How to pay your mortgage down faster and save
With a mortgage paid off in full, you
can allocate more money to other priorities, such as helping your
children through school or going back to school yourself, saving
for retirement, making home improvements or travelling.
Here are four strategies you can use to pay your mortgage down faster and save money. For each one, an illustration is included based on a typical mortgage repayment scenario for a $100,000 mortgage with monthly payments, an amortization period of 25 years and an annual interest rate of 6% over a five-year term. With this starting point, you’ll notice that over the five-year term:
- monthly payments = $639.81
- cost of borrowing (total interest paid) = $28,225.10
- outstanding principal after five years = $89,836.70
Strategy #1: Increase the frequency of payments
Instead of paying monthly, arrange to switch your payments to half of the monthly payment amount, paid on a biweekly basis, or even to a quarter of the monthly amount, paid on a weekly basis. Here’s how making accelerated biweekly or weekly payments compares with our original illustration:
|
|
Original illustration |
Accelerated biweekly payments |
Accelerated weekly payments |
|
Payment |
$639.81 |
$319.90 |
$159.95 |
|
Total interest |
$28,225.10 |
$27,647.12 |
$27,619.64 |
|
Outstanding principal amount |
$89,836.70 |
$86,059.70 |
$86,032.20 |
|
Your savings |
|
$577.98 |
$605.46 |
As you can see, simply taking advantage of accelerated biweekly or weekly payment options can reduce the cost of owning your home and help you pay off your mortgage much faster.
Strategy #2: Take advantage of increased payment options
By increasing your mortgage payment, you can significantly reduce your overall costs and own your home sooner. TD Canada Trust customers can increase their payments by up to 100% of their regular payment amount at any time throughout the term of the mortgage. Here’s how a 10% increase in monthly payment compares with our original illustration:
|
|
Original illustration |
Increasing monthly payments by 10% |
|
Payment |
$639.81 |
$703.79 |
|
Total interest |
$28,225.10 |
$27,608.45 |
|
Outstanding principal amount |
$89,836.70 |
$85,381.25 |
|
Your savings |
|
$616.65 |
Strategy #3: Take advantage of lump-sum payments
In addition to increased payment options, most banks offer the opportunity to make lump-sum payments on your mortgage. TD Canada Trust mortgage holders can make lump-sum payments of up to 15% of the original borrowed amount each year. This chart shows the effect of making a 2% lump-sum payment at the beginning of each calendar year of your mortgage:
|
|
Original illustration |
Making a 2% lump-sum payment each year of the term |
|
Payment |
$639.81 |
$639.81 |
|
Annual lump-sum payment |
-- |
$2,000 |
|
Total interest |
$28,225.10 |
$26,288.23 |
|
Outstanding principal amount |
$89,836.70 |
$77,899.84 |
|
Your savings |
-- |
$1,936.87 |
(Note: You can still make lump-sum payments greater than 15%, but a compensation amount will be due.)
Strategy #4: Choose a shorter amortization period
Most mortgages are automatically amortized over a 25-year period, meaning that that’s how long it will take for your combination of principal and interest payments to eliminate the principal balance on your mortgage. However, you can select a shorter amortization period at the beginning of your mortgage and dramatically reduce the amount of interest you pay over the shortened life of your mortgage.
Here’s how much money you could save simply by opting for a reduced amortization period:
|
|
25-year amortization |
20-year amortization |
15-year amortization |
10-year amortization |
|
Payment per month |
$639.81 |
$712.19 |
$839.88 |
$1,106.51 |
|
Total interest |
$91,941.99 |
$70,925.23 |
$51,178.90 |
$32,781.19 |
|
Your Savings |
-- |
$21,016.76 |
$40,763.09 |
$59,160.80 |