December 16 2022
Debt can be a scary word for a lot of people – in fact, a survey showed Canadians fear debt almost as much as they fear death. But debt can actually be a positive thing because it helps you achieve a goal or a higher rate of return. A mortgage, for example, is a huge debt issued to help you achieve your dream of buying a home. But…it is also a stepping stone toward owning a piece of property and eventually becoming financially independent. Here are a few tips that you can follow to reach your goal of being mortgage-free.
Shop around for the best mortgage
Before locking in a mortgage, you’ll want to do your research and understand what your options are. No two lenders are the same so it’s essential that you compare the features and benefits they can offer and then determine which option best suits your financial situation. A key consideration that many borrowers look at is the interest rate – this is a percentage you pay your lender in exchange for the money you borrow. While interest rates are determined by the Bank of Canada, most lenders have different rates based on their unique offerings.
Explore prepayment privileges and penalties
You’ll also want to consider other key mortgage features such as prepayment privileges and penalties. A mortgage prepayment is when you increase your regular payments to shorten your amortization and save on interest over time. In an open mortgage, you can add a lump sum payment to your mortgage before the end of the term, with little to no penalty. However, in a closed mortgage you often have a little less wiggle room. Typically, if you want to make additional payments, it would have to be within the approved amount that your lender set in the terms of your mortgage. In the event that you make a prepayment over that set amount, you may be subject to a penalty fee.
If your goal is to pay off your mortgage sooner rather than later, exploring prepayment options while shopping around for a mortgage could save you thousands of dollars in the long run.
Pay off other debt first
For anyone looking to start the mortgage application process, it’s always a good idea to begin by doing whatever you can to reduce your financial burden. To increase your chances of qualifying, we always recommend paying down any debt you currently owe. Outstanding debt increases your debt-to-income ratio – a key factor used by lenders to assess how you will manage your monthly payments. It also impacts your credit score, which can indicate that you’re a high-risk borrower at that point in time.
Shorten your amortization period
An amortization length is the amount of time it will take you, the borrower, to pay off your mortgage. This is typically around 25 to 30 years in Canada. While amortization is something that you will determine during the mortgage application stage, you can choose to re-evaluate the period and potentially shorten it during your mortgage renewal. The shorter your amortization period is, the higher your monthly payments will be, which can help you pay off your mortgage at a faster pace and save you on interest paid.
Accelerate your payments
As mentioned above, the biggest advantage to paying off your mortgage early is that it can reduce your interest payments and save you thousands of dollars. An accelerated payment is another route you can take to be mortgage-free faster. This option allows you to make more payments per year and pay down the amount you owe to the lender quicker. This can be done on a monthly, bi-weekly or weekly basis. Accelerated payments are slightly higher than conventional payment types but will allow you to pay down the principal mortgage amount in a shorter period of time. This is a great option if you expect your annual salary to increase – meaning you have the reassurance to comfortably make larger payments in the near future.
At Homewise, we are committed to finding you the best mortgage that suits your specific needs, regardless of your financial situation. If your goal is to pay down your mortgage faster, then our goal is to help you find the best full-feature mortgage to make that possible. All you have to do is apply online in just 5 minutes and a Homewise Mortgage Advisor will get in touch and guide you every step of the way.
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