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Pay off your mortgage quicker

Many home buyers end up paying more interest on their mortgage than the actual price of their home. It's a sad fact, but that's why paying down your mortgage as quickly as possible is vital.

Chris Murphy, a broker with Intercity Mortgage in Kelowna, B.C., was able to reduce his mortgage from 20 to 16 years using simple steps that anyone can follow, such as saving your coffee money. "People don't realize that anytime you increase your payment, the money goes directly to the principal," says Murphy. "A little means a lot."

By reducing the amortization period, Murphy saved himself four years of interest payments.

But most of us can't just pay off our mortgage at any time. Most lenders put conditions on prepayment in your mortgage contract, and all lenders have different terms.

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Some enable you to pay 10 percent, 15 percent or 20 percent of your principal without penalty at anytime, whereas others have stricter stipulations, such as letting you make extra payments only on the anniversary date of your mortgage. So, check your contract or talk to your lender about your options.

Then, take a look at the following four tips that almost everyone can use to become mortgage-free as quickly as possible:

1. Round up your payments
With any locked-in mortgage, homeowners can pay as much as 10 percent extra a year on the principal balance. These payments are often payable on the anniversary date of the mortgage or when the mortgage is up for renewal.

For example, if your regular payment is $639.81, put an additional $60.19 a month into a high-interest savings account to make it an even $700. Then, when your anniversary date comes around, you'll have some extra money to throw at your mortgage.

A small payment of even $30 a month can mean big savings in the long run, says Ron De Silva, a mortgage specialist with Invis Financial Group in Toronto. "Over a 25-year mortgage, that $30 on top of the principal (12 times a year) has a tremendous impact on reducing the number of mortgage payments you end up paying."

Here's an example. Let's say you had a $100,000 mortgage at fixed interest rate of 6 percent. Your monthly payment would be $639.81, so if you paid an extra $30 each month, you'd be shelling out $669.81. Over a 25-year term, that extra $30 a month will reduce your term to about 23 years, saving you $10,186.31 over the life of the mortgage.

And where, pray tell, do homeowners find the extra money? "Anyone can get in the habit of not going to Tim Horton's everyday or not going to Starbucks for a latte," says Murphy.

2. Accelerate your payments
Accelerated payments are the easiest way to make an extra payment on your mortgage.

If you arrange your mortgage payments to correspond with your biweekly pay cheque, you can squeeze in two extra payments a year. If you simply make two monthly payments, you end up making 24 in a year. Whereas if you pay biweekly with your pay cheque, you end up making 26 payments all together.

But make sure you get what you ask for. When calculating your mortgage payments, some lenders won't automatically calculate the accelerated payments. "Lenders will spread those payments across (the year) without actually accelerating the pay down," says Roberta Hague, vice-president of personal loans at Scotiabank, in Toronto, and co-author of "The Truth About Mortgages." So, be clear with your lender that you wish to make 26, not 24, biweekly payments each year.

3. Use your tax refund
Another good idea is to generate an income tax refund and then put that money toward paying down your mortgage, says Hague. "Take out an RRSP with the maximum tax refund available to you," she says.

Every year, when the refund comes in, you can pay off more of your principal. Paying a lump sum inevitably means the principal becomes smaller and your amortization period shortens, which means fewer interest payments for you.

"Combining the refund with the tax-free interest earned on the RRSP over the subsequent year will quickly outpace the short-term interest costs of the RRSP loan, which is usually at prime rate," says De Silva.

4. Get a variable-rate mortgage
Taking this path depends on your stomach for uncertainty because mortgage rates fluctuate constantly. "People with great cash flow go with variable-rate mortgages," says Murphy. But if you live on a tight budget, a variable-rate mortgage may be quite stressful.

As the name suggests, the rate fluctuates on a variable-rate mortgage. So, a good time to get a variable-rate mortgage is when rates are low, so more of your cash goes toward the principal and not the interest. But rates can change quickly, and that means your payments could change, too.

So if fluctuating rates are making you queasy, find a rate you can live with and lock in, says Murphy. If you switch mortgages types, there are fees to pay for breaking the contract. Depending on your lender, you may have to pay a penalty of three months' interest or the interest rate differential, whichever is greater, so switch with caution.

Many people have heard of these tips, but taking advantage of them is another matter says De Silva. "You have to stay on top of it."

And the best way to do that, says De Silva, is to create a mortgage repayment budget. Calculate how you can afford to find extra money in your budget and plan on setting it aside for your mortgage.

Melanie Chambers is a writer in London, Ont.

-- Posted: July 12, 2004
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