A 3% mortgage of $300,000
paid off over 25 years
costs $155,332.36 in interest
This means that if you borrow $300,000 from the bank, and stick with normal mortgage re-payment, over the next 25 years, you will pay a total of $455,332.36.
If your interest rate is higher than 3%, your mortgage will cost even more.
There is a way to pay off mortgage faster and spend a lot less on interest.
Yet, most Canadians are not aware of this and will pay the full cost of $155,332.36.
How to Pay Off Your Mortgage Fast
1. Open a line of credit.
The first step in fast mortgage pay down is to open a line of credit.
This line of credit gives you access to other people's money, which you can use to accelerate your mortgage pay down.
The credit room available to you on the line of credit should be your monthly budget or more.
To determine your monthly budget, login to your online banking account and download all your withdrawal transactions over the last three months.
Add these transactions up to get the total amount you sent over this period.
If you use more than one banking account, download three months' of withdrawal transactions for each of your accounts.
Add up all the spending together from all of your accounts to estimate how much money you spent during the last three months.
Divide this amount by three to obtain your monthly spending budget.
Now, your goal is to work with your bank and/or other lenders to open a line of credit with at least as much credit room as your monthly budget.
Example with Numbers
For example, let's say I have two checking accounts and I am going through this exercise in November.
- First, I log into online banking for my first account, download all withdrawal transactions for the last three full months, from August 1st to October 31st. I add up all these transactions together. The total here is $10,700. I've rounded up to a hundred.
- Next, I login into online banking for my second account, download all withdrawal transactions for the same period and sum them up. The total spent from this account is $3,200.
- Lastly, I add the totals together:
$10,700 + $3,200 = $13,900
To get my monthly budget, I'd divide the grand total by three:
$13,900 / 3 = $4,633. Rounding up to the nearest thousand, I get: $5,000.
My goal is to open a line of credit for the amount of $5,000 or more.
2. Check your principal pre-payment options with your mortgage provider and find out how you can make the additional payments to pay down your principal.
Usually, pre-payments you are allowed to make without penalties are 20% of your original mortgage value per year.
In our example, $300,000 x 20% = $60,000.
This means that the lender allows us to pay up to $60,000 annually, in addition to the regular mortgage payments. So, our mortgage can be paid off in as little as 5 years.
Most lenders accept additional payments online.
3. Plan how much extra you can afford to pay every month. Let's call this our mortgage pay-off budget.
Let's suppose it's $1,000. Meaning that every month, we have about $1,000 left after we pay all the mandatory bills and expenses.
If you don't live within your means yet and are paying a lot of interest in addition to your mortgage, consider debt consolidation first.
4. Take 3x your monthly pay-off budget from the line of credit and pay down your mortgage by this amount.
In our example, we will take 3 x $1,000 = $3,000 off the line of credit and make a $3,000 payment towards the principal on our mortgage.
If this is the very first quarter of our mortgage, this single payment will decrease our mortgage pay off term by 4 months, from 25 years to 24 years and 8 month, and save us $301.73 of interest.
5.Redirect your incoming paycheck (or income from your assets) to be deposited directly into your line of credit account.
Putting your paycheck/income into your line of credit will ensure that any left-over dollars from each of your paychecks are immediately used to pay off the line of credit.
Your money is starting to work for you immediately as soon as it goes into your line of credit, rather than sitting in your checking account, doing nothing.
This money helps you fight the two biggest costs behind your mortgage: time and interest.
6. As soon as your line of credit has been paid back down to zero, repeat steps 4 and 5.
In our example, unless any unexpected expenses pop-up, we'd be able to pay down the mortgage principal by $12,000 a year, in four quarterly installments of $3,000.
The overall saving of this approach will be over $64,000 in decreased interest cost.
The mortgage will be fully paid off in about 12.5 years, instead of 25.
What will it take you to pay off your mortgage by 2025? How much will you save?
Cheers to being Mortgage FREE!