The Road to Mortgage Freedom: How You Can Pay Off Your Mortgage Sooner
After years in the mortgage business, one of the questions I hear most often from homeowners is, “How can I get this mortgage paid off sooner?”
It’s a good question. A mortgage may be considered “good debt” because it helps us buy a home, but that doesn’t mean anyone wants to be making mortgage payments for the full 25 or 30 years if they can avoid it.
The good news is that most Canadian mortgages give homeowners several ways to accelerate their payments and reduce the amount of interest they pay over the life of the mortgage.
The key is understanding how your mortgage works and making use of the prepayment privileges that are already built into your contract.
Start by understanding amortization
First, it’s important to distinguish between your mortgage term and your amortization.
Your term is the length of time your current mortgage agreement and interest rate are in place. Five years is a common mortgage term.
Your amortization is the total length of time it would take to pay off the mortgage if you simply made the required payments and did nothing extra. A 25-year amortization is very common.
You don't have to wait 25 years to become mortgage-free. There are several strategies that can shorten that timeline considerably.
Increase your regular payments
The simplest strategy is often the one that gets overlooked: increase your regular payment.
If your mortgage payment is $2,500 and you increase it to $2,750, that additional $250 is going toward your mortgage balance. As the principal comes down, you pay less interest over time.
Most Canadian banks offer some form of annual payment increase privilege on closed mortgages. A common privilege is the ability to increase your regular payment by 10 per cent, although some lenders offer more.
That means a homeowner doesn't necessarily have to wait for a large windfall to make a difference. Increasing the payment by a manageable amount can gradually have a significant impact.
Make a lump-sum payment
Another popular option is a lump-sum prepayment.
Perhaps you receive a work bonus, a tax refund, an inheritance or proceeds from the sale of an investment. Instead of spending all of it, you can put some of that money directly against your mortgage principal.
Many Canadian lenders allow homeowners to make an annual lump-sum payment without a penalty. A common privilege is 10 per cent of the original mortgage amount, although some lenders allow 15, 20 or even more.
For example, on a $500,000 mortgage, a 10 per cent annual prepayment privilege could allow you to put $50,000 directly against the mortgage without a prepayment penalty.
That's a pretty powerful tool.
Of course, every mortgage contract is different, so it's important to check the exact privilege before making a large payment.
Take advantage of payment frequency
This brings us to one of the most common questions I get: What's the difference between bi-weekly and accelerated bi-weekly payments?
The difference is bigger than many people realize.
Let's use a $500,000 mortgage at 3.99 per cent with a 25-year amortization as an example.
The monthly payment would be approximately $2,630.
A regular bi-weekly payment takes that monthly payment, multiplies it by 12 and divides it by 26.
That works out to approximately $1,214 every two weeks.
Because there are 26 bi-weekly payments in a year, you're essentially making the equivalent of 12 monthly payments over the course of the year.
Now let's look at accelerated bi-weekly payments.
Instead of taking the monthly payment and converting it to a bi-weekly payment, the lender simply divides the monthly payment in half.
$2,630 divided by two gives us an accelerated bi-weekly payment of approximately $1,315.
Here's where the difference becomes important.
You're making 26 payments of $1,315, which works out to approximately $34,190 per year.
With regular bi-weekly payments, you're making 26 payments of approximately $1,214, or about $31,564 per year.
That's a difference of roughly $2,630 a year — essentially one extra monthly mortgage payment.
And that extra payment goes directly toward getting the mortgage paid down faster.
The numbers at a glance
| Payment schedule | Approx. payment | Payments per year | Approx. annual amount |
|---|---|---|---|
| Monthly | $2,630 | 12 | $31,560 |
| Regular bi-weekly | $1,214 | 26 | $31,564 |
| Accelerated bi-weekly | $1,315 | 26 | $34,190 |
The important thing to understand is that regular bi-weekly and accelerated bi-weekly are not the same thing.
Regular bi-weekly simply changes the timing of your payments.
Accelerated bi-weekly actually has you paying more money toward the mortgage each year.
On our $500,000 example at 3.99 per cent, that additional $2,630 per year can make a substantial difference over the life of the mortgage.
If the 3.99 per cent rate stayed unchanged for the entire 25 years, an accelerated bi-weekly schedule would pay the mortgage off roughly three years sooner and save a significant amount of interest.
Of course, nobody knows what mortgage rates will be over the next 25 years. You'll likely have several renewals, and rates will move up and down. So these figures are best viewed as an illustration of how payment frequency can accelerate your mortgage rather than a prediction of exactly what you will save.
Use your prepayment privileges
The other strategy I encourage homeowners to understand is their mortgage's prepayment privileges.
Most major Canadian lenders offer some combination of the following:
- Increasing your regular mortgage payment, often by 10 per cent or more each year.
- Making an annual lump-sum payment, commonly 10 per cent of the original mortgage amount.
- Increasing your payment frequency.
- Making additional or “double-up” payments, depending on the lender and mortgage product.
Some mortgages have 10 per cent privileges. Others offer 15 or 20 per cent. Some lenders allow more generous options.
The important thing is not to assume that every mortgage works the same way.
When you're shopping for a mortgage, don't look only at the interest rate. Ask about the prepayment privileges as well.
A mortgage with a rate that's 0.05 per cent lower isn't necessarily the better mortgage if another lender gives you substantially more flexibility to pay down the principal.
What happens when you renew?
Your renewal can also be an opportunity to accelerate your mortgage.
Let's say you've been paying $2,630 a month and, at renewal, interest rates have fallen enough that your required payment drops to $2,300.
You could certainly take the lower payment and enjoy the extra $330 in your monthly budget.
But there's another option.
If your finances allow it, you could continue paying approximately $2,630.
You've already been used to that payment, so you're not necessarily changing your lifestyle. You're simply directing more money toward your mortgage principal.
Over time, that can make a considerable difference.
Don't underestimate small amounts
I often tell clients that paying off a mortgage early doesn't necessarily require a dramatic financial sacrifice.
You don't need to suddenly find $20,000.
An extra $100 a month, a few additional payments a year or an occasional $5,000 lump sum can all help.
The earlier you start, the more powerful those extra payments can be because you're reducing the principal on which future interest is calculated.
It's also much easier for most people to make a small, sustainable change than to commit to a payment that stretches their household budget.
