Paying off your mortgage is rather unexciting as an investment, but in the long run can be hugely beneficial since having no mortgage is excellent for most retirement plans and often just a good investment depending on interest rates (since you are paying it in after tax dollars). The only problem with paying it off is it feels like a marathon race to kill off that demon since your payback horizon is typically 25 years or greater.
So how can you speed up the death of your mortgage? Well here is my handy guide.
- Get Less Mortgage – The ideal way to start off is to have a smaller mortgage in the first place. So avoid taking on too much house, when in doubt go cheaper and upgrade as you need. The ideal case is to keep you mortgage to less than two to three times your household pay.
- Get a Flexible Mortgage – When you are planning to pay off your mortgage faster than 25 year or 30 years you better to be sure to have some flexible options from your bank to get there. So beyond shopping for an interest rate also compare lump sum prepayments (when and how much), double up payments, and increasing your regular payment. I know when I renewed last year the breaking point for me was Scotiabank was offering a 15% lump sum payback during any point of the year, while Royal Bank was only offering a 10% lump sum (Guess who I picked?). For maximum flexibility you might want to check out ING Direct who offers a stunning 25% lump sum option.
- Pay a Little More Often or Extra – Check out the difference of either making payments every two weeks instead of twice a month especially if you get paid that way. You end up with an extra payment a year which helps a lot. Or consider increasing your payment a little bit to drop your amortization down by five years. Often the amount isn’t that much and can hugely save you interest.
- Even a Little Lump Sum is Good – People often grossly underestimate how much a few lump sum payments in your first five years of your mortgage can speed up its death. In the world of compound interest on a mortgage the idea is to really put anything you can in that first five years and you will see your amortization period drop like a stone. I know I didn’t put all that much on mind for the first few years, just the odd $1000 when I could spare it. That was even enough to drop my amortization by four years.
- Get Over the Hump – Once you get to the point when over half your regular payment is going to principle rather than interest you are on the downward swing of your mortgage. This is a exciting point to get to since you can really start to see your principle start dropping even without extra payments. So if you add the odd extra payment you will really see the results.
It can be a long and lonely road to kill off our mortgage demon, but if you keep it up it will start to die. I know I started working on my first mortgage just over six years ago. Now we are working on the home stretch and potentially could be mortgage free in as little as two more years. Even if I took my time we could still easily pay off in less than 10 years in total. Either way, it’s certainly a hell of a lot shorter than that first 25 year amortization I signed up for.
So how long did you take to pay off your mortgage? Or how long do you hope to have it paid off in?