4 Ways to Paydown Your Mortgage Quicker
1) Pay your mortgage bi-weekly or weekly – Most mortgage lenders allow you to make payments weekly or bi-weekly. By choosing either of these options, you’re effectively making one extra monthly payment each year. That’s because there are 26 bi-weekly payment periods, as opposed to 12 in a monthly payment plan. As a result, your 25 year mortgage is fully paid in 21 years.
2) Make extra payments – Making extra payments will also help you pay down your mortgage quicker. If you were to make one extra monthly payment each year on your 25-year mortgage, you would pay down your mortgage in 21.25 years.
3) Take a longer amortization programme and set-up an RRSP investment plan – This strategy requires a different mindset. Once your RRSP investments equal your mortgage, you could say that you’ve effectively paid off your mortgage.
a. Instead of taking our a 25 year amortization mortgage, you could take out a 40 year amortization mortgage. The payments on a 40 year mortgage will be lower than the 25 year mortgage. You then invest the difference in a savings plan to purchase RRSP investments. Assuming a modest rate of return of 8% p.a. on your investments, you would have enough RRSPs to pay off your mortgage in 20.5 years.
4) Make your mortgage tax deductible (i.e., The Smith Maneouvre) – You goal with this strategy is to convert your home mortgage to tax deductible debt. This will lower your taxes and generate perpetual tax refunds for you. You never pay off your mortgage since this will be a source of tax write-offs. However, once you have investments equal to your mortgage balance, you effectively have paid off your mortgage.
a. Assuming a modest return on investment of 8%, the Smith Maneouvre calculator shows that you would have paid your mortgage in approx. 20 years. If you are able to achieve a 10% rate of return, you would pay off your mortgage in 18 years.
You could choose one strategy or a combination of the above strategies. To determine the right strategy, be sure to consult a professional.
