How would you feel if you were mortgage free? If you didn't have to pay hundreds to thousands of dollars each month to keep a roof over your head?
If that's your goal, the path to getting there faster is by making prepayments towards your mortgage.
We get a lot of questions from our clients when they are going through the process of refinancing or buying a new home. One of the most common is whether or not they should try to pay down their mortgage faster by making prepayments. They want to know what exactly are the benefits of mortgage prepayment and if it's a good idea for them.
The answer is almost always a qualified "yes!".
Yes because paying off your mortgage can save you hundreds of thousands of dollars in interest payments.
Qualified, because it heavily depends on your financial situation and the mortgage you chose to get.
Real Client Case Study - How to become mortgage free in 10 years
Benefits of Mortgage Prepayment Case Study
The above video is a breakdown of a client's situation that we've worked with recently where the solution we put together for them ended up saving the client around $1500 each month.
We took that a step further and used their situation as an example of how anyone can save incredible amounts of interest over the life of their mortgage by making prepayments towards the balance.
Not everyone is going to be able to throw an extra $18 000 each year towards their mortgage like the person in the case study, but by taking their savings that we generated for them and putting it against their mortgage principle they could end up saving over $180 000 in interest over the life of the loan.
They also pay off their mortgage entirely in only 10 years instead of the 30 year amortization.
Read More: 5 Tips for Refinancing Your Mortgage
Even if you can only put a couple hundred dollars against your mortgage each month, it can still end up saving you thousands in interest and help you pay off your mortgage years earlier.
The qualified part of this is that your mortgage must allow for you to be able to make prepayments, also known as prepayment privileges, and your financial situation must give you the flexibility to make them as well.
Some lenders do not allow you to make prepayments towards the principle of the loan. If that's the case with your situation, you either need to refinance with another lender, or wait for your mortgage to mature and port it to another lender that will allow it.
Second to that, if your mortgage payment already stretches the limits of your ability to cover costs each month, you may not be able to spare the additional funds to take advantage of a prepayment. If that's the case, you basically have two options.
Increase your income (if only it were so easy to just make more money!) or reduce your mortgage payment. Since increasing your income is a whole different discussion, let's talk about some ways you may be able to reduce your mortgage payment.
Lowering Your Payments
There are a few main options you can explore when it comes to lowering your mortgage payments.
You can sell your current home and downsize to a house that has a value that's more within your budget. This option has a few advantages. If you're currently stretched to the financial limit with your current mortgage obligations, reducing the size of your home, and subsequently the balance of your mortgage, will free up cash flow and give you more security. You will know that you have more capability to cover your expenses when something unforeseen happens.
In this scenario, selling your current home also frees up the equity you have accumulated in the house so far. By downsizing and refinancing, you not only get the benefits of reducing the size of the mortgage you need to purchase the home, but you also get to apply the accumulated equity towards the property and reduce the mortgage balance even further.
Another option is to refinance your mortgage in order to consolidate your unsecured debts and free up cash flow. The majority of Canadians are holding tens of thousands of dollars of unsecured high interest debt. By rolling all that into a mortgage you can potentially reduce your weighted interest to the single digits, like the client in the case study, and save a considerable amount of money. Money that you can then use to pay off your mortgage sooner.
Becoming mortgage free is the dream of many Canadians.
Imagine what your life would look like if your monthly expenses were reduced to mainly food and bills, and didn't include $1000 to $2000 in rent or mortgage payments.
You could take that money and go on vacation, take your family on the trips and have the experiences you've always dreamed of. Buy the toys you've always wanted.
You could also leverage your built up equity and cash flow and invest in your future. You can begin growing your wealth like the client in the case study and through the magic of compound interest, accumulate a considerable nest egg for your retirement.
Becoming mortgage free is about financial freedom, and the freedom to choose is up to you.
Read More: What are the hidden fees in a mortgage?