High home prices got you down? Many people, particularly millennials, feel like the dream of homeownership is out of reach, especially in Toronto and Vancouver – Canada’s most expensive real estate markets. However, buying a home and being mortgage-free in a short amount of time is possible. Let me tell you how.
A little over a year ago, I paid off a 30-year mortgage on my Toronto home in only three years. In my new book, Burn Your Mortgage, I share the secrets to my success: simple yet effective lifestyle changes that anyone—from new buyers to experienced homeowners — can make to pay down their mortgage sooner.
My tips won’t suggest you eat baked beans and Kraft Dinner every night. Rather, they’re seven simple ways to pay off your mortgage sooner, yet suited to work with your income and lifestyle. For example, in my book, I talk about how accelerating your payments can help you burn your mortgage faster. This tip is often misunderstood but the benefits to doing this will actually surprise you.
Accelerating your payments won’t really save you now, but it will help you later
There’s a common misconception about payment frequency.
Many people think that frequent mortgage payments mean bigger interest savings. But in reality, if you choose to bump up your payments from monthly (12 payments per year) to biweekly (26 payments per year) or weekly (52 payments per year), the interest savings are minimal.
If you’re looking to pay off your mortgage sooner, you can choose to “accelerate” your mortgage payments. There is a difference between accelerated payments and regular biweekly/weekly payments. By choosing to “accelerate” your payments, you’re actually paying for an extra month of mortgage every year, meaning a slightly higher amount on each payment.
To understand the benefits, it helps to look at the difference in the way “biweekly” and “accelerated biweekly” are calculated. Let’s say your monthly mortgage payment is $1,418. If you choose to pay biweekly, your biweekly payment would be $654 ($1,418 × 12 months/26 weeks = $654). But when you pay accelerated biweekly, your biweekly payment is slightly higher, at $709 ($1,418 × 12 months/24 weeks = $709). As mentioned, with accelerated weekly and biweekly, you’re paying the equivalent of 13 monthly mortgage payments instead of only 12. This means that you’re paying off more of your mortgage, eliminating your debt faster, and paying less interest as a result.
Paying accelerated on a biweekly schedule that matches your payday is the most painless way to budget for the higher payment. You won’t even realize you’re making higher annual payments if it’s automatically taken from your account on the same day you get paid.