Owning a home in Toronto is a significant financial commitment, and reducing your mortgage term can save you thousands of dollars in interest and give you financial freedom sooner. Here are ten effective strategies to help you pay off your mortgage faster and shave years off your term.

1. Make Bi-Weekly Payments

Bi-weekly payments involve paying half of your monthly mortgage payment every two weeks instead of once a month. This results in 26 half-payments per year, which is equivalent to 13 full monthly payments. This extra payment each year can significantly reduce the term of your mortgage. For example, on a 25-year mortgage, bi-weekly payments can reduce your term by up to four years and save you a considerable amount on interest.

2. Make Extra Principal Payments

Paying extra towards your principal balance whenever you can is another effective method. This can be done by adding a fixed amount to your monthly payment or making additional lump-sum payments throughout the year. Even small amounts can make a big difference over the life of the loan. For instance, an extra $100 per month on a $400,000 mortgage could save you over $26,000 in interest and shorten your term by several years.

3. Refinance to a Shorter Term Loan

Refinancing your mortgage to a shorter term, such as from a 25-year to a 15-year term, can accelerate your payoff schedule. While your monthly payments will be higher, you’ll save on interest and pay off your mortgage faster. It’s essential to weigh the benefits of a lower interest rate against the increased monthly payment to ensure it fits within your budget. This option is especially effective when interest rates are lower than when you initially took out your mortgage.

4. Round Up Your Payments

Rounding up your mortgage payments to the nearest hundred dollars is a straightforward strategy that can help reduce your mortgage term. For example, if your monthly payment is $1,465, rounding up to $1,500 can significantly impact your principal balance over time. This small increase can lead to substantial savings in interest and a quicker payoff.

5. Apply Lump-Sum Payments

Using bonuses, tax refunds, or other windfalls for lump-sum payments towards your mortgage can substantially reduce your loan balance. Many Canadian mortgages allow for annual lump-sum payments of up to 20% of the original mortgage amount without penalties. Taking advantage of this can shorten your mortgage term by several years and save you a large amount in interest.

6. Recast Your Mortgage

Mortgage recasting is a lesser-known option that can reduce your monthly payments without refinancing. By making a large principal payment, you can lower your monthly payment while keeping your existing loan term and interest rate. This strategy requires a significant upfront payment but can provide long-term savings and reduce your overall mortgage term. Not all lenders offer this option, so it’s important to check with your mortgage provider.

7. Cut Expenses and Redirect Savings

Identifying areas where you can cut back on expenses and redirecting those savings towards your mortgage payments can accelerate your payoff. This might involve reducing discretionary spending, such as dining out or entertainment, and using those funds to make additional mortgage payments. Over time, these small adjustments can make a big difference in reducing your mortgage term.

8. Increase Your Regular Payments

Many lenders allow you to increase your regular mortgage payments up to a certain percentage each year without penalty. By increasing your payments, you can pay off your principal faster and reduce the overall term of your mortgage. Even a small increase, such as an additional $50 per month, can lead to significant savings in interest over time.

9. Choose an Accelerated Payment Schedule

An accelerated payment schedule involves making weekly or bi-weekly payments instead of monthly. This method works similarly to bi-weekly payments but can be even more effective if you choose accelerated weekly payments. With this schedule, you make one extra payment each year, which goes directly towards reducing your principal balance.

10. Utilize Prepayment Privileges

Most Canadian mortgages come with prepayment privileges, allowing you to make additional payments on your mortgage without penalty. These privileges can include making lump-sum payments, increasing your regular payments, or even paying off the mortgage early. Taking full advantage of these privileges can significantly reduce your mortgage term and save you a considerable amount in interest.

Conclusion

Paying off your mortgage faster can provide financial peace of mind and save you a significant amount of money in interest. By implementing these ten strategies, you can reduce your mortgage term and achieve financial freedom sooner. If you’re considering any of these options, it’s essential to review your financial situation and consult with your lender to understand the terms and any potential penalties.