25 Secrets Your Banker Doesn't Want You to Know...
Smart borrowers find ways to slash the mortgage amortization period and find financial freedom sooner. Here are some tactics to pay off your mortgage faster.
1. Make a double mortgage payment.
Doing this once a year can save over four years off the mortgage. If your payment is $2,000 a month, four years of no payments equals $96,000 in savings.
2. Increase the frequency of payment.
For example, go from monthly to bi-weekly accelerated payments. These can save over three years off your mortgage. At $2,000 a month, three years of no payments is worth $72,000.
3. Increase your payment.
For example, a one-time 10% increase can save four years off the mortgage. (That's $96,000 again!) Imagine if you bumped the payment 10% every year from the get-go. You would be mortgage free in 13 years. Can't do it? How about 5% every year? You would be mortgage free in 18 years. How about increasing the payment by the amount of your annual raise?
4. Lump sum payments.
Same idea-the mortgage is gone way faster! Even just one extra payment a year equivalent to one monthly payment will give you similar results as #2 above. How about using your annual work bonus?
5. Renegotiate whenever rates drop.
Generally this is a good idea, however get independent professional advice (a cost-benefit analysis) to make sure it makes sense for you at that time. A 1% reduction on a $300,000 mortgage will save $250 a month-times five years, that's $15,000.
6. Keep your credit rating high.
Always pay your bills on time. Never let payments slip past their due date-these will affect the mortgage rate you get quoted. Always keep balances low in relation to credit limits on credit cards, line of credit, etc. Fifty per cent or less is best even if you pay the balances in full every month. It's generally your statement balance each month that gets reported to the credit bureau. So if your credit limit is $3,000 and you are running $3,000 a month through the card each month (to collect all those points you never spend) and paying in full, it will look like you are maxing out your credit limit and your credit score will drop accordingly.
7. Increase your mortgage.
Yeah, I know that sounds backwards! Use it to pay off your credit card debt, line of credit, car loan and so on for a better rate and a set payment plan. Oh, you say you don't want to extend the repayment period of that stuff by rolling it into your mortgage? Then keep the total payment amount the same but pay it in one neat monthly payment to the increased mortgage.
8. Make an RRSP contribution.
Then use your income tax refund to pay down your mortgage.
9. Switch to a variable rate.
Keep your mortgage payments the same as if on a fixed rate. Variable rates usually win over fixed rates. By paying more than is required, you will pay off the mortgage faster. It's also a buffer in case the rate rises above the fixed rate for short periods of time. CAUTION: variable rates are not for everyone. Get independent professional advice to find out what is best for you.
10. Take your mortgage with you.
When you move, switch your old mortgage to the new property to avoid a penalty or higher rate on a new mortgage. This is called "porting". Make sure that your mortgage has this feature. It is not widely known and could save you a ton of $.
11. Set up automatic savings.
Set aside even $10 off every paycheque. When it reaches the amount of one mortgage payment, apply it to the mortgage. This concept goes nicely with #4.
12. Unhook from the money drip.
Just stop paying with your fancy points credit or debit card. These make it way too easy to overspend. Go old school, go off the grid and pay cash. It works!
13. Don't ever buy on layaway.
You know, those six months don't pay schemes. You think, 'no problem, I'll just pay it in six months. It will be okay'. Yeah, right.
14. Downsize your house.
Circumstances change; make adjustments along the way.
15. Rent out the basement.
Don't want to move? Convert spare rooms to rental and use the income to pay down debt.
16. Make your mortgage tax-deductible.
If you are self-employed, own rental property or have investments, this is likely possible. Ask your DLC mortgage broker.
17. Have a payment priority.
Define your various debts by category.
18. Pay off the debt with the highest interest rate first.
19. Pay tax-deductible loans off last.
And slowest. Pay the non-tax deductible loans first and fastest.
20. Pay off ugly debt first.
Stuff like credit card balances.
21. Pay off bad debt next.
Stuff like car loans, boat loans. Things that depreciate in value.
22. Pay off good debt last.
Stuff like mortgages, investment loans. Debt for assets that should appreciate in value is the least harmful to your net worth.
23. Buy a new car outright.
Finance it if you have to; don't lease. Exception: if you are self-employed leasing might make sense.
24. Use your secret stash.
You have $20,000 in a bank account for a rainy day fund and $20,000 owing on a line of credit. Seriously? The bank account is paying you next to no interest and the line of credit rate is way higher. You know what to do. You can keep the line of credit open and on standby for a rainy day. Make it the secret line of credit that you have but never use.
25. Give your banker more money.
No, really. Keep enough in your chequing account to meet the minimum requirement to waive your service charges. Some banks charge a fee for transactions and nothing, zero, zilch, zip if you keep $2,500 in the account. Let's see $10 x 12 is $120 a year to pay off debt. I'd have to earn 5% with the $2,500 in my savings account to come out ahead. No brainer here. Oh yeah, if you need more that 25 transactions a month, see #12 above.
Bonus tip (and most important).
Let's face it, you're not the government and you're not a bank. You can't run deficits forever and you won't get a bailout. So stop procrastinating already. See 1 through 25 above and take action now.
Be wary of some too good to be true, ultra low rate mortgages. These 'no frills' mortgages are often loaded with restrictions like pre-payment limitations, fully-closed terms, stripped-out features, or unusual penalties. If you're not looking at what you're giving up, you many regret it in the future. This alone could prevent you from taking advantage of tips #1, 2, 3, 4, 5, 7, 8, 9, 10, 14, 16 and 22.
Have some questions? We would love to hear from you. Just click on the 'Ask a Mortgage Broker' button below or visit us at http://alisonlopes.ca/.