay off our mortgage.
If you did that you would be mortgage free in less than 18 years. Wow. And you also save yourself over $170,000 in mortgage interest, double well. The fifth and final simple yet powerful way to pay off your mortgage sooner is to shop around for your mortgage. Whatever you do, don't sign the mortgage renewal papers from your existing lender, your lender will almost never offer you its best offering on the mortgage renewal papers.
That's where an independent mortgage broker can come in handy. Get in touch with an independent mortgage broker like myself for months in advance of your mortgage renewal date. An independent mortgage broker can help save you time and money by looking into the best mortgage options for you and presenting them to you at switching mortgage lenders is super simple. It only takes about a couple hours.
Let's say you're going to save yourself $1,000 By switching mortgage lenders. That's the equivalent of earning $500 an hour at your job. I don't know about you, but I don't earn $500 an hour but by taking the time to switch mortgage lenders you can keep more of your hard earned money in your pockets where it belongs. And those were the five simple powerful ways to pay down your mortgage sooner.
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