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How to pay off your mortgage faster in Canada (and when should you do it)

“Always pick your yard based on your Summer lifetstyle.”

~ KARL

May 13, 2019 - Karl Yeh

So how do you pay off your mortgage faster or earlier? Is it a good idea to? Are there any penalties? In this episode, we discuss how to pay off your mortgage faster and what is the fastest way to do so. We also explore if you should pay off your mortgage before your term ends and if there is a penalties for doing so. 

 
  

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Transcription:

Hi everyone. I'm Karl and welcome to another Homebuyer's School video: a channel where you get the latest strategies, tactics and tips from home buying experts. And remember, if this is your first time on this channel and you want to get the latest strategies from the experts, hit [00:00:30] the subscription button below, hit the little notification bell so you don't miss anything.

Karl Yeh:                             

So today I'm joined by Mujtaba Syed, Mortgage Specialist with the Bank of Montreal. And the question we're going to answer today is:

How do I go about paying my mortgage faster?

Mujtaba Syed:                  

Once again, it's a great question, right? A lot of people have mortgages and they don't really like having a lot of debt.

They want to pay it off as soon as possible.

So banks and lenders will actually give you repayment payment options on your mortgages. And actually those are built into your terms. [00:01:00]

So if you have a mortgage and you don't know what those are, reach out to your bank, book an appointment with them to go in and find out what those are.

Mortgage payment: 20% option               

So technically, for example, a lot of banks have a 20% option to pay down your mortgage. So what this means is that, let's say your original mortgage amount is $400,000. That means that every calendar year, which is January to December, you can put 20% of that as a lump sum, which is going to be on top of your mortgage payments.

And then on top of that, we also have an incentive where you can [00:01:30] take your monthly payments and you can increase them by 20% so that is called accelerated.

So if you actually do that, any payments that are made on top of your normal payment goes right towards principal.

So what that does is it actually reduces interest cost for the next month, since it is an average, so it's like a rolling average.         

So let's say you increase your payments the first month by 20%. Your principal has gone down by 20% of your mortgage payment. That means now the interest cost for the next months has actually gone down by that amount as well.                  

But if you take advantage [00:02:00] of both of these options available, you can pay off your mortgage a lot sooner.

You can knock off a great number of years from your mortgage.

The best thing to do is have a conversation, sit down with your bank and help them work out a solution or a budget that works best for you and tell them what your goals are.

If your goals are to pay off your mortgage in a certain number of a years, tell them that so they can work with you and tell you where you should be focusing your payments and your lump sum payments on.

How to finance your home

Karl Yeh:                              And so

What is the fastest way in terms of paying off your mortgage?

Is it sort of like, just one [00:02:30] lump sum? That you say, Hey, you know what?

I bought a $400,000 house and then hey, I can afford a $50,000 principal payment this year.

Like, can I just put that or are there actual checks from the banks or lenders that you can't do that?

Mujtaba Syed:                  

As long as it fits in within your repayment schedule.

Like for example, if it's 20% of $400,000 and it fits into that.

That $50,000 technically would because your maximum per calendar year would be $80,000.

You can 100% do that without any checks and balances. [00:03:00] The bank's not going to question you on that amount that is within the terms that you have agreed to on your mortgage.

So you can do that every calendar year and on top of that, you can take your mortgage payments and pay them and increase by 20%, do accelerated payments and that will pay it off a lot sooner.

I recommend to my clients to do an option of both, is to do the lump sum, at the beginning of the year, so your interest charges actually drop at the beginning of the year compared to the end of the year.               

And start using the option of increasing [00:03:30] your payments as well. Because it will average over the 12 years that every single month or you meet that extra payment, your interest cost drops for that month, so by the end of the year you've actually made considerable we payments onto your equity, onto your principal balance.

So, your interest charges has dropped significantly.                 

So, definitely. Sit down with your lender. If you have a BMO mortgage, definitely ask us any questions. We can get back to you guys on that to see what's the best way to pay off your mortgage sooner.

 I have [00:04:00] had clients use these options and pay off the mortgage within the five year term that they were in. It's a little aggressive but it's definitely doable.

Should you pay offer your mortgage faster than the committed term?

Karl Yeh:                             

Is it a good idea in general to pay off your mortgage faster than than the entire term that you said above?

Mujtaba Syed:                  

It really just depends on your financial goals. It depends on what your retirement goals look like [00:04:30].

I'm not a big believer in doing that because I feel like in diversifying, your home is going to be an asset. That is the way I look at it, it's an investment. It's an asset,  but like any investment, it's best to diversify your investments. If you have a house and you focus all your energy in paying it down and the real estate market drops, now your investment has actually dropped.

So, now you're actually at risk.

But if you diversify your investments, you have some RRSPs, you have some TFSAs, you have some stocks, you have some bonds, you have some mutual funds and you're really well diversified and then you still have some room available, then 100% start paying down your mortgage a lot sooner.

But it's always good to diversify [00:05:00] your investments.

Is there a penalty for paying off your mortgage faster?

Karl Yeh:                             

So why do the banks or the lenders prevent you from paying ... They set you up a payment plan. So let's say, oh, you're only allowed to pay $80,000 this year, but what if you say you won or you inherited a whole bunch of money? And you can pay $150,000 this year.

Why is there sometimes a penalty for doing that?

Mujtaba Syed:                  

The thing is, the reason is because what you're doing is technically breaking a contract that you've signed. It's a legal contract, you've signed with [00:05:30] the bank.

You decided for a five year term, these are what my payments are going to be, I'm not going to pay anything more than this lumps arm.

So when you break that contract, technically you are going to be penalized for that. Right?

The reason why these contracts are in place is because sometimes the bank have gone out of their way and they've given you the biggest discount they possibly could on their interest rate.

So for them now it has to kind of fit within the contract for them.

So it's always best, if you are expecting a large inheritance or you have some money that's put away to the side [00:06:00] and you know you're going to do it, have a chat with your specialist and your lender?

  • Maybe a five year fixed option is not best for you.
  • Maybe it's an open mortgage.
  • Maybe it's a one year open.
  • Maybe it's a six month convertible.
  • Maybe it's a five year variable.

There's a lot of different options that you can do. If you know beforehand what you're going to do and it's ideal to get you into the right product.

So, your a specialist should have a conversation with you to get you into the right product the first time around. Because the penalty is not fun.

No one likes to pay penalties, but they're there for a reason [00:06:30] and if you break a contract, unfortunately, they're going to come. It is a legal, binding contract that you sign.

Karl Yeh:                             

And remember if you want to know more about variable versus fixed mortgage, watch our video above and in the description below.

So that's the one thing I couldn't understand is wouldn't the banks or the lender want to get their money faster or is it more because they're counting on like the, interest rate that you're paying on top of that?

Mujtaba Syed:                  

So the way it kind of works is the banks, they make money. This is how their revenue is generated. [00:07:00] They have certain about amount of loan portfolios of their revenue, they generate revenue on it.

And that's the reason why these contracts are in place. Right? And it's really hard for them to track if you're appointing more than you need to.

They do give you a very healthy, generous repayment option, which is a lot for the average Canadian.

Now, if you have the one off scenario that you won max million lottery or something like that, that's a conversation that you can have with them and then see what they're willing [00:07:30] to do as a one off. But generally most buyers and Canadians or mortgage holders fall within the repayment, so they don't really need to do more than that.

So the reason is because you've signed a contract, the banks are expecting a certain amount of interest from that mortgage based on a contract. They might've gone out of their way to negotiate a really good reach for you.

So to get that rate, you've signed a contract to be in, so now you have to abide by that contract

Karl Yeh:                              [00:08:00] Great.

Do you have anything else to add in terms of paying off your mortgage faster?

Mujtaba Syed:                  

Yeah, little things that you do can help pay off your mortgage a lot faster.

It's a big misconception that you have to put large lump sum payments down if you don't have it. Sometimes do an accelerated biweekly payment, accelerated just means putting more than your average normal payment.

Sometimes as low as $50 a month can knock off a year of your mortgage or putting in $100 a month. Keep in mind, you can always increase your payments and if you're not comfortable, you can always decrease them back to your minimum as well [00:08:30] so it doesn't hurt to check out the budget.

If you have a couple of hundred dollars a month left to spare, throw them onto your mortgage and see if it's tight for you. If it is, then you can roll it back to $50. You can roll it back to $40.

Anything above the normal payment is always a good idea cause appears down your mortgage a lot sooner, it goes right towards principal.

There is no interest component to it and it just makes sense overall.

Karl Yeh:                             

Great.

So the question of the day I have for you is:

Have or are you planning to pay off your mortgage early? If you have, what are the steps  you took to do it and if you're planning to one of the steps you're going to take?

[00:09:00] Let us know in the comment section below.

Karl Yeh:                             

Thank you very much for watching and remember, if you enjoyed this video and found it helpful, please share, please like, leave a comment and subscribe. Thank you and we'll catch you next time. 

Your turn:

Let us know if you have additional mortgage or financing related questions that we can answer by submitting them in the comments section below. 

Homebuyer's School publishes new content weekly so subscribe or check back regularly for the latest information, strategies and tips from home buying experts.  

About Mujtaba Syed:

Mujtaba is an experienced mobile mortgage specialist with a demonstrated history of working in the banking industry. Skilled in Negotiation, Commercial Lending, Banking, Sales, and Credit Analysis. Strong product management professional.

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