Options to paying off your mortgage faster

Good intentions can fall by the wayside when new homeowners pledge to pay down the mortgage as quickly as possible. Unexpected expenses crop up -- and there are plenty of those in a new home -- and just the cost of living can derail many plans to become mortgage-free sooner.

But there are ways to drive down a mortgage. Available repayment methods can lop years off the amortization period and save thousands of dollars in the process.

The most popular plans involve periodic lump-sum payments or accelerating the regular payments. In both cases, the extra payments are applied directly to the outstanding principal, which dramatically reduces the balance owed.

Canadians are very good at doing this, according to Canada Mortgage and Housing Corp.

One-third of recent buyers told the agency in a survey they have already made a lump sum payment on their mortgage, and 84 per cent said they are making payments on an accelerated basis, which shortens the original amortization period.

The survey was based on more than 1,400 active mortgage consumers, along with customers renewing and refinancing their mortgages. Results are considered accurate within 2.6 percentage points, 19 times out of 20.

Making payments more frequently -- choosing to pay weekly instead of monthly -- saves money in interest charges and brings down the principal faster. It's also the simplest option because it can be worked into a budget and the payments are made automatically, says Chris Wisniewski, group project manager, real estate secured lending, at TD Canada Trust.

"Regular payments based on frequency are something you don't have to think about. Everyone going into a mortgage is quite optimistic about how they're going to pay it off faster."

Making periodic lump-sum payments, either on the mortgage anniversary date or when there's spare cash available, requires discipline and resisting the urge to spend elsewhere.

The regular payment choices range from a monthly payment, which is the least modest, to the accelerated weekly payment, which is the most aggressive. Between those choices are bi-weekly, semi-monthly, weekly and accelerated bi-weekly schedules. They are all based on the principle that the sooner the lender receives the due payment, the less interest is owed and the quicker the mortgage is repaid.

The difference between monthly, semi-monthly, bi-weekly, and weekly scheduled repayments is minimal because one repays only slightly quicker and the actual repayment amounts don't change that much.

The greatest saving is with the accelerated bi-weekly and accelerated weekly schedules, which on a $225,000 mortgage at six per cent, amortized over 25 years, can lop four years off the loan and save a maximum of $39,609 in interest payments.

Both accelerated methods involve making an additional month's payment over a period of 12 months, which quickly drives down the outstanding balance.

"But paying an extra few dollars a month has an impact," said Wisniewski. "Of course, finding those extra dollars is not always the easiest. But there are ways."

Wisniewski suggests homeowners examine their spending habits. "They might find that they are buying a couple of cups of specialty coffee a day, dining out twice a week and going to the movies. Incidental spending like that can quickly mount up and could be applied to the mortgage."

The incentive to do so is that every $1,000 repaid on a mortgage carrying an interest rate of six per cent saves $60 of interest that would otherwise have to be paid every year for the rest of the mortgage term. It's the equivalent of earning an after-tax return of six per cent every year on the money. That's comparable to holding a long-term bond that returns six per cent.

Which choice is best? That depends on the respective interest rates and where the best guaranteed return can be realized, either by paying down the mortgage or in an investment.

(prepared by Keith Woolhouse/Vancouver Sun)