According to a BMO 2015 home-buying report, the average Canadian expects to pay off their mortgage by age 59 — but 31 per cent think they’ll still have a mortgage by their 65th birthday. Looking to ditch your debt quicker — without over-extending your budget? It may save you hundreds (if not thousands) in the long run.
The biggest benefit is saving money on interest charges. The longer it takes to pay down your mortgage, the more you’ll pay in interest. The BMO report found that, on average, Canadians believe they’ll pay approximately $60,000 in interest on their mortgage (and this number hits $100,000 for B.C. residents).
First-time homebuyer tip: Curious how mortgage payments work? It’s all about the amount of money you’re borrowing and the length of the loan. Based on these factors, your lender will calculate your payment schedule. Some of your payment will go toward interest (the amount paid on the amount you borrowed), and some will go toward your principal (the amount initially borrowed under the mortgage). You may pay more toward interest than principal in the first few years of your loan, and more toward principal in the later years. Calculate your potential payment schedule with our nifty mortgage calculator.
“The faster you pay off a mortgage, the more you save in interest,” says Louis-François Éthier, product manager at National Bank.
The truth is, paying off a $100,000 mortgage in a short period of time is extremely difficult without both a sizable and stable income, and relatively few expenses. A small regular payment stretched out over a longer amortization period (the total time required to pay off the mortgage) is usually considered an expensive strategy. This is because mortgage payments mostly cover interest and little of the principal until the interest is paid, so it can take decades to pay off the balance.
“The amount of your mortgage payments should be based on your overall budget,” says Louis-François Éthier.
How much of your budget should go toward mortgage payments?
Most financial institutions recommend that no more than 30% of your total budget go towards mortgage payments, municipal taxes, and heating. “It’s the classic ratio in the industry: mortgage to total debt,” says Mr. Éthier. “It’s crucial to also consider other debts, such as car loans and balances on credit cards. Mortgage counsellors can help you make the right choice.”
Of course, the expected time if would take to pay off the mortgage directly influences the amount that we spend on our regular payments. Continue reading →
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