When people talk about financial freedom it’s often with the hope they’re going to win the lottery. We’ve all slightly held our breath as we scan our lotto ticket hoping to hear some bells go off and winning more than $20. While we can’t control if we win the lottery, we do have some influence over one thing that can get us to a place of financial freedom faster, our mortgage.
For most Canadians their biggest monthly expense is usually a mortgage payment or rent. In Toronto this cost can eat up anywhere from 40-60% of a household’s income and maybe even more! Now imagine if you were able to eliminate this cost and had 40-60% more of your money available each month as disposable income. You would definitely be freer!
While it’s not the same as winning the lottery, we’ve definitely hit a jackpot in the opportunity represented by years of super low mortgage rates (check out the graph above courtesy of ratehub.ca which shows the 5 year fixed and variable rate over the last 10 years. The drop in rates is even more dramatic when you go back to the 80’s when they were over 20%!!!). Right now you’re likely paying off more principle then interest and putting more money in your pocket rather than the bank’s. It’s because of low rates that the possibility of paying down your mortgage faster than ever feasible, and if you’re committed, doing so in record time.
So how can you do this?
Use some of these tips to chip away at your mortgage and hopefully realize financial freedom sooner, rather than later.
Tip 1: Add Additional Payments
As you add mortgage payments, you’re paying down the principle directly. The smaller your principle gets the less interest you’re paying and the amount of time to pay off the mortgage is reduced. An easy way to do this is rounding up your current mortgage payment so that you’re doing this automatically rather than when you think about it.
Tip 2: Reduce your Amortization Period
If you have a mortgage amortized over 25 years, reduce it to 20 (if you can, go to 15 years!) Be as aggressive as you can when setting up the amount of time that you will be paying off your mortgage. By lowering the amortization you’ll pay less interest and pay the mortgage off even faster. One way of doing this is by keeping your current amortization but setting the payments so they match those of a lower amortization period. This gives you the flexibility to reduce the payments if you ever need to.
Tip 3: Change Your Payment Frequency
If you’re currently paying your mortgage monthly, change to an Accelerated Bi-Weekly or Weekly Payment schedule. This type of payment schedule results in you making additional smaller payments that helps to payoff the principal sooner. For example, if you have a $600,000 mortgage amortized over 25 years with an interest rate of 3%, and were to switch to an accelerated payment plan, you’d save over $30,000 in interest and shave more than 2 years off the amortization period.
Tip 4: Make a Lump Sum Payment
If you receive a bonus or have extra savings or cash, make a lump some payment to lower your principal amount, which will lower the amount of time and interest it will take to pay off the mortgage. Most banks will allow you to make a lump sum payment of a certain percentage each year. Consider using a tax refund for this.
Taking the example above. If you had a mortgage of $600,000 amortized over 25 years at a rate of 3%, being paid monthly, and you were to make a one time payment of $5,000, over the life of the mortgage you’d save $5,458 in interest and shave 3 months off your mortgage. Now imagine if you did this on a yearly basis what it could do!
Tip 5: Allocate a Pay Raise to Your Mortgage
If you receive a pay raise, use a portion or the full amount each month as an extra payment. If you’ve been managing on your current salary, you won’t miss the increase in pay and better that it go toward helping you become mortgage free than buying stuff.
Use this online calculator to see how these tips can have an impact on reducing the life of your mortgage and the amount of interest you pay to the bank.
Tip 6: Buy an Investment Property
How could getting an extra mortgage help you become mortgage free you ask? By having a mortgage that tenants are paying for you and a property where the value is increasing, over time the market and someone else are going to be building equity for you. When the time is right, sell the property and use this equity to payoff or make a big ass lump sum payment on the mortgage of your primary residence!