Stepping onto the property ladder with a home or cottage purchase is exciting, but this pricey venture usually requires a mortgage that takes years to repay. The good news is that even small adjustments can speed up your repayment schedule, potentially saving you thousands of dollars. A good place to start is understanding how making payments more often can help you to become mortgage-free faster.

Payment amount and frequency

Within every mortgage payment, one portion goes towards repaying the principal amount and the other portion chips away at the interest charged by the mortgage lender. The amount of interest you pay over the lifetime of a mortgage can be substantial. Consider this example:

Arjun and Wen are excited to buy their first home at a price of $500,000. They have a down payment of $100,000, which is 20 per cent of the purchase value. The remainder of the purchase funds will be covered by a mortgage of $400,000, held by the mortgage lender. The interest rate on the mortgage is five per cent and the repayment plan, or amortization, is for 25 years.

Arjun and Wen choose the once-a-month payment option of $2,326.42.

Assuming the interest rate remains at five per cent for the entire 25-year amortization period, they’ll pay nearly $300,000 in interest alone! So that $500,000 home will end up costing Arjun and Wen nearly $800,000 by the time it’s completely paid off.

Ouch! Is there a better way?

If your budget permits, increasing the frequency and size of your payments can help you to become mortgage-free faster. Your mortgage lender will have specific guidelines to follow, but here are a couple of common options:

Make a lump-sum payment. Did you get an annual bonus from work or an inheritance? Directing these extra funds towards your mortgage can cut down how long it will take to pay down this debt.

Pay more frequently. Rather than paying once a month, consider paying more often, such as an accelerated bi-weekly or accelerated weekly schedule.

Increase the size of your regular payment. No matter the schedule, your mortgage lender may allow you to increase the amount of these regular contributions. Even boosting each payment by $100 can really add up!

Let’s run our mortgage scenario again. This time Arjun and Wen bump their repayment schedule to accelerated bi-weekly and include an additional $5,000 prepayment each year, which is Arjun’s annual work bonus.

By choosing to pay down their mortgage more aggressively, Arjun and Wen will be mortgage-free five years sooner and save more than $113,000 in interest, which they could re-direct into retirement savings.

A mortgage calculator can be a useful tool to help you see the difference that paying more often can make.

If you’re interested in making extra payments, first check with your mortgage lender to learn the specific terms of your contract regarding lump-sum payments or increasing the amount of the existing payments. There may be rules about when and how much extra money you can pay, in which case overpaying could result in penalties. Your advisor can help you determine what’s feasible based on your mortgage and what works for your budget.

All-in-one mortgage

Another innovative option can help you pay down a mortgage faster while also managing your household budget. The all-in-one mortgage combines your mortgage, bank accounts, short-term savings and other loans into one account. This type of account offers two unique advantages:

• Accessibility to cash
• Having all deposits paying down debt all the time

 All-in-one means you’re using all your money to pay down all your debt. When you combine your chequing account with your home equity line of credit (HELOC) and mortgage, any funds you deposit go directly towards paying down the outstanding balance of the loans. Unlike a traditional mortgage, 100 per cent of your deposit goes directly towards the principal.

At the end of the month, interest is charged based on the average daily balance. By timing all your payments to the end of the month, you could end up paying your debt off years faster. And when an all-in-one is used like a regular chequing account, as the principal is paid down, that repaid amount becomes immediately available to borrow if needed.

By contrast, with a regular loan or mortgage, set payments are made from your account. Once that money is paid to the mortgage lender, it’s gone.

Let’s look at how Henry uses an all-in-one to manage his finances

Henry is a writer, and his after-tax earnings amount to about $5,000 a month. He has a mortgage of $100,000. To simplify his life, he’s decided to use an all-in-one account for his mortgage and living expenses. When his $5,000 monthly net income is automatically deposited into his all-in-one account, the deposit instantly lowers the principal by $5,000. Thus he is charged interest only on the outstanding $95,000.

Meanwhile, Henry uses his credit card for monthly expenses such as food, utilities, transportation, insurance and entertainment, which total about $2,000. He pays his credit card balance in full each month to avoid incurring interest charges. At the beginning of the next month, after paying his credit card bill and the interest on his mortgage, Henry’s balance owing will be about $97,500.

By contrast, if Henry had a regular mortgage with a $2,000 monthly payment, half of that payment would have gone towards the interest and half towards the principal. He would have started the next month with $99,000 outstanding. With the all-in-one scenario, Henry saves nearly $1,500.

As Henry continues to spend less than he makes, he has the flexibility to borrow those funds back if unexpected costs arise or to pay down his debt faster.

Here are a few tips for paying down your mortgage faster with an all-in-one account:

1. Have your income automatically deposited into your all-in-one account. Every time you get paid, your debt goes down so you pay less interest.

2. Use funds from other chequing and savings accounts to pay down your all-in-one balance faster; otherwise you’ll be paying more interest on your debt than you’ll be earning on your savings.

3. Spend less than you earn by reviewing your expenses to see where you can cut back. Avoid the temptation of dipping into the funds available from your principal payments, with the assurance that those funds are available in the case of truly unexpected expenses.

It’s important to note that an all-in-one style of mortgage repayment requires discipline. If an unexpected financial situation arises, talk to your advisor, who can help you determine the best option to address it.

Beware of penalties

Becoming mortgage-free faster is a worthwhile goal, but it’s important to be aware of any financial penalties that may be triggered by your proactive payment plan. Check with your mortgage lender about the terms and conditions of your contract, and how much you will be charged if you decide to pay more than the allowable amount. Consider using an online calculator to see the effect of prepayment charges you may incur.

Getting on the property ladder is a serious goal for many Canadians, and becoming mortgage-free faster can make the experience of home ownership even more satisfying.

Consider these resources to learn more about home ownership and household budgets:

Bank of mom and dad (podcast)

Putting the brakes on debt (article)

Housing market manoeuvers (article)

Making the right mortgage moves (video)

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