Repay your mortgage faster Bruce Schoenne, AACI, P.App, RI Oct 1, 2010 - 10:01:24 PM RSS?

Put repayment of your mortgage on steroids!

Most people would love to pay their mortgages off quicker but don’t know how or what to do. In the past there have been two great options. Recently a third and more powerful option has become available. Let’s take a look.

For our example, let’s assume the following:

The Standard Option

The typical way to pay off a mortgage is to make monthly mortgage payments. In our example the homeowner would make monthly mortgage payments of $1,122.56. The total annual mortgage payments are $13,470.72 ($1,122.56 x 12). Under this repayment option, it will take a home owner 25 years to pay off the mortgage.

Option #1 - Semi-Monthly Mortgage Payments

Semi-monthly means payments are made on the first and the fifteenth of the month. You are making a total of 24 payments in the year.  To calculate semi-monthly payments, you take the monthly payment and divide it by 2 ($1,122.56 / 2 = $561.28).  At the end of the year semi-monthly payments still only add up to $13,470.72.  ($561.28 x 24), the same as if you made monthly payments of $1,122.56.  

Are there any savings making payments this way?  Yes, but very little.   The savings come from the fact that your paying down the principal quicker because you’re making payments twice per month as opposed to once per month.

Option #2 - Accelerated Bi-Weekly Mortgage Payments

Accelerated bi-weekly mortgage payments are a bit different.  The difference between semi-monthly payments and accelerated bi-weekly payments is that semi-monthly payments have 24 payments per year while accelerated bi-weekly payments have 26 payments per year.  You are now making payments every two weeks (26 payments per year) and not twice per month (24 payments per year).

To calculate your accelerated bi-weekly payment, take the monthly mortgage payment, divide it by 2, and multiply it by 26 (every 2 weeks).  Using the example, you're total annual mortgage payment is $14,593.28 (($1,122.56 / 2 = $561.28) x 26)

Essentially you're making one more payment per year ($14,593.28 - $13,470.72 = $1,122.56).  By making accelerated bi-weekly payments, you will be saving money on interest and reducing you're amortization period. In our example your mortgage would be paid off in 21.43 years.

Option #3 – Synergy Mortgage Plan

The Synergy Mortgage Plan combines your existing mortgage or new mortgage with a principal insured investment. The idea is to use the equity in your home to purchase a principally insured investment that pays you more than the cost to borrow the money. The monthly profit, in addition to your current mortgage payment, is then used to pay down the mortgage. One of the great things about this option is that it is all done without increasing your current monthly payment.

In the above example the homeowner has a mortgage of $200,000. Financial institutions currently allow homeowners’ to borrow up to 80% of the value of their home with the re-advance able mortgage product. In our case the maximum mortgage would be $400,000.

To take full advantage of the Synergy Mortgage Plan a homeowner would borrow the maximum on the mortgage and place the remaining $200,000 in the principally insured investment. At the time this article was written, Synergy’s principal insured investment was yielding an 8% annual return.

The result of this strategy is a mortgage that gets paid off in 16 years, 5.5 years faster than if the homeowner was to make accelerated bi-weekly payments and 9 years faster than making simple monthly mortgage payments. Not only that, the homeowner would see a savings of $121,236 over the life of the mortgage.

Don’t let the number scare you. So long as you have more than 20% equity in your home the Synergy Mortgage Plan can save you money and time on your mortgage.

The final word

Nobody likes mortgage payments and everyone would love to be mortgage free sooner. All three options give you a way to achieve that goal but by far the most powerful is the Synergy Mortgage Plan.

Pay your mortgage off sooner without changing your monthly payment, doesn’t get any easier than that.

Visit http://www.smp.ca for more information or to find a representative in your area.

Bruce Schoenne, RI, AACI, P.App has been involved in the real estate and mortgage industry for over 25 years including over 20 years as a real estate appraiser.

Real Mortgage Associates Inc. - Mortgage solutions for Canadians.