1. Change the frequency of your mortgage payments
First, when you sign your mortgage loan contract with your lender or when renewing it, you must determine the frequency at which you’ll make payments. Usually, a mortgage loan is calculated with monthly payments. You would make 12 payments per year, so once a month, and generally for the next 25 years, depending on your initial amortization period. The amortization period is the total time it will take to repay your mortgage loan.
We advise you to opt for payments every two weeks, or every two weeks accelerated, commonly known as “bi-weekly accelerated”. By making bi-weekly payments, usually when you receive your pay, you will make 26 payments per year. This means that you will pay your mortgage loan payments 13 times within 12 months, which is an extra payment per year. By changing the frequency of your payments, you can cut three years off your amortization period, which is significant.
Thus, if you have a mortgage loan of $200,000 at a fixed five-year interest rate of 3.49% and an amortization period of 25 years, your monthly will be approximately $1,000 per month. By dividing your monthly payment by two, you will have to pay $500 on your loan every two weeks. By doing this, you will make 26 payments of $500 instead of 12 payments of $1,000 per year.
Our mortgage payment calculator will show you different payment options and enable you to simulate various scenarios so you can determine what type of payment suits you, based on your needs and your reality.
2. Increase your payments
A second option is to increase your payments during the term. If you refer to your mortgage loan contract or deed, you will see the maximum increase limit permitted. Each contract may vary; for example, increase limits may range from 5% to up to double the payment.
Based on our previous example, if you increase your monthly payment by 15%, so from $1,000 to $1,500 per month, you can cut approximately four and a half years from your amortization period. Another example: by increasing your payment by about a dollar per day, or the cost of a coffee, you will have a monthly payment of $1,030 and will cut approximately eight months off your amortization period.
Every dollar you add to your payment will be applied directly against the capital and will help you pay your mortgage loan in less time, and pay less interest and less money.
3. Opt for a return of capital
Finally, you can also opt for a return of capital, or a one-time payment on your mortgage loan. If you receive a bonus or an inheritance, this option is an excellent way to quickly reduce your amortization period. Once again, the money will be applied directly to the capital and not on the interest.
With a return of capital of $4,000, after a year, on a $200,000 mortgage loan at an interest rate of 3.49% and a starting amortization period of 25 years, you will cut eight months off the total amortization period. This return of capital represents approximately four payments, thus reducing the total amortization period by eight payments or eight months. It’s practically a two-for-one!
Are you already a client and want to perform one of these transactions? Go to My Client Space, where you will find detailed explanations of the transactions listed above.
Are you looking to finance your future property? We invite you to work with a mortgage broker, who will guide you throughout the process and help you choose the right mortgage product for you.