4 easy ways to reduce your mortgage costs
COLIN MCCONNELL / TORONTO STAR
Christina and Darryl George have a mortgage, but that doesn’t keep them from saving for their next one.
The Georges live in a two-bedroom condo across from High Park. In the next couple of years, they hope to buy a house west of Toronto.
They plan to use the equity they’ve already built up in the condo towards their next home. They want to save even more so they can make a bigger down payment. But that’s not the only reason.
“We want to make sure we have enough to fix the roof or the backyard if necessary, the kinds of things you don’t have to worry about in a condo,” Christina says.
When it comes to saving on your mortgage, there are lots of ways to cut your interest costs, such as making pre-payments and shopping around at renewal time. The best way to save is by borrowing as little as you can. The best way to do that is by making as large a down payment as possible.
For instance, say you’re purchasing a home for $200,000. With a down payment of 20 per cent, or $40,000, your monthly mortgage payment would be $930.57, according to the mortgage payment calculator at the Canada Mortgage and Housing Corp. Your interest cost will be $119,170, at an average interest rate of 5 per cent, amortized over 25 years.
But, if you can put down 25 per cent, or $50,000, your monthly payment would be $872.41 and your total interest cost would be $111,722 — a savings of about $7,400.
Related: Why loyalty doesn’t pay when it comes to mortgage renewal
Most mortgages offer pre-payment privileges that let you pay an extra 10 to 25 per cent, per payment or per year. Those payments go directly to the principal and can take years off your mortgage, but few people take advantage of it.
“The reality is that, on that $200,000, people don’t have $30,000 or $40,000 lying around at the end of the year, and they think a small amount won’t dent anything,” says David Stafford, managing director of real estate secured lending at Scotiabank.
“But slow-and-steady wins the race. You don’t have to make major lifestyle changes or gargantuan transaction amounts, in this market with these rates, to have a big impact.”
Think of it this way: Financial planning experts say that, when it comes to saving for retirement, it’s best to start early and save often, even in small amounts.
The same principle applies to money that you owe for 25 or 30 years, Stafford says. “That extra payment goes to the principal, yes, but if you think about where that dollar gets applied, it’s the last dollar. It’s the one you’re going to pay interest on for 30 years.”
To illustrate the impact of small changes, here’s another simple example using a $200,000 mortgage amortized over 25 years at an average rate of 5 per cent.
Simply changing from monthly payments to accelerated bi-weekly payments will pay off the mortgage about four years sooner, with an overall savings of more than $25,000 in interest.
Also consider this advice: If your mortgage is up for renewal and you’re paying rates from five years ago, get the current lower rate, but don’t be in a hurry to change your payment.
For instance, if you’re renewing a mortgage from five years ago and your rate is 5.75 per cent and your payment on a $200,000 mortgage was around $1,200, at today’s rates, it would drop to about $900.
“If you can keep making the $1,200 payment, keep going, because, every payment, you’ll be whacking an extra $300 off your mortgage balance. You could literally take years off your mortgage in the next five years,” he says.
It’s typical for first-time homeowners to shop around to get a good rate on their mortgage, but that advice also applies when your mortgage is up for renewal.
People may not realize how much they can save by shopping around, says Alyssa Richard, chief executive officer and founder of RateHub.ca
Canada Mortgage and Housing Corp.’s 2011 Mortgage Consumer Survey found that 88 per cent of homeowners stick with their lender upon renewal. That may not mean they’re getting the best deal, Richard says.
“At renewal time, some lenders send a letter in the mail that says, your mortgage is coming up for renewal, sign here. The bank has posted rates, but may not list the lowest the rate on the market. When they get you into their office, they have some bargaining power there.”
Research from the Bank of Canada found that new bank clients receive larger discounts than existing clients.
When the Georges bought their condo last year, they opted to go with a variable rate mortgage of 2.25 per cent. “We decided to stick with variable and it’s been good so far. We can lock in any time if we want to,” says Christina, 25.
They are also making accelerated bi-weekly payments. “That way we can save a lot on interest,” she says.