Northern Alberta Institute of Technology

How to painlessly pay off your mortgage sooner

A broker crunches the numbers on one of life’s biggest investments

The size of a mortgage, in relation to most of our costs, can be large enough to cause it to enter the realm of abstraction, a fuzzy background in our larger financial pictures. But precisely because of that size, it’s worth bringing into focus.

That’s something that Renée Stribbell (Human Resources ’97) tries to do for her clients. “It’s the largest loan they’ll ever take on,” says the mortgage broker and co-owner of Platform Mortgage. “But it’s also their largest asset. Down the road, that’s something that could possibly help them have very good financial security.”

While historically low rates might leave some inclined to put money toward other investments (have a certified financial planner help you explore those options, Stribbell suggests), she sees paying off a mortgage more quickly as a good investment in itself.

“For anyone getting a mortgage, paying it off faster or sooner should always be part of the conversation, high rates or low rates,” says Stribbell.

Doing so can mean saving thousands in interest payments. Here, Stribbell shows how small efforts can make a big difference in creating a clearer – and brighter – financial picture.

A simple strategy

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If you have other, higher-interest debts, deal with those first, says Stribbell. “Then take half of what you were paying on that debt and use it to increase your [mortgage] payments. Use the other half for savings, fun, emergencies, and so on.”

It may not sound like a lot but, over time, it will pay off, Stribbell points out, because of how interest on a mortgage is calculated. Each time you make a payment toward the principal, or the original amount borrowed, the interest is recalculated, and therefore lower. The more principal paid, the less interest ultimately charged.

“When you make any extra payment beyond what you’re supposed to, that money goes immediately toward principal.”

The more principal paid, the less interest ultimately charged.

You can ease into the process. “A lot of people think they need to increase their payments by large amounts to make an impact,” says Stribbell. “This is not the case. If you do gradual increases it has less impact on your budget and it seems more manageable.”

Consider these scenarios from Stribbell. Say you have a mortgage of $400,000 at a rate of 1.79% for a five-year term, with a 25-year amortization, or the amount of time it would take to repay the loan with no extra payments. At the outset, says Stribbell, your payments are $1,653.55 per month.

Now let’s say you:

  • add $50 to your payment each year. That is, in year 1, your payment would be $1703.55, year 2 would be $1753.55, and so on. This would reduce your amortization from 25 years to 21 years and seven months, says Stribbell. “At the end of five years you would owe $324,292.13, as opposed to $333,586.54.” That’s $9,294.41 paid to the principal and $12,536.37 saved in interest.
     
  • add $100 each year. This would reduce your amortization to 19 years and save $21,536.92 in interest. “You would owe $314,997.71 at the end of five years, which represents an additional principal reduction of $18,588.83,” says Stribbell.
     
  • add $200 each year. “Your amortization would go down to 15 years and seven months and you would save $33,626.24 in interest.” At the end of the five-year term, you’d owe $296,408.86, which includes the additional principal reduction of $37,177.68.
     

In the long run, each of these scenarios represents more money in the bank, all while you’re ultimately securing the asset that is your home.

“It’s about trying to look at the entire picture,” says Stribbell. “If you’ve got the cash flow – you don’t have any other debt repayments and you’ve got some other investments – take some of that and put it toward paying down your mortgage.” Waiting will cost more.

“If you pay it off over 25 years, you’ll pay more for it,” says Stribbell, “as opposed to paying it off in 15 or 20.”

Banner image: benedek/istockphoto.com


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