How to pay off your mortgage faster in Canada (and should you do it?)

In this video we talk about how to pay
off your mortgage faster – is it a good idea – what are the benefits – can you
pay it off all in one lump sum? That’s starting right now. – Welcome to Homebuyer’s School brought to you by Brookfield Residential. – Hi everyone I’m Karl, and welcome to
another home buyer school video, a channel where you get the latest
strategies tactics and tips from home buying experts – and remember if this is
your first time on this channel and you want to get the latest strategies from
the experts, hit the subscription button below, hit the little notification about
so you don’t miss anything. So today I’m joined by Mujtaba Syed, mortgage
specialist with a Bank of Montreal and the question we’re going to answer today is – how do I go about paying
my mortgage faster? – Once again it’s a great question. A lot of people have mortgages and
they don’t really have like having a lot of debt. They want to pay it off
as soon as possible. So banks and lenders will actually give
you repayment options. All your mortgage is actually—those are built into your
terms. So if you have a mortgage and you don’t know what those are,
reach out to your bank, book an appointment with them to go in and find
out what those are. So technically for example, a lot of banks have a 20% option
to pay down your mortgage. So what this means is that, let’s say your original
mortgage amount is $400,000, that means that every calendar year which is a
January to December you can put 20% of that as a lump sum which is going to be
on top of your mortgage payments and then on top of that we also have an
incentive where you can take your monthly payments and you can increase
them by 20%. So that’s called accelerated. So if you actually do that, any payments
that are made on top of your normal payment goes right towards principal. So
what does is it actually reduces the interest cost for the next month since
it is an average. So it’s like a rolling average. So let’s say you increase your
payment’s the first month by 20%, your principal has gone down by 20% of your
mortgage payment. That means now the interest cost for next month of that
should go down by that amount as well. But if you take advantage of both these
options available you can pay off your mortgage a lot sooner. You can knock off
a great number of years from your mortgage. Best thing to do is have a
conversation, sit down with your bank and help them work out
a solution or a budget that works best for you, and tell them
what your goals are. If your goals are to pay off your mortgage necessary number
of years tell them that so they can work with you to tell you where you should be
focusing your payments, and your lump sum payments on. – So what is the fastest way in
terms of paying off your mortgage? Is it sort of like just one lump sum
that you say, hey you know what I bought a $400,000 house, and then
hey I can afford a $50,000 principal payment this year—like, can I just put
that or are there actually checks from the banks or lenders that you can’t do that? – As long as it fits in within your repayment schedule. Like for example,
if it’s 20% of $400,000 and it fits into that, that $50,000
technically would because your maximum per calendar year
would be $80,000, you can a hundred percent do that without any checks and
balances. The bank’s not going to question you on that amount that is
within the terms that you have agreed to on your mortgage. So you can do that
every calendar year and on top of that you can take your mortgage payments
and pay them all and increase them by 20% —do accelerated payments
and that would pay it off a lot sooner. I recommend to
my clients to do an option of both. It’s to do the lump sum in the beginning of the
year so your interest charges actually drop at the end of the year compared to
the—sorry, in the beginning of the year compared to the end of the year, and
start using the option of increasing our payments as well because it will
average over the 12 years that every single month that you make that extra
payment, your interest cost drops for that month. So by the end of the year
you’ve actually made considerable repayment onto your equity onto your
principal balance so your interest charge has dropped significantly. So definitely sit down with your lender.
If you have a BMO mortgage definitely ask us any questions, we can get back to
you guys on that to see what’s the best way to pay off your mortgage sooner. I
have had clients use these options and pay off the mortgage within the five
year term that they were in. It’s a little aggressive but it’s definitely doable. – ls it a good idea in general to pay off
your mortgage faster than the entire term that you said above? It really just depends on your
financial goals. It depends on what your retirement goals look like. I’m not a big
believer in doing that because I feel like in diversifying your home is going
to be an asset. That is the way I look at it is an investment. It’s an asset but
like any investments it’s best to diversify your investments. If you have a
house and you focus all your energy in paying it down and the real estate
market drops, now your investment has actually dropped. So now you’re
actually at risk. But if you diversify your investments, you have some RRSPs, you
have some TFSA’s, you have some stocks, you have some bonds, you have some
mutual funds and you’re really well diversified—and then you still
have some room available, then a hundred percent to start paying
down your mortgage a lot sooner. But it’s always good to diversify
your investments. – So why do the banks or the lenders
prevent you from paying— they set you a payment plan. So let’s say you’re only allowed to pay $80,000
this year, but what if you say, inherited a whole bunch of money a
nd you can pay $150,000 this year. Why is there sometimes
a penalty for doing that? – The reason is because what
you’re doing is it technically you’re breaking a contract that you’ve signed.
It’s a legal contract you sign with the bank, you decided for a five-year term these are
what my payments are going to be. I’m not going to pay anything more than
this lump sum. So when you break the contract, technically you
want to be penalized for that. It’s a reason why these
contracts are in place is because sometimes the bank have gone out of
their way and they’ve giving the biggest discount they possibly could on their
interest rate, so for them now it has to kind of fit within the contract for them.
So it’s always best if you are expecting a large inheritance or you
have some money that’s put away to the side and you know you’re going to do it,
have a chat with your specialist and your lender. Maybe a five year fixed
option is not best for you. Maybe it’s an open mortgage. Maybe one year, or
maybe six months convertible, maybe it’s a five year variable. There’s a lot
of different options that you can do if you know beforehand what you’re going to
do—and it’s ideal to get you into the right products. Your specialist should
have a conversation with you to get you into the right products the first time
around because the penalties is not fun. No one likes to pay penalties but
they’re there for a reason, and if you break a contract unfortunately
they’re going to come. It is a legal binding contract that you sign. – Remember, if you want to know more about variable versus fixed mortgage, watch our video above and in the
description below. So that’s the one thing I couldn’t understand is,
wouldn’t the banks or the lender want to get their money faster? Or is it more
because they’re counting on like the interest rate you’re paying on top of that? – So the way it kind of works is the banks they make money—that’s how the
revenue is generated. They have certain loan portfolios that they generate revenue
on it and that’s the reason why these contracts are in place—
and it’s really hard for them to track if you’re putting more than you
need to. They do give you a very healthy generous repayment option which is a lot
for the average Canadian. Now if you have the one-off scenario that you won the
maxmilion lottery or something like that, that’s a conversation that you can
have with them and then see what they want to do as a one-off, but
generally most buyers and Canadians or mortgage holders fall within the
repayment so they don’t really need to do more than that. So the reason is
because you’ve signed a contract, the banks are expecting a certain amount
of interest from that mortgage based on a contract they’ve given, they might have
gone out of their way to negotiate a really good rate for you, so to get that
rate you’ve signed a contract to be in, you have to abide by that contract. – Great. Do you have anything else add in
terms of paying off your mortgage faster? – Little things that you do can help pay
off your mortgage a lot faster. It’s a big misconception that you have to put a
large lump sum payments down if you don’t have it. Sometimes doing an
accelerated bi-weekly payment actually just means putting more than your
average normal payment. Sometimes as low as $50 a month can knock off a year of
your mortgage or putting in $100 a month. Keep in mind you can always increase
your payment’s, and if you’re not comfortable you can always decrease
them back to your minimum as well. So it doesn’t hurt to check out the budget if
you have a couple hundred dollars a month left to spare, throw in to your
mortgage and see if it’s tight for you. If it is then you can roll back to $50,
you can roll back to $40. Anything above your normal
payment is always a good idea to pay down your mortgage a lot sooner,
goes right towards principal, there’s no interest component to it, and it just
makes sense overall. – Great. So the question of the day I have
for you is, have you or are you planning to pay off your mortgage early? If you have,
what are the steps you took to do it?—and if you’re planning to, what are the steps
you’re going to take? Let us know in the comment section below. Thank you very
much for watching, and remember if you enjoyed this video and found it helpful,
please share—please like leave a comment and subscribe. Thank you and
we’ll catch you next time. – That’s another edition of Homebuyer’s School. Tune in next time for more expert tips and tricks, and visit to bring you one step closer to finding your dream home. As with everything, it would be great if you like and share our videos, also please let us know if you have any home buying questions you want us to answer.

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