4 Ways to Pay Off Your Mortgage Earlier in Canada

You’re excited but nervous too.  Your palms are a little sweaty….wait….they’re glowing. 

Yeah. Glowing. Definitely not sweaty. 

But why do you feel this way?

Well, you just purchased your first home. And…it’s the biggest cost you will probably face in your lifetime. 

With the prices escalating quickly across the continent, you know you paid more money than your neighbours did, while taking on considerably more debt.

According to Equifax and the Canadian Mortgage and Housing Corporation, the average mortgage amount taken by new Canadian borrowers increased from $254,000 in the second quarter of 2016 to $346,000 in the second quarter of 2021.  That is an increase of about 36% in five years.

If there was ever a time to figure out some ways to pay off your mortgage faster, it’s now. 

If you give any of these strategies a go, you will save both time and money. That, in turn, will give you more financial options in the future. Read on to find out more.

What’s in a Mortgage?

A mortgage has two parts to the payment. 

One portion is dedicated to paying back your principal amount. The second portion is dedicated to paying off the interest.

Mortgage lenders also allow you to pay amounts over and above the minimum amount, and these are called prepayments.  One hundred percent of your prepayments go towards paying down your mortgage. 

This is an extremely important point. 

The faster that you can pay down your principal, the quicker your interest payments decline as well. 

Read on to find out more about the strategies that can help you shorten the life of your mortgage.

Mortgage Base Case  

In order to evaluate the scenarios, we need to define the base case.  Assume you make regular payments for the life of your mortgage.  If your original mortgage balance is $300,000 amortized over 25 years at 2.50% your monthly payments are $1,344 for a 5-year fixed term.

It will take you the full 25 years to pay off your mortgage under this original scenario and you pay $103,170 in interest if the interest rate stays at 2.50% over the life of the mortgage.

For all strategies below, it assumed that the interest rate is 2.5% on a $300,000 mortgage, amortized over 25 years initially. 

Four Ways to Pay Off Your Mortgage Faster

There are four strategies that you can use to pay off your mortgage faster. You can use an “accelerated payment frequency, increase your regular mortgage payments, shorten your ammorization period or make lump sum prepayments. Or you can combine some of the strategies.

4 Ways to Pay Off Your Mortgage Faster

1. Use an “Accelerated” Mortgage Payment Frequency

There are six different mortgage payment frequencies:

  • Monthly
  • Semi-monthly
  • Biweekly
  • Weekly
  • Accelerated biweekly
  • Accelerated weekly

The first four scenarios are regular (non-accelerated) payment options and no matter which option you choose, you don’t really save that much time or money. 

With regular payment options, the best idea is to match your payment frequency with your paycheque frequency. Alternatively, you can use a monthly frequency because it makes it easier to budget.

Big savings can be had by using accelerated payments as opposed to regular mortgage payments.

Both types of accelerated payments — weekly and bi-weekly, result in you making the equivalent of an extra monthly mortgage payment per year. 

With regular mortgage payments, you would end up paying $16,128 per year.  With the accelerated bi-weekly option, you would end up making $17,472 worth of mortgage payments per year, or $672 for each one of the 26 payments. 

By paying $1,344 extra each year, you save $480 in interest payments over the first five-year term.

In total, you end up saving $11,791 in interest and 2.58 years of mortgage time over the course of your mortgage if you use bi-weekly accelerated payments instead of regular monthly mortgage payments. 

Pretty powerful, right? One decision led to a five-digit savings amount.

Total Time spent paying off your mortgage: 22.4 years 

2. Increase Your Regular Mortgage Payments

There are two prepayment allowances offered by a lender.  The first one is an allowance for you to increase your regular mortgage payment by an extra percentage each year.

If your prepayment terms are 10/10, then you can increase your prepayment privilege by 10% each year.  You can keep increasing it year after year by 10% until your mortgage term finishes.

Remember, your original monthly mortgage payment is $1,344.  In the first year, you could increase your payments to $1,478 per month. Then in year two, you could increase it again by 10% to $1,626 per month.  So over the five years, the payments would look like this:

TimeRegular Payment ($)
Original1,344
Year 11,478
Year 21,626
Year 31,789
Year 41,968
Year 52,165

It is a bit challenging to expect to go from monthly payments of $1,344 to $2,165 in a stretch of five years, but it is possible if your income increases and you spend wisely

Suppose you only increased your payments by 10% once, to $1,478 each month and left it at that rate for the rest of the mortgage?   How much would you save?

Over five years, you would save $511.86 over the non-prepayment (original) scenario.  Over the life of the mortgage, you would save $13,457 in interest payments. This is slightly better than the accelerated bi-weekly scenario.

You would finish paying off your mortgage in only 22 years.  That means you would have that same $1,478 freed up every month to save, invest, or even splurge (in moderation, of course) three years earlier. 

If you just saved $1,478 for 36 months, it would equal $53,208 in extra cash. 

One decision to pay an extra $134 on top of your regular mortgage payments each month would help you save three years of mortgage payments and over $50,000 in extra cash.  Not bad.

Time spent paying off your mortgage: 22.0 years 

3. Shorten Your Amortization Period

This is the most obvious way to shorten the time required to pay back your mortgage. 

Your amortization is how long it will take you to bring your mortgage balance to zero, assuming you make equal payments for the remaining life of your mortgage.  If you set your amortization to 25 years, and you make your regular mortgage payments all along, then it will take 25 years to pay it off. 

If you set your amortization to 20 years, then that’s how long you’ll take to pay it off, assuming you do not make any prepayments or miss any mortgage payments.

By shortening your amortization period, you end up with higher monthly mortgage payments.  You also pay off more of your principal balance sooner, which helps reduce the amount of interest you pay. If your budget allows, then this is a good way to save money.  

Remember, in the original scenario, you have a $300,000 mortgage at an interest rate of 2.50% you will make monthly payments of $1,344 with a 25-year amortization.   You would end up paying $103,007 in interest by the time you pay your mortgage off. 

If instead, you chose a 20-year amortization when you signed your original mortgage documents, you would only end up paying $81,077 in interest for a savings of $21,930 over the original scenario.

The reason?  Your monthly mortgage payments would jump from $1,344 in the original scenario to $1,588 in this 20-year amortization scenario. 

Since you pay off your mortgage five years earlier, you would have $1,588 to save, invest, or spend for an additional 60 months.  That is $95,280 over five years that is at your disposal since your mortgage is paid off.    

There are plenty of mortgage calculators online to help you make these calculations. Here is one from Ratehub.

Time spent paying off your mortgage: 20.0 years 

4. Make Lump Sum Payments

At a minimum, most lenders allow you to make lump-sum prepayments up to a yearly maximum that you cannot exceed.

If you have prepayment terms of 10/10, then you can make lump sum prepayments of up to 10% of your original mortgage balance. 

That would allow you to make lump-sum payments of up to $30,000 ($300,000 * 10%) per year, in addition to your regular mortgage payments.

You can use the Government of Canada prepayment calculator to experiment with your numbers. 

Of course, pushing $30,000 extra a year towards your mortgage is not feasible for most Canadians. 

So let’s look at another example where you could make a lump sum prepayment amount of $4,200 per year (or $350 per month).

Recall your mortgage terms from above: A mortgage balance of $300,000 at 2.50% amortized over 25 years on a 5-year fixed term, with monthly payments of $1,344. 

With a $4,200 lump sum prepayment each year, your situation changes drastically.  Initially, it won’t seem like it though. 

First 5 Year TermFirst 5 Year Term (with $4,200 prepayment annually)
Number of Payments6065
Regular mortgage payment$1,344$1,344
Lump sum yearly prepayment$0$4,200
Principal payments$46,086$68,170
Interest payments$34,548$33,464
Total cost$80,634$101,634
Remaining Balance$253,914$231,830

First Five-Year Term Summary

If you only made your regular monthly mortgage payments, then you would pay $34,548 in interest over the five-year term and have a remaining balance of $253,914.  

If you made a yearly lump-sum contribution of $4,200, which is $21,000 in extra payments over the five-year term, you would save $1,084 in interest payments and have a remaining balance of $231,830.     

You may question the point of paying an extra $21,000 just to save $1,084.  That equals a total savings return of 5.16% over five years. That doesn’t sound like a lot, right?

Well, the $21,000 you paid directly to the principal means you won’t pay any interest on any of those dollars for the remaining life of the mortgage.  So let’s think further than five years.  Then think about in the even longer term how much cash you will free up for yourself.  

Mortgage Full Amortization Summary

 Amortization Period (Regular Scenario)Amortization Period ($4,200 Prepay Once/Yr)
Number of Payments300224
Regular mortgage payment $1,344 $1,344
Lump Sum Yearly Prepayment $0 $4,200
Principal Payments $300,000 $300,000
Interest Payments $103,170 $75,298
Total Cost $403,170 $375,298
Remaining Balance $0                             $0
Savings with Prepayment $0 $27,872
Mortgage Time (Years)2518.67

If you continue making a $4,200 prepayment towards your mortgage each year, you will end up saving $27,872 in interest payments.  Not only that, but you would finish your mortgage 76 months sooner than if you made no lump sum prepayments.  You would be mortgage free in under 19 years, with a time savings of 25%. 

The real benefit is that you would then free up $1,344 in extra cash each month to save, invest, or even spend for 6.3 years.

Extra Cash Flow Numbers

If you held the former $1,344 in mortgage payments as cash, you could save $102,144 over the 6.3 years (76 months) without affecting your lifestyle.  That amount of money could really add to your nest egg.

Isn’t that fantastic?

You can also estimate your future investment returns.

If you took four months to enjoy the money on expenditures and then invested $1,344 per month for 6 years and earned 5% per year, you would end up with about $114,392 in your investment account. 

Lump-Sum Payment Summary

Keep in mind that you would pay an extra $78,414 over the life of the mortgage in lump sum prepayments.           

However, you would save $27,872 (or 35% of your lump-sum prepayments) in interest.  That is guaranteed savings. 

Time spent paying off your mortgage:  18.67 years 

Summary

In the original scenario where you just paid off your mortgage based on the original terms, you paid $103,170 in interest and it took 25 years to clear the mortgage.

Below, you can see how much interest you would save using each method and how much time it would take to pay your mortgage off. 

ScenarioInterest SavedTime to Payoff Mortgage (Years)
Bi-Weekly Accelerated Payments$11,79122.4
Extra Prepayments$13,45722.0
Shorten Amortization by 5 years$21,93020.0
Lump sum payments$27,87218.67

Remember, the key to paying down your mortgage faster is to allocate more of your money to your mortgage. 

The extra dollars spent will help save interest and free up time on the back end where you are mortgage-free and you can redistribute the money elsewhere.  You can save, invest, or spend the money you formerly spent on your mortgage. 

The Financial Cosumer Agency of Canada has a wonderful mortgage calculator here that you can use to check out different mortgage payoff scenarios.

If you can’t earn more money right away, then there are many ways to save money.  You can use the saved money to make extra payments toward your mortgage. 

You can use gift money, RRSP refunds, your bonus, extra overtime money earned, or side hustle money.  

Even a small decision, like changing your payment frequency to an accelerated method, can shave a few years off your mortgage.  

Ways to Pay Off Your Mortgage Faster Conclusion

There are several great ways to pay off your mortgage faster, now you just need to choose one. If you have the monthly cash flow then you should consider increase your regular mortgage payments or prepaying a lump sum each year. Both strategies will help you shave years off or your mortgage.

What are you doing to pay off your mortgage faster? Let us know in the comment section below.

Ways to Pay Off Your Mortgage Faster Conclusion FAQs

What are the fastest ways to pay off your mortgage?

The fastest ways to pay off your mortgage are to make lump-sum prepayments, use accelerated mortgage payment frequencies, increase your regular mortgage payments and shorten your amortization period whenever your mortgage is up for renewal.  

What if I make 2 extra mortgage payments a year?

If you make two extra mortgage payments a year you will pay down your mortgage balance faster and you will pay less interest.  Your amortization period will decrease too.  Once your mortgage is paid off, you can redirect that cash flow towards savings and investments.    

Do extra payments automatically go to the principal?

If you increase your mortgage payments from $1,000 to $1,100 per month, you will split your payment between principal and interest.  However, if you make a lump-sum payment then the entire amount gets applied to your mortgage principal.  

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