Speed up mortgage repayment with different strategies. Use a combination of high downpayment, yearly prepayments, and more regular payments. But, never borrow to do any of them. Sadly, many folks do.
Today, Canada’s household debt is about $1.07-trillion–$1.15-trillion, of which 70 per cent represents mortgage debt. A recent CIBC poll showed the average Canadian expects to repay his or her mortgage fully by age 57. That’s two years longer than reported a year ago. With record low interest rates, folks should be getting rid of consumer debts and speeding up mortgage repayments. I realize this is contrarian advice, but when you remove debt you lower stress.
Mortgage Repayment Silver Bullet
Several firms will say they have the silver bullet to get rid of your mortgage quickly. This will excite many folks. Soon, however, they will discover they must sacrifice to speed up mortgage repayment. They must choose between today’s benefits and early debt freedom. There is no magic wand. People must develop strategies and plans and follow them if they wish to lower their mortgages. Here are three obvious, but often overlooked, means to get rid of your mortgage faster than normal.
- Proper downpayment
- More frequent payments
- Regular prepayment
Mortgage Repayment with high Downpayment
The best platform to speed up mortgage repayment is a conventional mortgage with a downpayment of at least 20%. However, never borrow a downpayment. That’s crazy! Renting a home is acceptable. I repeat, if you don’t have enough downpayment and the means to support home ownership in your regular budget, don’t borrow.
Let’s look at the figures in the table below. Notice extra costs with a 5% down payment–mortgage insurance, higher interest rate, and so higher mortgage payments. Imagine if you borrowed the down payment! You would sink deeper in debt, and remain there a long time.
Then again, please understand there are more up-front costs, such as tax on mortgage insurance, land transfer tax, lawyer’s fees, title insurance, and home inspection fees. These could add $4,000 to $5,000 to this house. Besides, there will be on going expenses such as insurance, taxes, and maintenance. With a 5% down payment compared to a 20% downpayment, you will pay about $20,000 more interest over the mortgage’s life.
A proper downpayment is essential. Sadly, with no downpayment, people are in worse situations than if they rented. They have no benefits of ownership, and none of renting. They pay owner’s costs and carry the risks of falling housing prices. In a couple years, mortgages might be higher than houses’ values.
So, what should people do? Start focussing on regular payments.
Mortgage Repayment with Frequent Regular Payments
The table below shows that accelerated weekly payments, paying 52 times yearly, reduce the mortgage period and interest costs the most, of the selected options. However, to cut the mortgage period even further, annual prepayments work best.
Mortgage Repayment with Regular Prepayments
Paying an extra $2000 yearly would lower the accelerated weekly interest cost by $10,000, and the mortgage period by two and a half years. Instead of spending tax refunds on consumer items, folks should set aside at least $1,000 yearly to put against their mortgages. Other options include doubling up regular payments.
Conclusion
In the CIBC poll mentioned above, 50 per cent of Canadian homeowners said their non-mortgage debts increased since they first took on their mortgage. These Canadians said they were less likely to make lump sum prepayments to their mortgages because they would have no funds to do so.
Certainly, it is difficult to find extra funds. However, therein lies the sacrifice. People must choose between today’s benefits and later debt freedom. It is a tough choice, but a needed one. The question is this: how badly do people want to be debt free?
You might find this blog on mortgage life insurance helpful.
© Copyright 2013, Michel A. Bell
