Just by making a small increase to your monthly mortgage payment, you can save enough over time to buy a (albeit inexpensive) car, send a child to university or boost your retirement savings. This is something we all know in the back of our minds, like putting away 10% of your paycheck and eating green vegetables, but how do we actually make it happen.
According to an article on star.com, it may be easier than you think to put together an extra payment or two…
Take your lunch to work more often, iron your shirts instead of dry cleaning them, or give up a few lattes every week, and put the money into your mortgage.
“It’s $10 a week, easy money. These things are relatively small potatoes, but they add up over a year,” says Martin Beaudry, vice-president of lending at ING Direct, who irons his own shirts for the week after dinner every Sunday night.
The article goes on to say that if you changed your mortgage to every two weeks from monthly on a $250,000 mortgage, at 5 per cent and added $57 to each payment, it is the same as making 13 months of payments a year, not 12, according to Beaudry.
“You’d save $30,000 in interest and be mortgage-free four years sooner.”
That’s money in the bank.
However, it’s good to note that the only time to be putting extra money on the mortgage is when families truly have a surplus. If all your monthly bills are paid and you don’t owe anything on a credit card at 18.9 per cent interest and you find yourself with some extra cash, then go for it!
Check out this great calculator to see the impact even $10 a week can make.
So how do you actually go about making those extra payments? Most mortgages come with something called pre-payment privileges which allow you to make a certain amount of extra payments each year, without being penalized. Typically, you can choose between making a regular monthly increase to your payments or making a one time, lump sum payment.
When you speak with your lender about arranging an extra payment , be sure you are fully informed about the rules regarding your particular privileges in order to the make best use of them.
For instance, some lenders only allow you to start and stop extra monthly payments once in a calender year. So increasing one monthly payment by $57 now and then again in 3 months would not be allowed. This privilege is best used when you are ready to commit to a continual increase to your regular payments, at least for a few months in one year.
If you think your access to extra funds will be more random, save them up in a savings account and then make use of your lump sum privilege on or near the yearly anniversary of your mortgage. Some lenders do allow you to break up your lump sum privilege and make random payments at any time, as long as you don’t exceed the allowed amount in one calendar year.
It’s true that making extra payments in the first couple of years of your term has the biggest impact but really, every little bit will help you get closer to being mortgage free, faster. Myself, I’ve cut my Starbucks visits down to twice a week and I can already afford a small yacht. Go figure.