Signing up for a mortgage may seem like a life-time commitment. For most of us, it is the biggest debt we'll ever take on. What many people may not realize is just how big a dent they can put in their mortgage by making pre-payments.
Making extra payments or larger payments early on can add up to significant interest savings and shorten the life of your mortgage, leaving more money available for RRSPs and other investments, as well as improving your cash flow for changing lifestyle needs.
Here are some strategies for making prepayments:
Add a bit to your monthly payment
Most of us can find an extra $50 per month by cutting out a restaurant meal. Add that money to your mortgage and you’re saving a lot in interest down the road. Most lenders allow you to increase your payment amount by a certain percentage every year.
Make a yearly pre-payment
Paying an extra one or two thousand on your mortgage once per year on the anniversary date of the mortgage could yield significant savings over the life of the loan. For many borrowers, the money for such a prepayment comes from a tax return.
Make a larger prepayment early in the mortgage
Note that lump-sum mortgage prepayments have a much greater impact on the total amount of interest you’ll pay, the earlier they are made. Check your mortgage contract to see how much you can pay down your principal, and how often you can do so.
If you're paid bi-weekly, sign up for "bi-weekly accelerated" payments
If you split your monthly payment in half, and pay that amount every two weeks, it's an easy way to sneak in an extra payment every year. This can save your thousands in interest and allow you to pay off your mortgage years earlier.
Please call me if you have any questions or would like to further discuss your options!
Photo credit: Microsoft Clip Art
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