Becoming Mortgage Free

Having a mortgage hanging over your head can be an awfully big burden. You look at the size of the loan and the time it will take to repay it, and understandably feel financially exhausted. If you really want to make yourself miserable, add up the interest you'll pay over 25 years, the usual amortization.

Fortunately, there are many things you can do to repay your loan early and save thousands of dollars in interest. Lump–sum payments of $10,000 a year would obviously help, but they may not be possible. Not to worry. You'll be surprised at how much money you can save — and how much quicker you can pay off your mortgage — just by taking several small steps.

For example, consider what would happen if you put the following strategies to work on a $100,000 mortgage at 8 per cent interest over 25 years:

• Make weekly rather than monthly payments.
• Round your payments up from $190.80 to $200.
• Increase the weekly payment by $5 each year.
• Pay a lump sum of $500 (from income tax refunds) on the first anniversary, increasing subsequent annual payments $50 a year.

None of these steps are too dramatic, but these small financial changes would have a pretty big impact. How big? They would allow you to retire the mortgage loan in about half the time and would cut your interest bill in half.

There are a variety of methods you can use to decrease your mortgage. The best choice usually boils down to what is easiest for you, and which approach you're likely to stick with. The important thing is to choose a strategy and try to stay with it. Here are a list of tricks that can help you become mortgage free:

• Pay more frequently
  
• Make lump–sum payments
  
• Keep payments the same when rates fall
  
• Raise your payments with your income
  
• Put your tax refund to work

Use our Mortgage Calculator to test the effect of these mortgage reduction strategies on your own payments.

Pay More Frequently
Rather than making the usual monthly payments, consider stepping them up to bi–weekly, perhaps having the money come out of your account when your paycheque goes in. The critical part is to pay half your monthly payment every 2 weeks. The reason this strategy works is that instead of making 24 payments (2 payments a month times 12 months equals 24 payments) you actually make 26 payments (52 weeks divided by 2 equals 26). In effect, you're making one extra payment each year equal to your previous monthly payments. On the mortgage described above, this approach would cut five years from the amortization, and slice over $30,000 from the total interest bill.

Make Annual Lump–Sum Payments
The most convenient time to do this is usually on the anniversary of your mortgage. Depending on the size of the payment, this can slash the cost of borrowing dramatically. Even a dollar a day, or $365 a year, helps. At Carpathia Credit Union you can make an extra annual payment of up to 20% of your mortgage amount!

Keep Payments the Same When Interest Rates Have Fallen
If rates are lower when your mortgage comes up for renewal, consider maintaining payments at current levels. After all, you're getting by paying that much, and can obviously live within your means at the current level. The difference between your now lower required payment and what you were paying before will go directly to paying down your principal.

Raise Your Mortgage Payments in Line With Your Income
Of course, this only works if your income is rising. Say you get a 10 per cent increase (we know that doesn't happen to many people but we can always dream!). Increase your payments by what that raise will put in your pocket after–tax. Again, the idea is that you're getting by on what you're taking home today. If you're comfortable, consider directing the extra cash toward your mortgage.

Put Your Tax Refund To Work
Make a contribution to your RRSP and use the tax refund to pay down your mortgage. This is a good approach because it allows you to invest in both your home and your RRSP, rather than struggling with the decision to do one or the other.

Something to look forward to when prepaying your mortgage quickly is the comparison you can make between the way things are and the way they could have been. Each year, add up the money you save through your prepayment strategies. Over time, it will be substantial. Best of all, you'll be out from under one big financial burden early, leaving you free to enjoy yourself without having to worry about whether mortgage rates are rising or falling —a great relief for such a small effort.

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