I had a great meeting last week with a prospective client. They wanted to know how to pay off their 25 year mortgage in 10 years. It was a huge focus for them, as they wanted to take the money left over after paying off their mortgage and put it towards their retirement savings. They are both in their 40’s and want to be debt free by their early 50’s.
They, like many people did not take savings seriously and so now in their 40’s find themselves with a hefty mortgage and not much in the way of savings. I assured them that to do so would mean making sacrifices, such as less traveling, which they both love to do and eating at home instead of eating out, which they also love doing. They assured me they were committed. Of course there were many more sacrifices they would have to make but these were two of the biggest in their particular scenario.
Paying off your mortgage is the single most important step towards financial independence and a healthy retirement. Owning a principal residence outright gives you the financial freedom to channel money that formerly went to your mortgage into your savings or to pursue lifelong dreams or to invest in real estate, which in my opinion is the thing to do as it provides one with extra cash flow, which is another form of retirement savings.
If paying off your mortgage as quickly as possible is your goal you want to make sure you pay attention to the following tips.
Tip #1. First you want to make sure you have a good credit rating. You can pull your credit report from Equifax here: (http://www.equifax.com/equifax-credit-score/)
By pulling your own credit bureau, you will be sure that when you speak to your mortgage agent or broker, there won’t be any surprises and if there are, you have already taken care of them. You want to make sure that there are no “monsters in the closet” and that you are aware of your past credit problems, so that you can be prepared to discuss them with your mortage broker.
A good mortgage broker, will make sure that they explain your past indiscretions to the lender and that it does not impact your ability to qualify. You also want to make sure that you are not behind on payments as these can impact your score. It can make the difference between getting a great interest rate and one that is not that great. This can also impact the amount of interest you are paying on your mortgage.
Tip #2. You should be pulling your credit bureau every six to twelve months before shopping for a mortgage, just to make sure everything is on the up and up and that you are not faced with disappointment when it comes time to shop for that mortgage.
Tip #3. Don’t quit or change jobs just before applying for a mortgage, as that can drastically affect your ability to qualify. Lenders want to see at least 6 months on the job.
Tip #4. The next step is maximizing your down payment. The minimum required for most mortgages in Canada is 5% (depending on your credit rating) but by paying at least 20% down upfront, you cut down on your principal and interest payments and also avoid having to pay CMHC fees. Remember CMHC insurance protects your lender and not you in case of default so why incur that extra cost? Of course it’s not always easy to pay 20% down so what else can you do?
Tip #5. You can be mindful of the amortization period. Many people confuse amortization with term. Amortization is the life of your mortgage, while the tem can run from 1-10 years with a fixed-rate or variable-rate interest mortgage. After each term expires, you renew for another term. Amortization on the other hand, defines how much interest you will pay over the life of the loan. For example, you might pay less monthly (Principal + Interest combined) with a longer amortization, but the interest portion will be higher. Amortization can run anywhere from 15 years to 35 years (with at least a 20% downpayment). Interest can be the killer. It can amount to thousands of dollars over the life of your mortgage. Imagine what you can do with that extra money?
Tip #6. When it comes time to get that mortgage, don’t just go to your bank. It is understandable that people want to stay with the same institutions that they regularly bank with or have their credit cards and car loans with but it doesn’t always pay to get your mortgage there. By speaking to a mortgage agent or broker, you can shop around or more importantly they can shop around on your behalf. Your mortgage agent will get you the best product and rate that works for you. They have access to more than 40 lenders with different solutions and products, while the bank only has one – themselves. Furthermore, the bank will push you to insure your mortgage and just like CMHC, the beneficiary of this insurance is the bank not you.
I remember when my husband and I went to get our first mortgage more than ten years ago – just like most, we went to our bank, thinking that since we had all of our business with them, it would make sense to get our mortgage there. We were shocked when they offered us a rate that was higher than prime at the time and would not even consider a rate reduction based on our years of patronage.
On the advice of a friend, I called a mortgage agent and he was able to negotiate a great rate that was 2% lower. It saved us years of mortgage interest and was a less stressful expeience overall.
Tip #7. Furthemore, rate is not the only thing you should be concerned with; you want to know if the mortgage will be compounded monthly or semi-annually. Again this comes down to how much interest you will be paying – the less often the interest is compounded the better—semi-annual compounding could save you hundreds of dollars or more in interest.
Tip #8. Make sure you understand the difference between the variable rate and the fixed rate products, but more importantly how the penalties could affect you if you were to break the mortgage beforfe the term ends. A variable rate mortgage will cost you 3 months interest, but a fixed rate mortgage will cost you the IRD, which is the difference between the posted rate and the discounted rate, multiplied by the number of months left on the mortgage. In some cases it can cost you thousands of dollars in fees.
Tip #9. You want to take advantage of any and all prepayment privileges. This can also help you pay your mortgage off faster as you can make annual prepayments of 10% to 20%, which goes directly towards the principal. Not all mortgages allow this option so make sure that your broker factors this in, if this is important to you.
Tip #10. Finally and maybe most importantly, as it also has to do with budgeting and savings, is your payment schedule. Don’t choose something that you can’t stick to, as it will make your life and that of your budgeting very difficult. By paying bi-weekly instead of monthly, you put more money towards the principal as you have two extra payments every year. However, if get paid monthly and you are now paying bi-weekly, you may find yourself stretched too thin. Ask your broker to run different scenarios for you so you know what you can and cannot afford. The last thing you want to do is get into a mortgage that you can’t afford.
Paying off your mortgage early will take lots of sacrifice, great budgeting and keeping steadfast to your goal, but if you can follow these tips, the rewards will be aplenty!
To Your Wealth!