I entered a contest on moneyville.ca by writing a blog entry with some financial advice.
They didn't like it enough to put me in the final five, but I'd hate for nobody to ever read it. It took some effort to pare it down to (EXACTLY!) 500 words, so it would be a shame for that effort to be in vane.
So I'll post it here. Now 2 or 3 people will read it. 🙂
So here it is. My advice on paying down your mortgage early.
Your lender tells you about Accelerated Bi-Weekly payments as a way to pay off your mortgage quicker without much impact to your wallet. Take your monthly payment, divide it by two, and pay that amount every other week (bi-weekly). It’s like magic.
It’s a great idea.
It’s not magic though. What’s happening is you’re choosing a bi-weekly payment and a shorter amortization period. That’s the time it’s expected to take to pay off your mortgage. The standard to start with is 25 years.
I suggest you take that further. You can make higher payments. Paying more each month may not make a huge difference now, but you’ll thank me in 10 years when you’ve got a year or two of payments left instead of 15 years. With 5 years left, you’ll look forward to being mortgage free and thinking about how you’ll spend all that money each month. With 10+ years remaining, that’s just science fiction.
Understand that the amortization period, so long as it’s less than you got approved for, is an arbitrary number and you can ask for whatever you want.
RBC has a “double-up” option that allows you to manage this yourself on a payment to payment basis. I expect other lenders have similar things. My wife and I used this to manage our mortgage as follows.
First, buy a house you can afford. If you can barely make your payments, then you’ve taken away your options.
Next, decide how much you can pay every other week.
This should be higher than what the bank is expecting. Then drop it down to give yourself some buffer, and make that your payment. Finally, increase your payment to be up to double that (which should be way too much or you started too low) and test the waters, adjusting up and down as you feel comfortable.
Here’s an example.
You're borrowing $300k and the current variable rate is 3%.
A 25 year mortgage will have a bi-weekly payment of $655.27.
The "accelerated bi-weekly" option will change the amortization to 22.2 years and make the payment $709.87.
You then decide to make payments of $900.
Set the bi-weekly payment to $800, so even though you can pay $900, you can drop it down later if you were too ambitious, or just want to put $200/mo toward something else.
Ask the lender for an amortization period of 18 years and 10 months. Your bi-weekly payment becomes $801.43. Immediately set a schedule to add $98.57 to each payment, making it $900.
When your husband seems to have too much money at the end of each month, convince him that you can each pay an extra $200 a month toward your future. If it's too much, you can drop it back down again. So you increase your payment to $1100. Now, your mortgage will be paid off in 12 years and 7 months and you'll have paid $50,000 less in interest than if you'd done the accelerated bi-weekly option. How cool is that??