The lifetime of a mortgage is typically the largest of any kind of loan. Currently, the maximum amortization of a mortgage loans is between 25-30 years, although in the past it was as long 40 years. The amortization of a loan is simply the amount of time it would take to pay off the mortgage principal that was taken on the onset of the loan.
The way an amortized loan (and most typical mortgages) works is that with every scheduled payment that is made by the borrower, a portion of the payment is directed towards principal reduction while the other portion services the interest of the loan. As such, with every subsequent payment that is made, there is a slight shift in the amount that is directed toward the principal and interest. More specifically, the amount that goes towards the principal increases and the amount that goes towards interest decreases over time (essentially every payment, even minimally). This is due to the fact that interest is paid on the remaining balance of the mortgage and since each prior payment “chips away” at the principal balance, each subsequent interest payment due continues to decrease.
Although this is the standard means by which a mortgage is paid off over time, there are ways to decrease the original timeline with the following tricks:
1. Decrease amortization along the way
As time goes on, your financial circumstances may improve through an increase in income and financial stability. As such, it may be feasible for you to decrease your amortization, which will shorten the remaining time in which it would take to pay off your mortgage. Naturally, this method does increase the monthly payment obligation to the mortgage, but if you are able to comfortably bear the higher payments due to the increased income/stability, then this might be a viable option for you.
2. Prepayment privileges
Most mortgages today offer their clients the option to make pre-payments on their mortgage. These “pre-payments” are extra payments made by the borrower which are completely applied against the principal balance (unlike scheduled mortgage payments which involve interest). This means that since the interest on every scheduled mortgage payment is calculated on the remaining principal balance, your pre-payment will help decrease the balance on which it is calculated. Ultimately, this decreases the amount of the payment that goes towards the interest and increases the amount that is applied toward the principal
These strategies can be very useful in decreasing the timeline in which the mortgage is completely paid off. We often caution our clients to not be over ambitious with these options unless they are able to use either strategy comfortably and can withstand the various life events that would disrupt their cashflow at any given time. It’s great to pay down principal on your mortgage… if after doing so, you still have a liquid financial buffer or ‘rainy day fund.’
If you would like to learn more about the strategies to pay off your mortgage sooner, or would like to discuss your personal circumstances, please feel free to reach out today. (905) 455-5005.