Select Page

Save Money on Your Mortgage

Chat with your mortgage broker, financial advisor and make the choices that are best for you. Calculations were made using the Mortgage Calculator from The Financial Consumer Agency of Canada.

Work with a Lender that Allows Pre-payments

 

There are a few strategies here on changes to your mortgage payment options and other details. The single biggest strategy is to ensure your mortgage is with a lender that allows you make these changes in the first place and that you understand all the options available to you. Some lenders offer a great rate, but then restrict your ability to modify or pay down your mortgage.

Ask your lender or mortgage broker the following questions and any others that may apply to your future self. It is ok to ask them to calculate some examples for you so that you can better understand.

  • What if I want to sell my current home and move to a new home within the term of the mortgage? Can I port/move my mortgage to a different property, or do I need to reapply? Are there limitations if I want to increase or decrease the mortgage amount? What are the costs, fees and penalties that may apply?
  • What if I get a job offer out of province and wish to move? Does my mortgage port out of Province? What are the limitations?
  • What if I wish to sell my home during the term of the mortgage and pay out the mortgage with the proceeds? What are the limitations and costs?

When you are already in your home with a mortgage and the term is expiring you may receive documentation from your bank to extend for another term. You don’t need to sign on for another 5 years if you know changes are upcoming. You can ask for a shorter term, an open mortgage and many other options that would avoid costs and penalties.

The Basic Example for Comparison:

All of the examples use the same example to make things easier to compare.
$375,000 mortgage – the amount you are borrowing from the bank
25 year amortization – the length of time to pay off the mortgage in full
5 year mortgage term, monthly payments – the length of time of the current payment details
3% interest – current interest rate
Fixed rate mortgage – the interest rate stays the same for the duration of the mortgage term

Over the 5-year term, you will have made 60 monthly (12x per year) payments of $1,774.67 and have paid $54,470.22 in principal, $52,009.99 in interest, for a total of $106,480.21. At the end of your 5-year term, you will have a balance of $320,529.78.

Over the 25-year amortization period, you will have made 300 monthly (12x per year) payments of $1,774.67 and have paid $375,000.00 in principal, $157,401.19 in interest, for a total of $532,401.19.

Change to Accelerated Bi-weekly Payments

 

This method is especially effective for those that get paid on a biweekly schedule. Your income and mortgage payments will line up and takes advantage of those extra paycheques a couple times a year when 3 paycheques arrive in one month.

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 on a rapid bi-weekly schedule. 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.

The original mortgage:

Based on our basic example your monthly payment would be $1,774.67.

You would pay $54,470.22 in principal, $52,009.99 in interest, for a total of $106,480.21.

At the end of the 5-year term you would have a balance of $320,529.78.

The total cost of the mortgage is $532,401.19.

Implementing a Bi-Weekly Payment:

You now would be paying bi-weekly payments of $887.37.

You would pay $64,109.36 in principal, $51,244.23 in interest, for a total of $115,353.59.

At the end of the 5-year term you would have a balance of $310,890.64.

The total cost of the mortgage is $513,062.67.

What You Will Save using an accelerated bi-weekly payment:

You will save $766 in interest payments over the first 5 years.
You will save $19,338.52 over the life of the mortgage and pay off your mortgage almost 33 months sooner.

You end up making two extra payments during each calendar year when there are three pay periods in the month instead of two.

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.

Topping Up Your Regular Mortgage Payment

 

Topping up your mortgage payments by $50 or $100 can make a big difference over the long term.

Using this method, you make an extra payment towards your principle with every regular payment by adjusting the amount of your monthly payment with your lender. 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.

It is a lot easier to pay a bit extra each month than let it sit in your account and not touch it until a ‘later’ lump sum payment.

The original mortgage:

Based on our basic example your monthly payment would be $1,774.67.

You would pay $54,470.22 in principal, $52,009.99 in interest, for a total of $106,480.21.

At the end of the 5-year term you would have a balance of $320,529.78.

The total cost of the mortgage is $532,401.19.

Implementing an extra $50 per month:

Your monthly payment would be $1,824.67  ($1,774.67 + $50.00). 

You would pay $57,701.07 in principal, $51,779.18 in interest, for a total of $109,480.25.

At the end of the 5-year term you would have a balance of $317,298.93.

The total cost of the mortgage is $525,461.70.

What You Will Save topping up your payment by $50:

First, you save $230.81 more in interest over the first 5 years.

Secondly, you save $6,939.48 in interest and pay your mortgage off 12 months sooner over the life of the mortgage.

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.

Take Advantage of Double-up Payments Offered by Most Banks

 

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.

The original mortgage:

Based on our basic example your monthly payment would be $1,774.67.

You would pay $54,470.22 in principal, $52,009.99 in interest, for a total of $106,480.21.

At the end of the 5-year term you would have a balance of $320,529.78.

Doubling a Payment Once per Year:

Your monthly payment would be $1,774.67 and you will have made an extra doubling payment once per year of an additional $1774.67.

You would pay $64,184.26 in principal, $51,169.33 in interest, for a total of $115,353.59.

At the end of the 5-year term you would have a balance of $310,815.74.

What You Will Save By Doubling Up a Payment per Year:

First, you save $840.66 more in interest over the first 5 years.

Secondly, you save $19,620.88 in interest and pay your mortgage off 34 months sooner than over the 25 year amortization of the mortgage than if you had made the same mortgage with no prepayment.

This option is almost the same as doing bi-weekly accelerated payments. It can be hard for people to save an entire mortgage payment to put down every year but others may find this a perfect use for an RRSP refund or other bonus funds.

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.

Consider Shortening the Amortization Period on your Mortgage

 

Today you can get 25 or 30 year mortgages. Some people choose a longer amortization period to have lower payments, but sometimes people have a small mortgage compared to their willingness or ability to pay it down and don’t realize they can shorten 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.

In this example we will compare the cost of a 25 year amortization (the original example) to a 30 year amortization offered by a lender.

 

Example 1:

The original 25 year mortgage:

Based on our basic example your monthly payment would be $1,774.67.

You would pay $54,470.22 in principal, $52,009.99 in interest, for a total of $106,480.21.

At the end of the 5-year term you would have a balance of $320,529.78.

The total cost for the mortgage over the 25 year amortization period is $532,401.19.

Compare to a 30 year option:

Your monthly payment would be lower at $1577.26.

You would pay $41,714.23 in principal, $52,921.35 in interest, for a total of $94,635.58.

At the end of the 5-year term you would have a balance of $333,285.77.

Because the interest accumulates for an extra 5 years the total cost of the mortgage over the 30 years is $567,813.56.

What extending to 30 years will cost you:

This decision to take a lower payment over a long period of time will cost an additional $35,412.37 to repay.

Example 2:

Instead let us say you can afford higher payments than the 25 year amortization offered by your lender. Let’s compare the original example of 25 years to a 20 year amortization.

The original 25 year mortgage:

Based on our basic example your monthly payment would be $1,774.67.

You would pay $54,470.22 in principal, $52,009.99 in interest, for a total of $106,480.21.

At the end of the 5-year term you would have a balance of $320,529.78.

The total cost for the mortgage over the 25 year amortization period is $532,401.19.

Compare to a 20 year option:

Your monthly payment would be higher at $2076.25.

You would pay $73,957.55 in principal, $50,617.74 in interest, for a total of $124,575.29.

At the end of the 5-year term you would have a balance of $301.042.45.

The total cost for the mortgage over the 20 year amortization period is $498,301.16.

What shortening to 20 years will save you:

Over the life of the mortgage you will save $34,100.03 in cost by changing from a 25 year to a 20 year amortization.

You will be able to burn the mortgage papers 5 years sooner.

Prepare Yourself for Rising Mortgage Interest Rates

 

A 3% mortgage rate is historically a very low rate. It will most likely go up and it is important to be financially prepared for that change.

It is exciting to buy your new home, but being house poor isn’t fun either when you then can’t afford the other things life offers.

A good way to get prepared is to calculate the difference and set it aside each month. Once you are comfortable then use that money for an extra prepayment on your mortgage. Or add it to your payment now and see the benefit of the principle payments going down before the rates increase.

The original 25 year mortgage:

Based on our basic example your monthly payment would be $1,774.67.

You would pay $54,470.22 in principal, $52,009.99 in interest, for a total of $106,480.21.

At the end of the 5-year term you would have a balance of $320,530.

The total cost for the mortgage over the 25 year amortization period is $532,401.19.

As rates increase:

The same mortgage with a 3.5% fixed rate would be a monthly payment of $1,872.26.

The same mortgage with a 4.0% fixed rate would be a monthly payment of $1,972.58.

The same mortgage with a 5.0% fixed rate would be a monthly payment of $2,181.02.

The same mortgage with a 6.0% fixed rate would be a monthly payment of $2,399.27.

The cost of rising interest rates:

Based on our basic example at a 3% rate the monthly payment would be $1,774.67 and the total cost of the mortgage over the 25 years would be $532,401.19.

At a 6% rate the monthly payment would be $2,399.27 and the total cost of the mortgage over the 25 years would be $719,782.45.

That is $187,381 extra that you have to earn.

Combining Strategies to Save on Your Mortgage

 

We all need a place to call home. We also need to be informed about what it costs us over the long term. It is so easy to get excited about home shopping and getting caught up in the excitement.

Take the time to see if any of these ideas can save you a bit of money in the long term.

There are additional strategies such as saving a bit of extra money for RRSPs and then using the refund to pay down on the mortgage.

These examples are generic. Run a couple of options with your own numbers and see what the impact could be. You can combine options to find a payment schedule that works best for you to save where you can and have enough money to enjoy life without going house poor.

 

May you always find your way home.

The Downsizing Myth

Throughout our lives most homeowners have lived in several properties. They often start renting, maybe own a condo or townhouse, and then move to a larger family home. A larger home allows some to raise children, enjoy the company of pets, entertain on the backyard deck, watch their children play in the yard and enjoy the dream of home ownership.

Once the children move on, it is often in the financial plans to sell the larger family home, extract some equity, and move to something smaller that is easier to manage. This is called the Downsize. The plan is to sell the larger family home for more money than the cost of the smaller home and bank the difference in market price using the funds as part of their financial future plans.

A single level home is called a Bungalow here in Calgary and it is a sought-after home for those downsizing. The problem is that financially, downsizing and extracting equity is a myth. I have had the misfortune of dispelling this myth to many families as I assisted with their downsize plans in my former profession as a realtor.

Why a bungalow?

As people age, they often prefer to avoid stairs and see the benefits of consolidating their household needs to the main floor.  Moving to a bungalow is about independence. It is about not having to go through the moving process again for as long as possible. People often told me that downsizing to a bungalow it is their last move or their last move until they are forced into a retirement home.  Many homeowners are surprised with they see the market value of bungalows in Calgary.

The challenges:

Bungalow numbers are declining

Older existing single level homes are regularly taken down and replaced with multi-level semi-attached duplexes especially in inner city communities. There are few, if any, bungalows built in newer communities these days.

Bungalows will have a larger footprint than a two story home of equal size.  There is little to no incentive for developers to build a decent size bungalow on a large lot when they could build 2 multi-level homes on the same size of property and increase their return on investment.

I wish I could provide detailed data to show you the number of single level homes available over time but neither the City of Calgary nor the Province of Alberta provides this information. The available information only focuses on single family vs multi family statistics. To see if for yourself take a drive around some local neighbourhoods.

There aren’t many single level townhouse or semi-detached options

Just like the demise of the construction of single level homes there are few single level townhome or semi-detached properties built in Calgary these days except for the luxury market. If you have $1 Million to spend on your ‘downsized’ townhouse bungalow there are options, but many homeowners were not considering spending 7 figures on a downsized property that meets their needs. There are existing single level properties in more mature neighbourhoods, but past clients found the pricing higher and homes older than they expected. It made the prospect of selling their current home less attractive.

The Apartment Option

Many homeowners that are ‘downsizing’ are not considering an apartment option due to pet restrictions; no room for hobbies such as music, a wood shop or gardening or just the change to daily life. It becomes the only choice sometimes due to cost. Sometimes people begrudgingly make the move and other times choose to remain in their existing homes instead.

Some people do look forward to an apartment option when they consider downsizing, but they are often surprised at the small sizes available and lack of options in their current communities. There are a large number of compact units but they are often not what people often expect when it comes to size, initial cost, and ongoing condo fees.  When considering most condo fees start at approximately $0.50 per sq ft then that 1200 sq ft condo can easily cost over $600 a month in condo fees.

One of the main pros for the apartment choice was the lock and leave lifestyle for snowbirds, those people that spent their winters in warmer climates. Other challenges homeowners had transitioning from a single family home to an apartment include:

Condos and Pets

Pets are family. Most condos, apartments and townhouse complexes alike in Calgary, restrict pets. There are some that allow pets but finding one that allows dogs over 20 pounds is often a big challenge.  Unless people are forced into a decision due to other circumstances, I have had most past clients tell me they will stay where they are for a while longer rather than have to give up a pet to make a move.  I once found a great single level detached townhouse for a client in a community close to where she was selling her family home.  She had a 12-year-old larger dog that spent his days going for walks and napping on her sofa. The complex denied the pet approval due to the dog size and she didn’t purchase the unit.

 

Lifestyle and Condo Rules

Condo rules are unique to each complex, but there are some general trends such as the pet restrictions mentioned, rules about what is allowed on decks and gardens, what can be parked or stored in the parkade, and noise limitations.  Some people love rules and all that makes them quite content. Other people really don’t enjoy being told what to do. In the end it depends on the tone of each condo board and how an individual complex is run and how that fits with each potential owner.

A unique challenge recently was a change at the provincial level which requires all condos to remove age restrictions other than those for age 55+. There will no longer be age 18+ complexes.

The rules come down to lifestyle and how people had planned to spend their time as they retire. If your plan was to tinker in the woodshop, build a garden, foster some dogs, or play an instrument then an apartment is probably not the ideal choice. It is about happiness after all and quality of life.

The specific Calgary planning process

This part is a little political so skip this section if necessary. In late 2021 I watched Calgary Council debate the development direction for this City and the ‘Guidebook for Great Communities’. This document has now been renamed the ‘Guide for Local Area Planning‘ if you want to find it.

Everything about it is a push towards density and multi-family housing and I just didn’t see any thought to the need for bungalows or single level homes in the process.

In the push for higher density living, it is forgotten that there are many that can realize an improved quality of life living on a single level such as those with various medical or mobility issues. The ongoing challenge of appropriate housing options will just increase as less single level supply makes it to market.  It appears the conversation of types of housing was ignored and the conversation focused more on density than on quality of life.

So why is this an issue?

Well, there are more people entering retirement age in the coming years than before as the baby boomers retire.  From statscan:

The proportion of seniors (aged 65 and over) in the population would increase from 17.2% in 2018 to between 21.4% (slow-aging (SA) scenario) and 29.5% (fast-aging (FA) scenario) in 2068. The increase in the share of seniors would be most pronounced between 2018 and 2030, a period during which all members of the baby boom would reach age 65 and over.

This is no small number.  As developers keep building more skinny townhouses across 3 levels and narrow multi level homes on narrow lots I wonder where all those that wish to age in place will go. The current environment may push some families into avoidable financial hardship, jeopardize safety by remaining in a home with mobility hazards or force them to move to a different city with more available housing options but further away from the support of family.   It all seems so predictable and requires active planning consideration. Unfortunately I don’t think it’s even on the radar at least locally.

The supply and demand challenge around single level homes will only grow.

I may have just burst the downsizing myth for you however it is better to find out sooner than later that there may not be an opportunity to cash out on the equity in your current home as you planned. You may opt to instead modify your existing home as needs arise or adjust your financial plans so you can afford to move to a single level home that meets your needs when you sell your existing home.

May you always find your way home.