12 Mortgage life hacks. How to pay off your mortgage faster?
The life with a mortgage, oh, so much fun. The money you have to pay every month that you could have saved for retirement, the idea that you will have to pay over 50% of your property price in interest, calculating when you will pay it off, and understanding you will be done at 65. A mortgage is like a stone in your shoe. You try not to think about it, but it exists and irritates your thoughts and life.
There is likely not a single person who has a mortgage and who does not wish to pay off the mortgage faster. The idea of having debt for 20-30 years and having to pay all that interest is daunting. Imagine, on a $500,000 mortgage, with a 30-year amortization and a 4% interest, you will pay the bank $360,000 in interest. Ouch! That is $1000 on average each month. If only you could invest that $1000 each month over the course of 30 years at a 6% return, you would have $1,006,000 in your bank account after 30 years.
So, when we say "pay off your mortgage faster," what we actually mean is paying less money in interest in addition to just breaking free from the feeling of indebtedness.
To set things straight before we jump into the ways to pay off your mortgage faster and pay less in interest:
if you got a mortgage, it is likely for a huge amount, more than you can afford to save in a matter of a couple of years.
if you borrowed money from a bank to buy a property, the bank would want its money back no matter what. So, if you borrowed $500,000, you are on the hook to return this money. It is the interest that we can reduce.
it is almost impossible to repay the mortgage so quickly that you would pay almost no interest unless you bought a dog house that costs one month's worth of your income and you somehow obtained a mortgage for it. I am obviously joking, but if you are obtaining a mortgage for a property that is worth $200,000 while you make $300,000 a year and only spend $100,000 of that, you are likely going to repay your mortgage in a year and pay only a few thousand in interest.
Now, considering the above, there are still ways to pay less in interest and pay the mortgage faster using the below 12 mortgage life hacks:
If you got a better rate, keep your monthly payment the same.
Put bonuses towards mortgage
Search for the best rates
Know the terms of the contract
Pay off as fast as you can in the first few years - delaying will not help as much
Make your property work for you
Refinance to a shorter period
What is better: paying off the mortgage faster or investing?
Mortgage lifehack #1: Refinance frequently
There are times like now when the economy is distressed, and interest rates are low. Even if you are still locked in your 5-year contract with your current lender, it makes sense to see if you should break it. There are 3 types of mortgage contracts:
Fully open. With a fully open contract, you can break your mortgage at any time with no penalty.
Partially open. With a partially open contract, you can break it with a penalty. It is most likely you have this type of mortgage.
Closed mortgage. With a closed contract, you are not allowed to break exit the contract unless you sell your property.
In any case, if you sell your property, you are usually free from any penalty.
There are also 2 types of penalties for the partially open mortgage. Your contract will either say you have to pay 3 months’ worth of interest or the interest rate differential (the difference between the mortgage’s rate and the lender’s current mortgage rate for the remaining term). Let's look at the impact of those closer. Let's say you have a $500,000 mortgage with a 4% interest and an amortization of 25 years. This means your monthly payments stand at $2639.18. You have been in your current term with the current lender for 3 years with 2 years remaining. Over the past 3 years, you paid off $37,132 of your mortgage principal, meaning your mortgage stands at $462,868.
The interest rates recently dropped to 3%, but you believe it will go back to 4% soon. Is there a benefit to refinancing (renewing) your mortgage sooner?
With the first type of penalty, you would have to pay 3 months' worth of interest, which comes to 4% / 12 months * 3 months * $462,868 = $4,629. With the second type of penalty, you would have to pay the difference between the current interest rate your lender uses (usually, it should be around 3% that is currently prevalent in the market) and the interest rate in your contract for the rest of the remaining term. This comes to about a $9,000 penalty.
Now, let's see the benefit of refinancing today at a 3% rate. You refinance $462,868 for a 22-year amortization. For the next 5 years, your monthly payments will be reduced to $2,397.17. Thus, your savings in monthly payments will be $4,520. A clear saving vs. both types of penalty. Also, if you don't refinance earlier and are stuck with a 4% interest rate, in the next 5 years you would pay $85,668 in interest. If you renew earlier and pay the penalty, you will pay $63,668 in interest.
The above way to refinance sooner also has another benefit which we will discuss next in lifehack #2.
Mortgage lifehack #2: If you got a better rate, keep your monthly payment the same.
When people refinance and get a lower rate, the bank representative automatically recalculates your monthly payment to stretch your contract to the original amortization period of your mortgage. Now, most people just go for the new payment. They think it is a bit less money to pay every month, they can save more. They also tell themselves that if they have a sizeable amount saved after the year ends, they will make a lump-sum payment. Guess what? This rarely happens. Instead of accepting the new, lower payment, consider keeping the amount as it was. This will mean no change for your budget but will help pay the mortgage off earlier.
In the example from the 1st mortgage lifehack, instead of accepting the lower monthly payment of $2,397.17, you can just keep it at the original $2639.18 level. By doing that, you will be able to pay off your mortgage almost 3 years earlier and will pay $22,900 less in interest.
Mortgage lifehack #3: Put bonuses towards mortgage
In the same spirit as in mortgage lifehack #2, you could spend your bonus or any other unexpected money that comes on top of your usual budget and spending. Instead of buying another expensive toy or buying an extra expensive vacation, you may consider putting this bonus towards your mortgage. Consider this: let's say you have a $500,000 mortgage with a 4% interest and an amortization of 25 years. Your monthly payments will be at $2639.18. If you put down an extra $2000 of your bonus or other savings towards your mortgage once a year, your mortgage term will reduce to 22.5 years, and you will pay $30,400 less in interest (without these payments, your total interest on this mortgage would be $292,000. The more you put, the more you will reduce the interest and the mortgage amortization time.
Mortgage lifehack #4: Search for the best rates
During the course of your mortgage, you will be forced to refinance a few times. E.g., if your amortization period is 30 years and you refinance (renew) the mortgage every 5 years you will have to refinance 6 times. As discussed, above you may refinance more frequently by either breaking your term earlier or having shorter terms (e.g., 3 years).
You should expect that during these 30 years of the life of your mortgage, the economy will change course a couple of times, and the interest you pay will fluctuate. However, it makes sense to fight for lower rates each time. Making efforts to find better rates will pay off greatly down the road. Don't just go to your preferred bank you have a checking account with. Reach out to a few financial institutions. When talking to banks representatives, mention the lowest rate you were able to find and see if they want to counteroffer. The other factor that may impact your interest rates is your credit score. The banks will usually have slightly better rates for people with higher credit scores. Making sure your credit score is high enough will help you save money on interest.
Consider the below 2 examples. In both cases, you have a mortgage of $500,000. In the first case, you have an interest rate of 4% through the term of your mortgage. In the second, you work hard at reducing the interest rate and manage to get 3.5%. Obviously, the interest rates will fluctuate over time, but we are assuming average interest rates over the course of your mortgage. In both cases, you have the same monthly payment of $2,639.18. In the case of a 3.5% interest rate, you will pay your mortgage 2 years earlier and will pay $62,973 in interest.
4% interest rate
3.5% interest rate
Time to pay off the mortgage
Total interest paid
Mortgage lifehack #5: Hire broker
Consider using the services of a mortgage broker. Mortgage brokers have access to multiple lenders and will do the search for the best rates and terms for you. I wrote a post about mortgage brokers here: Mortgage Brokers and Agents: What do they do and how can they help you with your mortgage?
Mortgage lifehack #6: Know the terms of the contract
We discussed the terms of the contract here: Know your options before you get a mortgage: Mortgage repayment plans and options.
Depending on your mortgage options, you may have different levels of flexibility to cut your mortgage earlier, increase monthly payments, pay off the mortgage in lump-sum payments every year, move the terms and the interest rate of your current mortgage to your new home. There are also different levels of penalties associated with different options. Knowing your mortgage terms will allow benefiting from changes in the market without paying too much in penalties.
Mortgage lifehack #7: Extra payments
Consider moving to "accelerated bi-weekly" payments. What this actually means is that you would add an extra pay period for the year. This works like this: Let's say you were paying $1264 every month, which amounts to $15,168 per year. If you use an accelerated bi-weekly payment plan, you would be paying $1264 every 4 weeks (or $632 every 2 weeks). Thus, you would pay $15,168 in just 46 weeks of the year, and then an additional $1264 for the final 4 weeks of the year. This means you pay more per year and repay your mortgage faster, ultimately reducing the amortization period and interest.
Number of payments
Payment amount each period
Payment per year
Time to pay off the mortgage
The total amount paid in interest
Mortgage lifehack #8: Pay off as fast as you can in the first few years - delaying will not help as much.
The mortgages work so that earlier in the mortgage term, the majority of your monthly payment goes towards repaying the interest that was accumulated on the borrowed money that month. A small portion of your payment goes against the actual repayment of your debt.
Thus, the extra payments you put down early in the mortgage term will have a compound effect on future interest payments as you would not have to pay interest for many, many months on that money.
Consider the effect of putting down a one-time $10,000 payment towards your mortgage with payment 12 (1 year in the mortgage), payment 120 (10 years in), and payment 240 (20 years in). We use the same mortgage details: $500,000 mortgage, 4% interest rate, 25-year amortization period. As you can see, the savings from paying $10,000 in a lump sum one year into the mortgage will result in $15,699 interest savings. The same lump sum payment 20 years in will give a saving of mere $2,139 savings.
No lump sum payment
$10,000 lump sum at payment 12
$10,000 lump sum at payment 120
$10,000 lump sum at payment 240
Total interest paid
Interest savings vs. no lump sum payment
Mortgage lifehack #9: Make your property work for you
This is a lifehack that deserves a separate post as the number of options to make your property work for you is many. While this lifehack is not going to suit everyone, you can explore a few options for your property to earn a few hundred dollars every month. You can then put this money towards your mortgage. This will help to pay it off faster and spend less in interest. The key starting point is to evaluate your property as your asset for making money: the extra space you have. Below are some ideas to make money with your property:
Turn one of the rooms or basement into a rental unit.
Rent out your spare storage space.
Rent your home out for filming and photoshoots.
Rent your home out Airbnb style for short-term homestays.
Rent your house out while you're on holiday.
Rent out your parking space.
Grow and sell plants.
Grow and sell oyster mushrooms in the basement.
Start a mini business (e.g., making jewelry, fixing small items, etc.)
If you have a backyard, you could explore one of the below ideas:
Grow and sell backyard produce.
Grow and sell trees.
Grow and sell flowers.
Get into honey-making.
Build a tiny rental house.
Turn your property into a private campground.
Grow city chickens or rabbits.
Grow vegetable seedlings.
Mortgage lifehack #10: Buy smaller
A few of the above lifehacks talked about putting more towards your mortgage to accelerate payments. Obviously, this is not an optimal solution for people on a tight budget, especially in our times of high inflation eating into your budget. There is, however, another option: if you cannot increase payments, consider reducing your mortgage by buying smaller. Don't rush to buy the biggest place you can afford. Evaluate what space you really need to live comfortably and try to buy a cheaper place.
Let's say you calculated your budget and figured out that you can afford a monthly mortgage payment of approximately $2,640. With that monthly payment, you can take a $500,000 mortgage at a 4% interest rate with a 25-year amortization period. You could instead scale down and buy a $50,000 cheaper place but maintain the same monthly payments. With that, you will pay off your mortgage 4 years faster and pay $75,451 less in mortgage in addition to having to repay that extra $50,000 you borrowed.
Time to pay off the mortgage
The total amount paid in interest
Mortgage lifehack #11: Refinance to a shorter period
When you negotiate a mortgage deal with your lender, don't just take the amortization period the lender offers you. The lender will likely offer you the maximum possible amortization, which is 25 or 30 years. This is how the lender makes more money in interest. The monthly payment amount for a longer-term mortgage will also be lower, so you may fall for it. However, you have to remember that you can pick any amortization period you want. If you can afford a higher monthly payment, go for it. A higher monthly payment will automatically reduce your mortgage amortization term.
Mortgage lifehack #12: What is better: paying off the mortgage faster or investing?
The last mortgage lifehack goes back to the second paragraph in this post about how investing $1000 each month over the course of 30 years at a 6% return could bring you $1,006,000 in your bank account after 30 years. And this lifehack may be a bit mind-twisting for some people who just want to pay their mortgage off as soon as possible. To do that, they put all available cash towards their mortgage. And it does make perfect sense: every dollar you pay today on top of your usual monthly payment will save you 3-4% interest on that money that you don't have to pay for the remaining years in your mortgage. However, in times of continuously low-interest rates, you are borrowing the money from a bank to buy your property at sometimes as low as 2.5%. Now, you do have to make your monthly mortgage payments, that is a given. But for anything extra, you may as well choose to invest that money. If you are able to find any investment means that gives you more than the interest rate you pay to a bank, you are actually making money.
Let's go back to the example from the beginning of this post. Let's say you got a $500,000 mortgage with a 30-year amortization and a 4% interest. Your monthly mortgage payment would be $2,387.08. Now, let's say you calculated your budget and found that you could easily top up this monthly payment by $1000 a month. This would result in you paying off your mortgage in just 17 years instead of 30. Also, instead of paying $359,000 in interest, you would pay only $189,000 in interest. This is great! But let's say, instead of putting this $1000 towards your mortgage, you invest it at 6%. In the same 17 years, your investment portfolio would have grown to $353,000. You would still have a balance of $290,000 in your mortgage. But you could have used your investment money to pay off the mortgage, and you would still have $63,000 remaining. You could also just keep paying your mortgage as you were, keep the amortization period of 30 years, and keep investing for all this time. This would mean in 30 years, you would pay off your mortgage, but your investment portfolio would grow to $1 million.
In summary, there is no way to escape the necessary evil of a mortgage if you want to own a home. With that comes the burden of debt and monthly payment in big part bearing the interest on the borrowed money. However, one can and should work to reduce this burden. There are a few ways you can use to pay off your mortgage faster and break this burden faster. The key is to pay less to the banks and get over with the mortgage as soon as you can.