This mortgage series was first published from 2010-2013 and is consolidated here for you to help you save money on your mortgage. As rates increase these strategies become more and more effective.

Details provided by two great local mortgage brokers:

Allan Bowerman, Liberty Mortgage Solutions

Daryl Marsden, Verico Maximum Mortgages

Included:
Topping Up Your Mortgage Payment
Dual Benefit of a Low Rate
Double-Up Payments
Changing to Bi-Weekly or Weekly Payments
Shortening the Amortization Period
Looking Beyond the Mortgage Rate

Topping Up Your Mortgage Payment

Source: Daryl Marsden

Topping up your mortgage payments by $50 or $100 can make a big difference. Using this method you make an extra payment towards your principle every regular payment. Depending on whether you choose to make your payments monthly, bi-weekly or weekly you can choose to pay a little bit extra on your principle with every payment.

Many people use this method when on a restricted budget. It is easier to save $50 to $100 each month than one lump sum. How much money and time can we save using this method?

Example:
Based on a $100,000 mortgage at 6.00% interest for a 5-year term amortized over 25 years.
Your monthly payment would be $639.81.
You would pay $28,225.07 in interest over the first 5 years.
You would pay $10,163.50 in principle over the same 5 years.
Principle Balance left owing after 5 years: $89,836.47

What You will Save by Adding $50 per month:
If you paid an extra $50 per month, each month for 5 years.
You would save $388.34 in interest
You would pay the principle down by $3,388.34

If you continued this process every year you would save 18 months worth of payments; 1 1/2 year’s worth of mortgage payments. At $639.81 per mortgage payment that means a savings of $11,516.58

This method makes it easier for many people to budget and save. Another idea to consider is to round up your payments. Sometimes for a budget it is easier to remember that your monthly mortgage payment is $900 than $835.81. If you can afford to pay the $900 then talk to your financial institution about rounding up your payments.

Saving Money on your Mortgage: Dual Benefit of a Low Rate

Source: Allan Bowerman

So you got ultra lucky and managed to secure a 3.29% fixed 5 year mortgage on your recent home purchase.  This incredibly low rate is a consequence of our recent years of economic uncertainty and it is bound to increase in the years to come.

A great way to avoid the shock of the rate change later on is to use the low rate as a double benefit in paying down your mortgage.Act as if you had a higher rate today and save yourself thousands of dollars in interest costs.

An example:

Using a $400,000 mortgage with 30 year amortization and comparing a 3.29% to a 4.29%  rate. This would be a common scenario for an average single family home purchase in Calgary.
The difference in payment is about 13% or $224 per month. Monthly payments based on 3.29% are $1745 vs a payment of $1968 if the rate was 4.29%.

If you prepare yourself now by opting to raise your regular payments by 13% (using the privileges within the mortgage contract) to $1968 per month you will actually save $21,000 in interest costs which equate to 5.5 years off the mortgage amortization.

Not sure if you can make the change? Add the extra $224 per month into a savings account and put down the lump sum payment on your mortgage once you are comfortable with the payments.  If the extra $224 is a challenge, then you know now that you will need to make financial adjustments when your mortgage term expires if rates are higher.

Take Advantage of Double-up Payments Offered by Most Banks

Source: Daryl Marsden

The double-up advantage allows you to make an extra payment usually equal to your normal monthly payment. Depending on your financial institution, you can make anywhere from 1 to 12 double up payments annually.

Each double-up payment is applied directly to the principle on your mortgage. This means you save thousands each and every time you make one of these double-up payments. Even one double-up payment per year can make a difference.

Example:

Based on a $100,000 mortgage at 6.00% interest for a 5-year term amortized over 25 years.
Your montly payment would be $639.81.
You would pay $28,225.07 in interest over the first 5 years.
You would pay $10,163.50 in principle over the same 5 years.

Implementing Double-Up Payment:
If you make one double-up payment each year during the average 5 year term you would save the following (monthly payments remain the same):
Total Interest padi during the 5-year term: $27,810.89
Total Principle paid during the 5-year term: $13,777.26
Principle Balance left owing after 5 years: $86,222,74

What You will Save:
If you paid one extra double-up payment each year for 5 years you would save in the following ways:
You would save $414.18 in interest
You would pay the principle down by $3613.73
If you continued this process every year you would save 21 months worth of payments; that’s almost 2 year’s worth of mortgage payments. At $639.81 per mortgage payment that means a savings of $15,355,44 (based on 6.00% interest over the full term.)

It can be hard for folks to save an entire mortgage payment to put down every year. If you can, consider this option to save on the long term cost of your mortgage. If not, consider some of the other tips such as rounding up your payments or switching to biweekly rather than monthly payments.

 

Change to Bi-Weekly or Weekly Mortgage Payments

Source: Daryl Marsden

You can start using this method of saving money on your mortgage the day you read it. You simply call your bank and ask to start taking your payments out bi-weekly or on an accelerated or rapid payment plan.

You can also request that the bank coordinate your payments with your pay day. It has always been easier to pay your bills on the day you get paid… simply request this at the time that you change your payment method. By implementing this strategy you can save over four year’s worth of interest and payments.

Example:

Based on a $100,000 mortgage at 6% interest for a 5-year term amortized over 25 years.
Your monthly payments would be $639.81.
You would pay $28,225.07 in interest over the first 5 years.
You would pay $10,163.50 in principle over the same 5 years.

Implementing a Bi-Weekly Payment:
(Using the same $100,000 mortgage at 6% interest for a 5 year term amortized over 25 years:)
You now would be paying bi-weekly payments of $319.91.
You end up making two extra payments during each calendar year: one in November and one in July which, when totalled, is only one extra payment per year.
You would pay $27,646.99 in interest over the first 5 years.
You would pay $13,941.31 in principle over the same 5 years.

What You Will Save:
First, you will save $578.08 in interest payments over the first 5 years
Second, you will have paid an extra $3,777.78 in principle over the 5 years
Third, your payment stays close to the same except you now make two extra payments instead of one each month and they are made when you get your pay cheque.

In other words, you will pay off your mortgage faster just by paying your mortgage on a bi-weekly basis. The best part is that you won’t likely even notice it after a few months. Just like anything we do that’s new to us, it takes time to turn it into a routine. You need to adjust a little to plan for payments, but will like the numbers on your updated mortgage statement.

Consider Shortening the Amortization Period on your Mortgage

Source: Daryl Marsden

Today you can get 25 or 35 year mortgages. Some folks choose a longer amortization period to manage payments, but sometimes people have a small mortgage compared to their willingness or ability to pay it down and don’t realize they can shorter the amortization period on their mortgage to save themselves significant amounts of money.

This tip can be a bit more painful in the wallet, but it can also have dramatic effects on how much money you save in interest and payments. By reducing your amortization period by just 5 years you can save thousands of dollars.

You can instruct your bank to do this on anniversary dates or when your current term expires. Some institutions will allow you to change this at any time but may charge a penalty for doing so. Some banks will offer it as an incentive to attract new business.

Example:

Based on a $100,000 mortgage at 6.00% interest for a 5-year term amortized over 25 years.
Your montly payment would be $639.81.
You would pay $28,225.07 in interest over the first 5 years.
You would pay $10,163.50 in principle over the same 5 years.

Implementing a Shorter Amortization Period:
Based upon the same $100,000 at 6.00% interest for a 5-year term amortized over 20 years.
Your monthly payment would be $712.19
Your total interest paid in 5 years amortized over 20 years would be $27,527.47.
You would have paid a total of $15,203.93 in principle over the first 5 years.

What You Will Save:
Once again you save $697.60 in interest and save 5 years of payments.
You also pay an additional $5,040.43 in principle over 5 years.

This method could cost you $72.38 more each month, but look at the savings. Could you spare $72.38 extra to save you that much money and be debt free on your home 5 years sooner?

Looking Beyond the Mortgage Rate

Source: Allan Bowerman

Most people will define a mortgage purely based on the rate they receive, but that’s like judging the “best car” by the one with the lowest monthly payment.

It’s nearly impossible to predict your refinance needs three or four years out. Statistics show that well over half of Canadians with a mortgage renegotiate before their term is up.

So if you try to end your mortgage or move your mortgage prior to the current term (say 5 years) you may face larger than expected mortgage penalties or be restricted by mortgage limitations. Mortgage restrictions can easily outweigh small (e.g., 0.10% to 0.15 %) differences in interest rates. Did you know the average five-year borrower changes their mortgage after just three-and-a-half years?

That’s why it often pays to trade a slightly lower rate for more flexibility, unless you absolutely know that you won’t change your mortgage during its term. A cheap rate can certainly save hundreds of dollars up front, just be sure you won’t be paying thousands later.

Can you break your mortgage any time you want?

  • Most lenders let you pay a penalty and get out of a closed mortgage early. Some no-frills mortgages only let you out if you sell your property. Some don’t let you discharge your mortgage at all, until the term is up.
  • You’ll almost always pay a rate premium for an “open” mortgage with no penalties. If you plan to keep the mortgage for more than six months, you’re often better off choosing a lower rate and paying the penalty to get out early (if needed). The more you are borrowing, the more this applies.

If a mortgage penalty applies, how is it calculated?

  • Fixed rate penalties are usually three months of interest or the interest rate differential (IRD), whichever is more. This is the difference between what the bank would have made if the mortgage went the full term and how much money they are not getting paid by closing your mortgage rate and the current mortgage market rate. Variable-rate penalties are typically 3-months of interest based on your current rate.
  • Penalty calculations based on posted rates (i.e. rates higher the rate you actually pay) can sometimes be several thousand dollars more expensive. For example, instead of a standard 3-month interest penalty based on your current rate, some lenders charge 3-month interest penalties based on posted rates.
  • Others charge interest rate differential penalties when 3-month interest charges normally apply. A few even ding you with 12-month interest penalties or penalties equal to 3% of your balance. Avoid such mortgages unless the rate savings is significant.

Can I port (move) my mortgage to a new property to avoid penalties?

Never underestimate your odds of moving. Look for good porting flexibility, especially if you’re young, need job mobility and/or have a growing family. Some lenders let you port, but not increase. That forces you to pay a penalty if you buy a pricier house and need more financing.

Remember as well that that credit unions prevent porting across provincial lines, a problem if you move out of province. If you have been shopping for a mortgage and your lender hasn’t explained about porting your mortgage, terminating your mortgage or other situations when fees may apply, please take the time to review your options and potentially save yourself some money on your mortgage costs. 

 

Which Mortgage Saving Strategy is Best for You?

There are 6 options here to help you either negotiate or adjust your mortgage to help you save money over the long term.  Sometimes refinancing your mortgage or renegotiating your mortgage is an option and then it’s best to speak to folks like Darl and Allan to help you find the best option. If you are locked in with your current lender ask them to run some numbers for you to help you make the best choices to save money on your mortgage.