How to pay off your mortgage faster and own your home

While many Canadians dream of homeownership, you’d be hard-pressed to find one who yearns to have a mortgage. Paying off your mortgage is a huge achievement; your home can finally fully be yours.

Luckily, there are many ways to make a dent in your debt. Read on to learn how to reduce your mortgage, minimize or avoid prepayment charges, and even free up some money to get you there faster.

Chances are, you haven’t looked at your mortgage documents since you initially signed them— and you likely haven’t had any reason to. But if you’re interested in reducing or paying off your mortgage entirely, you need to understand the contract back to front. Let's refresh your memory.

Like with any other loan, interest is the amount you pay on top of the principal amount in exchange for borrowing money. Mortgage interest rates are usually lower than the interest rates on other borrowing options like credit cards, but the amount borrowed is typically much larger. Even a fraction of a percentage point in the interest rate that applies to your loan can make a big money difference.

Monthly payments are the most common payment frequency for mortgages, but some allow for other options, such as weekly or bi-weekly payments.

The time (in years) it will take to pay off your mortgage is called your amortization period. Five-, 10- and 25-year mortgages are pretty common, though you may be eligible for a 30-year amortization period.

The mortgage term is the amount of time that your mortgage contract is in effect. Don’t confuse your mortgage term with your amortization period, they are separate things.

There are a variety of types of mortgages available to Canadians, like open or closed, fixed- or variable rate, and so on– so make sure you understand exactly what your mortgage contract allows you to do, which changes are possible and when prepayment charges may apply.

Depending on the type of mortgage you have, there can be prepayment charges for making additional payments during the term or paying down your mortgage before the end of the term. For example, with a closed mortgage, you might incur a prepayment charge if you end your mortgage contract before the maturity date, move your mortgage to a different lender, pay more than the permitted amount, or even pay off your entire mortgage early.

Prepayment charges can cost thousands of dollars, so it’s vital to do the math before you make a change to ensure you’re making a financially sound choice. Different lenders calculate prepayment charges differently. You can calculate your prepayment charges using this Scotiabank Prepayment Charge Calculator.

Just because there might be a prepayment charge doesn’t mean that you shouldn’t make a change. You’ll need to balance your potential cost savings with the charges to be paid. Here are some ways to keep those costs low or to avoid them altogether.

The type of mortgage you have affects the prepayment charges you might incur. Open mortgages, for example, tend to let you make prepayments or lump sum payments, while closed mortgages usually don’t. Depending on your circumstances, you might consider making a change to your mortgage type when you renew.

Prepayment privilege is the amount of money you can pay towards your mortgage, above and beyond the regular scheduled payments, without a prepayment charge. This is usually expressed as a percentage of your mortgage but might also be a maximum annual lump sum. The amount of prepayment privilege you have depends on your mortgage and lender. Find out what it is and use it if you can.

Now that you know all about your mortgage, let’s look at what you can do to pay it off faster.

If you choose to pay bi-weekly rather than monthly, you pay half your monthly payment twice. In other words, you change the frequency but not the amount of your mortgage payment. However, this does have the advantage of adding one extra monthly payment each calendar year. This will also end up reducing your amortization period. 

Changes to your amortization period affect your monthly payments. The longer the amortization period, the lower your monthly payment. If you want to pay your mortgage down faster, you can make your amortization period shorter, which will increase your payments but decrease the overall amount of interest you pay. Consider adjusting to the largest payment you can realistically afford.

Just because you have always paid a certain amount on your mortgage doesn’t mean you can’t change it. Revisit your budget frequently, especially after pay raises or getting a new job, to see if you can increase the amount you pay.

Depending on the type of Scotiabank mortgage you have, you might be eligible for Match-a-Payment, which allows you to double your current mortgage payment of principal and interest on any regular payment date without having to pay a fee or prepayment charge.

One-time prepayments are a great way to make a dent in your mortgage balance. With Scotiabank, depending on the options you select for your mortgage, you can choose to repay up to 10%, 15% or 20% of the original principal amount of your mortgage at any time during each year of the term.

Refinancing your mortgage can incur prepayment charges and other fees, but in some cases, it can give you much-needed flexibility and options. If, for example, you took out a fixed-rate mortgage at a relatively high interest rate and the rates have since dropped, refinancing—and paying a prepayment charge—may be the most cost-effective option. You can use a mortgage calculator to estimate your costs.

Thinking about paying down your mortgage faster is definitely inspiring, but you might be wondering where you’ll come up with the funds. Here are some ideas to get you started:

• It all starts with a solid household budget. Once you know what you have and what you need, you can find areas to save so you can pay off your mortgage.
• Redirect extra cash like tax refunds, bonuses, or money from a side hustle.
• Consider a loan like a home equity line of credit (HELOC) to pay down higher-interest loans. It might sound confusing to suggest using your home equity when you’re trying to pay off your mortgage, but it can make sense in some scenarios. If, for example, you carry debt at a high interest rate, like with a credit card,  you’ll save significantly if you pay it off. If you reduce your other monthly debt payments, then you will be able to free up some of your cash flow towards your mortgage. One option to help consolidate your loans is Scotiabank's combined loan program, the Scotia Total Equity ® Plan (STEP). * STEP is a flexible borrowing plan tied to the equity of your home. You can easily add multiple products under the STEP within your borrowing limit without having to re-qualify for additional credit and remove products as your needs change over the years.¹ Think of it as a borrowing solution that allows you to consolidate your debts to help lower your overall borrowing costs.

If paying off your mortgage is a key financial goal, let us help you. Book an appointment with a Scotiabank home financing advisor to discuss all the ways you can be mortgage-free faster.