Save Money on Your Mortgage

I originally wrote this article in 2002 before the rates started their upward climb to where they are today hovering just below 7% for a 5 year posted fixed rate.   This series of options to help save money on your mortgage is valuable both to those paying current rates and especially to those that have not yet renewed. 

If you recently renewed or opened a newer mortgage at the higher rates, see what options may work for you to save some interest charges.

If you are paying a lower rate, see all the options but especially consider the section, “Prepare Yourself for Rising Interest Rates”. If the payments are too hard on your family then use the time to plan your next steps.

 All calculations below were made using the Mortgage Calculator from the Financial Consumer Agency of Canada.

Understand any administrative costs and penalty costs that could be associated with your mortage.

• Moving to a new home but keeping your mortgage to purchase a different home: 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? What if I move to a different province? Are there limitations if I want to increase or decrease the mortgage amount? What are the costs, fees and penalties that may apply?
• Selling without buying another property: 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? What penalties would I pay and how are they calculated? Ask specifically what the costs are if rates go down and the posted current rates are lower than the rates you are paying. If you do not hear the term ‘interest rate differential’ then ask more questions.

Work with a Lender that Allows Pre-payments

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 early.

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

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.