I wrote previously about how accelerated bi-weekly mortgage payments can pay your mortgage off sooner.
In that post I used this example, if you have a $200,000 mortgage, amortized for 25 years @ 5%, and bi-weekly accelerated payments, you would pay $124,095 in interest and will have the mortgage paid off in 22 years. The bi-weekly payment would be $582.
While this step saved almost $25,000 in interest, another step could be to increase your payment amount. Many banks will allow you to pay up to twice the amount of your set mortgage payment.
By increasing your bi-weekly payment to an even $700, you would pay $88,346 in interest and pay your mortgage off in 16 years. This saves you almost $36,000 more in interest and reduced the life of the mortgage by 6 more years.
With the bi-weekly payment and increasing the amount, the interest was reduced by over $60,000 and the mortgage was paid off 9 years early over a regular monthly payment!
If you don’t think you have the available money to increase your payment that much, even rounding up to $600, an $18 increase in this example, would save almost $7,500 over the set bi-weekly payments and pay the mortgage off in 21 years.
The simplest way to free up money to increase your bi-weekly payment might be to fill out a T1213 or a TD1 and reduce the amount you pay in taxes instead of waiting for your tax refund.
My wife and I have debated the choice between investing and paying off the mortgage.
In our case we have a $220,000 mortgage at 4.5% fixed, amortized over 40 years with payments of $1000 per month. He have no other debt. We invest $900 per month in two different programs, RESPs, and the Employer Deferred Profit Sharing Plan (RRSP). We practise a zero balance budget system and all our money is allocated, so there isn’t money left over at the end of the month. The RESP makes 20% plus what the market returns and the RRSP makes 100%(because of matching) plus the market return.
Does it make sense to stop investing and pay off the mortgage?
Gregg,
This depends on a couple things. I wouldn’t put more than $2,500 a year into RESPs per child since the Canada Education Savings Grant doesn’t apply beyond that. With the employer plan, some have a limit where you can put more in but they don’t match it, do you put the maximum in that the employer matches and not any more?
Assuming you are only contributing up to $2,500 into the RESP and only contributing up to the limit that the employer matches in your RRSPs, I’d keep doing that. The free money that you get from that beats any benefit you’d get from paying down your mortgage.
If however, you are paying over the limits on either of these, you might be better off taking that extra amount and decreasing the principle on your mortgage.
And of course, using your tax refund and paying down your mortgage lets you do all three.
Especially after the finance crisis banks are being careful with offering mortgages to buyers and are making sure they can afford what they are borrowing so if something does happen like a job increase and more money is available then the smart move would be to pay your mortgage off quicker by paying in more money a month which as well will reduce the interest you pay overall and the banks will not totally mind as they get their investment back fully and at lease with some profit for it.
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