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Save Thousands: Pay down your mortgage sooner
Save Thousands: Paying your mortgage sooner
Introduction
Buying a home is going to be the biggest single investment that most people make in their lifetime. Receiving a mortgage from a lender to make that purchase is a necessity and a big commitment. Just because most mortgages are paid over 25 to 30 years doesn’t mean it has to take that long. We have some simple tips to help you pay yours off faster. Reducing the number of years you make mortgage payments doesn’t just get you out of debt quicker, but adds up to significant savings.
There are several ways to “pay down” your mortgage and save you unnecessary interest costs. What you may not realize is that interest payments on a mortgage are front loaded. What this means is at the start of the mortgage the majority of your payment goes towards interest and very little towards the principal (the amount you originally borrowed). While at the end of your mortgage most of your payment goes to the principal simply because you’ve already paid your lender all of the interest. You can use this to your advantage by paying more down at the start of your mortgage, and not getting caught in the “I’ll pay more later” mentality. You will see the biggest benefit in the first years of your mortgage, but extra payments at any time will help.
We will give you a few straight forward tips that are very do-able and extremely effective in saving you money. They say “a penny saved is a penny earned”, so that means $50,000 saved is $50,000 earned!
Let’s get our numbers together for our example. If we average the price of the homes in Chinook Crossing we come up with $169,900. Then we subtract the minimum allowable down payment of 5% ($8,495), add on the one time lump sum premium for CMHC mortgage insurance of 2.95% ($4,761) and that gives your mortgage amount of $166,166. Now, breaking that down into your payment amounts gives us $717 per month, or semi-monthly payments of $358.
Let’s start saving!
Tip 1: Payment Frequency
Change your payment frequency from Monthly (12 full payments a year) or Semi-Monthly (24 half payments a year) to Accelerated Bi-Weekly (26 half payments a year). By making the same payment amount every two weeks instead of twice a month you are saving money in interest charges over the long run. Making an extra two payments a year doesn’t sound like a big deal, does it? But look:
Savings: $13,056 with your mortgage being shortened by 4 years
Tip 2: Rounding Up Payments
Round up your payment amount to the nearest hundred when you arrange your mortgage, or at any time during the term (verify with your lender that you can change payment amounts at any time). See what bumping up your payment by $42 to $400 can do for you:
Additional Savings: $13,286 with your mortgage being shortened by another 4 years
Tip 3: Doubling Payments
You also have the option of doubling your payments whenever you choose. You could double every payment, but even just doubling a few payments every year gives you significant savings. Let’s be realistic and say you will be able to double up on four payments during the year. How much will you save?
Additional Savings: $13,450 with your mortgage being shortened by another 4 years
Tip 4: Lump Sum Payments
The majority of lenders will allow you to make a lump sum payment against your mortgage once a year ranging from 15% to 20% of the original mortgage amount. A lump sum payment is applied directly to your outstanding principal and makes a big difference. Did you get a bonus at work, a tax refund from the government after getting an RRSP? Again, let’s be realistic and say the amount is $2000, but you could go much higher to the full 15% to 20% every year.
Additional Savings: $10,753 and shortening your mortgage by another 3 years
Conclusion
If someone came to you saying they could make you $50,545 without any risk, would you jump at the chance? With these four simple tips this is exactly what will happen. Saving over $50,000 and taking your 30 year mortgage down to only 15 years is not only amazing, but realistic. Now when people tell you they are going to make their regular mortgage payments for the full 25 to 30 years, you can be their financial wizard and help set them straight.
If you were to not do any of these mortgage tips and invest the suggested extra payments instead, you’d need a very good rate of return to even come close to these savings. A regular savings account leaves you nearly $41,000 short after 15 years, and a high interest account nearly $4,100 short. Your ideal situation will be a balance between these tips and investing in guaranteed RRSPs. If you did Tips 1 and 2, then took any tax refund you receive from investing in your RRSP and applied it to Tip 3 or 4 (or both) you’d still be saving big on mortgage interest while also building your investments.
Comparison:
Savings Between Different Chinook Crossing
Mortgages and the Average Canadian Mortgage
| Our Minimum Mortgage | Our Sample Mortgage | Our Maximum Mortgage | Avg Canadian Mortgage | |
|---|---|---|---|---|
| Total Savings | $39,670 | $50,545 | $61,296 | $66,875 |
| Mortgage Amount | $134,900 – 5% + 2.95% | $169,900 – 5% + 2.95% | $204,900 – 5% + 2.95% | $283,000 – 5% + 2.95% |
| Monthly Payments | $569 | $717 | $864 | $1194 |
| Payment Frequency | $10,364 $284×26 |
$13,056 $358×26 |
$15,743 $432×26 |
$21,745 $597×26 |
| Rounding Up | $5,247 | $13,286 | $20,308 | $1,139 $3 round up |
| Double Payments | $12,158 | $13,450 | $15,105 | $28,302 |
| Lump Sum Payments | $11,901 | $10,753 | $10,140 | $15,689 |
Assumptions: 5 year closed variable mortgage at 3.20% amortized over 30 years. More simply put, your 30 year mortgage will need to be renewed after 5 years, and the rate will vary based on the lenders current rate.
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3 Comments For This Post
May 29, 2012 at 11:25 am
This week, CIBC reported that 72% of Canadians are carrying debt, and over 50% of them have made at least one lump sum payment towards that debt in the last year. That’s good news. Saving money in interest payments is always a good thing!
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