To explore your options, let's imagine you're buying a home for $440,000 and are able to make a down payment of 20%, or $88,000. That leaves you with a mortgage of $352,000. Let's also imagine you're able to keep a consistent interest rate of 3.5% throughout the 25-year length of the loan.
So how can you speed things up?
1. Make payments more often
Making payments more frequently will allow you to pay down your principal faster and save money in interest charges over the long run. You have a lot of options: You can pay monthly, biweekly or weekly and can also accelerate your biweekly or weekly payments by paying a bit more.
In our example, a monthly payment would be roughly $1,760. You could resolve to pay half that amount — $880 — every other week instead. Doesn't sound too painful, right?
However, because most months aren't just four weeks flat (that is, 28 days), taking this accelerated biweekly option means that over the course of a year you'd end up making the equivalent of one additional monthly payment. And that's all it would take to free yourself from your mortgage two years earlier — and save you more than $23,000 in interest.
Your payment schedule is set when you sign a contract with your lender, but you can change it when you renew your mortgage. Some lenders might let you change it during the term.
2. Make a lump-sum payment
Did you get an inheritance, a bonus or a tax refund? Apply it to your mortgage! Even a relatively small amount of money can help cut the time you'll be in debt and save you money.
A lump-sum payment applied directly to the outstanding balance of your principal can reduce your overall costs by a surprising amount.
Let's say you were able to save up an extra $5,000 by the second year of your mortgage. Over the coming years, that one-time payment would save you more than $6,000 in interest and help you pay off your mortgage six months earlier.
If you have an "open" mortgage, you can pay down as much as you want, whenever you want. If you opted for a "closed" mortgage to get a better interest rate, then you'll have to see what prepayment privileges are in your contract. Paying more than your privileges allow could cost you thousands in penalties, depending on how much you want to pay and when, so make sure the math works out in your favour.
3. Increase your regular payments
It hurts to see such a big chunk of your money leave your account every month — but if you're able to stomach it, increasing your payments by even a few dollars will pay off.
Maybe you got a raise at work, and can afford to put an extra $100 toward your normal montly payments of $1,760, starting in the second year of your mortgage. Instead of using that money to eat out more, you just saved yourself $14,600 in interest and cleaned up your mortgage almost two years early.
Keep in mind that you can also run afoul of prepayment penalties by increasing your regular payments, so see what your contract allows.
4. Keep your payments the same at renewal
When your term ends and it’s time to renew your mortgage, you might be able to snag a lower interest rate, allowing you to reduce your regular payments. But if you keep a steady hand on the tiller and decide to keep your payments the same, you can pay off your mortgage much quicker.
With our $352,000 mortgage at a 3.5% interest rate, you'll have a balance of about $303,700 left at the end of a standard five-year term. Let's say you're able to renew with a lower rate of 3%.
You can spend the next 20 years paying your new monthly rate of $1,680 — or keep paying $1,760. That would save you $6,450 in interest payments and wrap up your mortgage over a year ahead of time.