Whether it’s an essential milestone like retirement or a lasting legacy like leaving as much as possible as inheritance, everybody has their reasons for wanting to pay off the mortgage faster. You’ve probably heard mortgage debt in Canada is record-high – the average amount hit a record $355,000 in 2021 – so it’s time to start thinking about mortgage debt reduction.
Why Pay Off Mortgage as Quick as Possible?
There are many reasons for paying off a mortgage debt as quickly as possible. First and foremost, of course, mortgage debt in Canada is at historic heights and growing fast: more than 20% of mortgage holders had amortization periods of 25 years or more. So if you’re looking to secure your financial future, putting extra effort towards mortgage debt reduction is an excellent place to start.
It can also make your retirement planning easier. Let’s say you have the traditional mortgage debt of $100,000 at 5% interest over 25 years. That means your mortgage payment would be about $582 – but that doesn’t include any interest. Now let’s say you switched that mortgage debt for an even $100,000 at 2.5% over ten years. Your mortgage payment is about $867 – but this time with interest. The interest payments are double the mortgage payments on the 25-year mortgage.
But mortgage debt is also mortgage stress. By signing the mortgage agreement with the maximum amortization period of 25 years or more, you may be putting yourself under unnecessary financial pressure. If your mortgage payment takes up most of your monthly income for two-and-a-half decades, it may be challenging to build retirement savings, especially if mortgage rates keep rising.
By trying to pay off your mortgage faster, you can free up money that may be better spent on other things – like retirement savings down the line. But how do you go about paying off the mortgage faster? It’s all in the math.
Calculating How Long it Will Take You to Pay Off Mortgage
The mortgage calculator is the first place to start when figuring out how long it will take for mortgage debt in Canada. For example, suppose you input all of your mortgage information – mortgage balance, interest rate and mortgage payment amount – into a mortgage calculator like this one. In that case, you can see exactly how much time and money it would take for you to pay off the mortgage.
You may be surprised at how much difference it makes if you try to pay off the mortgage faster. For example, the mortgage calculator shows that paying $100 more per month on a mortgage amortized over 25 years saves about five years and gives you savings of over $35,000 in interest.
Trying to pay off your mortgage debt as quickly as possible means you should never take on more debt than you need. That’s why it’s important to understand mortgage qualification and refinancing, which means making sure that your mortgage payments will fit into your budget, even if mortgage rates rise.
3 Ways to Pay Off Your Mortgage Faster
Now that you understand mortgage qualification and refinancing, as well as mortgage debt reduction in Canada, it’s time to decide how you can start paying off your mortgage debt as quickly as possible. There are a variety of strategies people use to try and pay off their mortgage faster – some with more success than others.
- Increase the Amount You Pay Each Month
That is one of the easiest and most effective mortgage debt reduction strategies. Increasing the amount you pay each month over time will significantly reduce your mortgage balance – even if mortgage rates rise. For example, increasing the amount you pay by an extra $100 per month reduces your mortgage term by six months to 8 months on mortgage debt of $180,000 at 6%.
- Increase the Frequency of Your Payments
This strategy can be effective in many cases. But there are a few mortgage qualification considerations to keep in mind before you start paying your mortgage off faster using this method:
- It would help if you had a mortgage payment schedule with a set due date. If your mortgage payment is due on the 15th of each month, for example, you’ll only be able to increase the frequency every other month – unless you pay two mortgage payments in one month.
- You can’t change your mortgage payment schedule. So, for example, if your mortgage payment is due on the 1st of each year and there are 365 days to pay off your mortgage, you can’t increase the frequency every year – unless you pay more than 365 mortgage payments in a single year.
- This strategy works best on mortgages amortized over 25 years or more that have little mortgage debt stress on borrowers.
- Finance Your Mortgage Debt Reduction
A few mortgage debt consolidation loans can help you pay off your mortgage faster. For example, you can consolidate all of your high-interest credit card debt and other high-interest debts into a mortgage loan on which you’ll make monthly payments with a lower interest rate.
One of the most common ways to reduce mortgage debt is taking a mortgage debt consolidation loan. However, mortgage debt consolidation loans may not be the best option for you if:
You have good credit and can get approved for other types of mortgage refinancing options, such as a line of credit mortgage or variable-rate mortgage, at similar interest rates. Then you can pay off your credit card debts without consolidating them into a mortgage.
You have a mortgage amortized over 25 years or more and can increase your mortgage payments to pay down the mortgage faster. However, you may be better off simply increasing the amount you pay each month since mortgage debt consolidation loans usually have higher interest rates than fixed-rate mortgages.
That’s what you need to do. To recap, there are several ways to reduce mortgage debt, including:
- Increasing the amount of money you pay monthly
- Start paying more frequently
- Financing your mortgage debt reduction
If it’s the right mortgage debt reduction strategy for your situation, mortgage debt reduction is a strategy that can save you mortgage interest and help you pay off your mortgage faster.
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