So you saved, you house hunted, you brought your mortgage professional all the paperwork they asked for. You get the call to come on in and sign the mortgage approval and you are excited and happy.
And then your mortgage professional shows you something so horrendous that you think surely the theme song from Psycho should be playing.
What is this terrible awful you ask? Well my mortgage minions I am going to tell you.
The terrible awful is the cost of borrowing. Lenders are legally required to show you just how much you will pay in actual dollar figures for the interest on your mortgage loan for each term and this number can be truly nasty.
Let’s look at a $300,000 mortgage at today’s best rates.
In the first five years alone you will pay over $40,000 in interest.
That’s a lot of moola. Without boring you with a series of math equations you should keep the following in mind. If the average interest rate over the whole 25 years is 4% you will end up paying $1.60 for each dollar you have borrowed. That feels like really great motivation to take a serious look at a few techniques to pay down your mortgage ASAP.
Pay 15% less in interest – how you ask? Choose a bi-weekly accelerated payment frequency. Your mortgage payment will be taken from your account every other week. But wait! Please keep in mind that there is a bi-weekly and a bi-weekly accelerated.
With the regular bi-weekly the lender will take the annual mortgage amount and divide it by 26 payments. This is convenient if you get paid bi-weekly and want your payments to come out on the same schedule. The misconception is that choosing the regular bi-weekly payment frequency will make you mortgage-free faster.
The difference with the accelerated bi-weekly is that you choose to pay a slightly higher payment on every payment. Remember the extra amount goes directly to the principle. This choice reduces your overall borrowing cost from $1.60 to $1.50 which adds up to 15% less in interest over the 25-year mortgage. Plus you get the benefit of being mortgage-free three years earlier.
A buck a day saves you $6,000. Say what? Your mortgage debt can feel insurmountable to say the least. If you put $1 extra each day or $365 a year you will be mortgage-free 11 months ahead of schedule. Assuming the same $300,000 mortgage you will save $6,000 in interest payments. Small is the new big.
You may not have a fortune to throw at your mortgage annually but I would bet you could round up your payments? If you were to round your payment up from $795 to $800 you would not even notice that slight change. But if we use the numbers above then you are all of a sudden on track to pay that mortgage out way ahead of schedule which will save you thousands of dollars in interest costs and allow you to celebrate the demise of your mortgage that much earlier.
Think outside of the number five. Most of us think in five-year increments when it comes to our mortgages.
Let’s get crazy for a minute shall we and think outside the five-year box. What if you choose a 24-year term at the start? That’s already one year off the mortgage.
And when your mortgage comes up for renewal? What if instead of just signing, you contact your mortgage professional to get you the best rate, and then take another year or two off? Instead of 20 choose 17 or 18.
Years gone and interest saved just by indicating a lower amortization.
Work that variable rate baby! Historically people who choose the variable rate do better over the life of the mortgage. What if you chose the variable rate but set the payment to match what the fixed rate would be on the same mortgage? The extra goes directly to principle and (say it with me) saves you thousands and gets you mortgage-free that much sooner.
Do it! Thinking about working out or eating better will not give you the same results as exercise and diet. According to the Maritz Research Poll only 32% of Canadians use their pre-payment privileges. It’s all well and good to have the intention of being mortgage-free ASAP but you need to act. Pick one or all of the above and starting planning your life after your mortgage.
Pam Pikkert is mortgage broker at Dominion Lending Centre – Regional Mortgage Group.