With a mortgage being the only option for purchasing a home faster, many people believe they are obliged with a financial burden forever. However, it shouldn’t become a nightmare with years of payments. Here are some strategies that can help reduce the payments.
1. Pay Bi-Weekly
It’s advisable to pay your mortgage not monthly but every two weeks to increase the speed of a repayment. Since you pay more often than if you would pay monthly, you repay the mortgage balance faster.
Another important point is an interest. The interest payable is a percentage of the outstanding mortgage amount. Therefore, when you pay bi-weekly, you reduce the mortgage balance faster and pay less in interest charges. This also frees up additional funds for larger payments.
If you have a 25-year amortization, you can erase around four years of the mortgage term. This strategy won’t hurt your budget during the repayment period but will allow you to save up to thousands of dollars of interest in the end.
2. Use Prepayment Privileges
Prepayment privileges depend on the mortgage lender you choose. Some banks only allow borrowers to make a lump sum payment once a year; with other banks, you can make extra payments anytime. The sum you can pay also depends on the lender and may be up to a maximum percentage of your original mortgage balance. Such privileges allow you to reduce the mortgage term and free up your balance.
3. Choose the Highest Payment and Shortest Amortization You Can Afford
Although lenders allow borrowers to take mortgages for years, it’s better to reduce the period and pay it off as soon as possible. Choose the shortest term you can afford without struggling over the years and negotiate the largest payment you can make. The shorter the period, the higher the monthly payments you will have. However, this will save up to thousands of dollars in the end as you will pay less interest overall.
4. Apply for the Home Buyer’s Plan
Since the 1990s, Canadian citizens have been able to apply for the Home Buyers’ Plan (HBP) if they purchase a home for the first time. To be qualified as a first-time home buyer, you mustn’t have occupied a home owned by yourself or your spouse or common-law partner in the previous four years. If you are a person with disabilities or you buy a home for an individual with disabilities, you can apply for the HBP without a period requirement.
This plan provides a so-called interest-free loan because you borrow your own funds from your Registered Retirement Savings Plan (RRSP). The maximum sum you can take from your RRSP to provide a down payment of 20% is $35,000.
If you can’t afford at least 20% down payment, you will have to purchase an expensive mortgage default insurance that will significantly increase your payments. The insurance is added to your total mortgage balance and becomes subject to the mortgage interest.
HBP allows you to:
● lower the mortgage size
● reduce the interest you will have to pay back
● free up funds to make extra payments and pay the mortgage off faster.
The only requirement is to pay the loan back within 15 years.
5. Negotiate the Renewable Interest Rate
If the mortgage term is nearing its end, but you haven’t paid it off yet, you can renew your mortgage. For that, you can stay with your lender or choose a new one that may offer better terms and conditions.
There is a pitfall here that is related to human nature. The easiest option is to sign the form your lender sends you. However, you risk signing up for higher rates than you would have if you negotiated or chose another bank. You can even reach out to mortgage professionals to select the best renewal option for you. Here, it is vital to start searching for options several months before the expiration of the mortgage term.
Takeaway
There are many ways to free yourself from your mortgage earlier and save a lot of money if you invest time and effort in researching.
