How to be Mortgage Free on your Primary Residence within Ten Years

By Calum Ross

I believe that one of the single largest facts that many mortgage professionals seem to regularly forget is that almost nobody actually wants a mortgage. What people really want is to own real estate … and having a mortgage is often really just an unfortunate side effect of that pursuit. Even if you are amongst the select few that want a mortgage for estate planning purposes or some other reason, the fact still remains – after taxes, a consumer’s mortgage typically makes up the single largest monthly payment an individual or household has. There are other hidden costs, of course, which you can read about on this post, and these can all add up to a nasty bite, but ultimately the thing that people don’t want to have to pay for is their mortgage.

While today‘s interest rate environment makes having a mortgage more affordable than ever, it is important to never forget that paying off your mortgage is for most people still a very good financial decision. With the average mortgage amount growing along with home values – making sure you pay down your mortgage has become more important than ever. Now you can be proactive about it, and calculate the estimated monthly to yearly mortgage costs with the help of tools such as Mortgage Calculator, before selecting a mortgage; however, you might have to do a few extra things after securing the loan as well.While most mortgages today are amortized over 25 years, below are the tips that I give my clients who want to be mortgage-free as quickly as possible. If you follow all the suggestions below, your mortgage can be gone a lot quicker than you think:

1) Never get an open mortgage at a fixed rate unless you plan on paying it off within its term. Today’s closed mortgages generally offer 10-20% prepayment privileges and can be obtained at a much lower rate. Open mortgages at fixed rates carry higher interest. Why pay higher interest unless you are going to exceed this 10-20% prepayment? You can always make bigger lump-sum payments at renewal time with no penalty.

2) Use accelerated weekly, or bi-weekly payments. Accelerated weekly payments are equivalent to ¼ of your monthly payment. Accelerated bi-weekly payments are equivalent to ½ your monthly payment. Both of these methods enable you to make one extra monthly payment a year – the effect of this alone reduces your amortization from 25 to less than 21 years.

3) Give your mortgage the same raise as you get each year. If your income goes up 10%, so should your mortgage payment. This extra increase in payment will go directly towards principal repayment.

4) Give your mortgage a portion of any bonus or extra income. If you spend 30% of your income on your mortgage, then 30% of any extra income should also go to your mortgage in the form of a prepayment. This bonus portion will go straight towards principal repayment.

5) Keep your payments the same even if you renew or refinance at a lower rate. Since you know you can afford to pay at this level, don’t decrease your payment when you negotiate a lower rate. The difference in payments between your new rate and the old rate will go directly to the principal. Therefore, it might be essential that you seek out a finance agency that offers you the ability to change your flexible loan to a fixed loan or change the term length (visit https://reali.com/loan-refinance/ for more information) so you can save more for retirement.

6) Use your income tax return to put a lump sum payment towards your mortgage. This is extra money that is not used in your monthly budget. Don ‘t indulge – make it really benefit you and use it to build your wealth.

7) Use extra money from your budget. Most financially successful people have a budget that they live by, if you have a little bit extra then apply it to your mortgage. Minimum prepayments can be as little as $100 and add up quickly.

8) Never use a homeowner line of credit for long term borrowing. Homeowner lines of credit were designed for short-term borrowing and cost more than variable-rate mortgages. If you are going to keep a large balance outstanding for a long time then convert it to a fixed rate or below prime variable rate mortgage.

9) Consider a variable rate mortgage or short term fixed when market conditions justify it. While the fluctuation will keep some people awake at night, those who can endure the rate adjustments can save money over time. Some variable mortgages are considerably below prime and one-year fixed rates are typically the lowest fixed cost.

10) Try to stay prepared for dire situations. Personal issues can cause severe drawbacks to your finances and monthly mortgage payments. It can be beneficial for you to consider getting mortgage protection insurance so that the problems such as medical illness, job loss, etc., can’t affect your plans. Moreover, you can also opt for add-ons to protect your mortgage from specific matters related to accidental death, overloan protection, and many more.

11) Seek independent financial advice. While many bankers do look out for your best interest, never forget that they work for the bank and not you. Their branch, organization, and shareholders all have a financial interest in lending at higher rates hopefully having you keep your mortgage for a long time. Talk to your financial planner, a competent mortgage advisor, or talk to a financially savvy friend.

In the process of arranging a mortgage – the mortgage provider is putting you in the largest debt of your life and I believe that mortgage advisors have a professional responsibility to help you manage that debt.

I know that these steps take discipline and dedication, but the old adage still holds true – a penny saved is a penny earned! In fact – if you are in the top tax bracket in this country – a penny saved is nearly two pennies earned. The one thing that most financially successful people have in common is discipline and part of that discipline is paying off debts quickly. Following these simple steps will put you well on your way.

Calum Ross was ranked as the top producing mortgage broker in the country by Candian Mortgage Professional Magazine. He is regularly featured in the media as a mortgage expert including appearances on Canada AM, CTV, City TV, and Inside Toronto Real Estate. He is the mortgage columnist for New Homes and Condos magazine and The Condo Guide and is regularly quoted in newspapers such as The National Post, The Globe and Mail, and the Toronto Star. He holds both a B.Comm and MBA in finance and recently completed the Comprehensive Leadership Program at Harvard Business School.