August 20, 2021 • Buying
How to Become Mortgage Free, Faster!
By Kate Barker with Shannon Hendrikse, Accredited Mortgage Professional and Owner of Canmore Broker Inc.
Mortgages are a large commitment that you’ll be paying for years to come. But there are some strategies to getting them paid off faster, saving you money in the long run. It all depends on what kind of flexibility you’re allowed.
“Pretty much every mortgage has prepay options before you incur a penalty,” says Shannon Hendrikse, Accredited Mortgage Professional and Owner of Canmore Broker Inc. “Knowing your pre-payment privileges can mean the difference between paying your mortgage on time, or paying it ahead of schedule to become mortgage free faster.”
While there are open mortgages that allow you to pay off your mortgage in one large chunk, these are very rare and they carry a high interest rate for the flexibility. The vast majority of mortgages are closed mortgages, which means you’re committing to the lender for the long term. “With that in mind, every lender will allow you to do additional payments, called pre-payments, throughout the mortgage. That structure varies a whole lot between lenders and it’s important to know what your lender is offering and what your needs are.”
Some lenders allow lump sum payments on the anniversary date of the mortgage. These can be between 10%-20% of the mortgage amount. Other lenders will let you do a number of lump sum payments throughout the year, while others will have options to increase your regular payment amount.
In general, if you have a pre-payment option, setting up payments as biweekly or monthly accelerated will help you pay off your mortgage faster. Accelerated payment options are calculated to give you an extra month’s payment throughout the year. While you’ll initially end up paying more, you’ll be contributing more to your principle, which means you’ll shrink the balance faster. When you renegotiate your rate after 5 years, there will be less principle and therefore less interest you’ll have to pay.
Whether you’re able to pay lump sums, increase your payments or negotiate an accelerated payment plan, the extra money goes towards the principle. Hendrikse says, “The faster you can get the balance down early on, the better. Interest is always calculated on the balance, so the less principle you have, the less interest you pay going forward.” All of that adds up to being mortgage free, faster!