Buying a house without a mortgage is not possible but that is a pretty big expense that can create a big hole in your pocket if you leave it inattentively. A mortgage is a big part of the house buying process. As per data, 40% of Canadian debt is given to mortgages. Also, every 9 Canadians out of 10 opt for a mortgage loan in order to buy a house. Are you looking for ways to get rid of your mortgage loan but don’t know how to move ahead? Well, I have got you covered with 7 amazing ways for paying off mortgage loans faster. Let’s get into it.
7 Ways for Paying Off Mortgage Loans
Pay a Lump Sum Amount Whenever You Can
Suppose you have a mortgage of $200,000 and for example, you got a bonus of $20,000 last year. You can easily plan and divert $10,000 for paying off the mortgage amount. In that way, it will reduce your overall mortgage and interest rate. if you pay the principal amount faster, it would eventually reduce the interest payment as well. If you practice this on a regular basis you can get rid of a mortgage loan faster than you imagine.
Opt for a Mortgage Loan that Offers a Good Interest Rate
Basically, the cost of a mortgage lies in the interest payments. Even a basis point reduction in interest rate makes a big difference when it comes to monthly payments. If you have opted for a high-interest loan, then it would take you a long time to pay off your mortgage.
It is very crucial that you choose a mortgage loan that offers a competitive interest rate. There are two types of interest rates.
Fixed-rate Interest: As the name suggests this is a fixed interest rate and you pay a certain amount every month for your mortgage payment.
Variable Interest Rate: Here the interest rate can be a mixture of fixed or variable depending on the market condition. you can also change your interest rate as per your preference.
Reducing the Period of Amortization
You can avail of this option if you have enough funds or savings. It means that if your mortgage loan is for 10 years, you can reduce it to 7 or 8 years. But if you reduce the tenure, it will also increase the monthly payment that you have to deposit because now you have less time to complete your loan payment.
The benefit here can be availed in terms of interest rate. The shorter the period of amortization the better the interest rate is. You can plan in advance or you can consult an advisor and decide on how you want to approach this option.
Weekly or Biweekly Mortgage Payments
This can be a new concept for many because as of now we only knew that we pay mortgage payments every month. In this option, you can choose to pay a mortgage every week or every two weeks.
If you want to choose the weekly payment then you would pay 52 installments every year, rather than 12 annual installments. Overall you pay one month’s mortgage extra each year in this method. If you opt for bi-weekly payment, it means that you will have 26 annual installments instead of 12 and also in this method, you will end up paying one more month’s mortgage each year. Like this, you will be paying off your mortgage more every year and can retire the loan sooner.
Prepayment is the Key
A lot of lenders offer prepayment benefits. Usually, there are three types of mortgages – open, convertible, and close. In an open mortgage, you get the flexibility to repay any amount you desire anytime and you also have a slightly higher interest rate. If you choose a convertible or closed mortgage, you can pay 10 to 20% of the amount as a prepayment.
Again this flexibility depends on a lender to lender and you should research well before opting for a mortgage.
Higher Mortgage Installment
If you choose to pay a higher amount every month for your mortgage payment, it would reduce your liability and interest rate and you will be able to pay off your mortgage faster. You can always choose to pay a bigger amount if you are rearranging your mortgage. This will reduce the principal amount.
Indeed, choosing this option would require you to manage your day-to-day expenses. If you want to start paying off a mortgage of a larger amount from next year then you can save for that year in advance.
You can cut off some of your expenses or you can take up side hustles to make up for that increased amount. Also start slowly; you don’t have to increase your monthly payments unrealistically. For example, if you are paying $500 every month for your mortgage payment you can increase it to $700. This depends on your income resources, your expenses, and your responsibilities. So plan well that it doesn’t adversely impact your daily life.
A Lump Sum Payment Before the Renewal
Last but not least, this is a tip that you can use to reduce the interest rate on your mortgage when you are going to renew it. If you pay a large lump sum amount before you renew your mortgage, it would reduce the principal amount and you can get a better interest rate which will lead to a lesser payment amount every month. You can also utilize this low interest rate to increase the monthly amount and pay off the mortgage loans early.
The Last Thought
Buying a house is not a one-time process. If you are taking a house on a mortgage, the process will continue till you pay it off. As much as it is important to save for a down payment, it is also important to take care of the mortgage payments. Thus, also pay attention to how you will tackle mortgage payments and how early you want to retire at the time of buying the house.
Planning is always important and helpful in becoming free of debt. I hope this article helps you understand the different ways you can end up paying off your mortgage faster. Let me know what you think in the comments.