3 Easy Ways to Save Money on your Mortgage
Posted by Gail | Filed under Home Buying, Saving
Your mortgage is likely the single largest debt you’ll every take on. And if you take a mortgage for $300,000 at an average rate of 5% and pay it off over 35 years you’ll end up paying $331,789.91 in interest. Wow!
There are ways to significantly reduce the amount of interest it costs and the time it takes to get to mortgage-free.
1. Choose an accelerated payment frequency. Most mortgages come with a vanilla-flavoured monthly payment. If you want to speed things along, choose the caramel-almond version: an accelerated weekly payment. Since you end up making an extra payment directly against your mortgage each year, you’ll save $70,003.63 in interest. That’s gotta be worth the extra thirty bucks or so you’ll have to come up with each week, dontcha think?
2. Shorten your amortization. The shorter your amortization, the more you have to come up with for each payment, but the less you’ll pay in interest overall. If you shorten a 35-year amortization to 30 years, you’ll save $55,430.90 in interest. Go with a 25-year amortization and save $108,345.42. Can’t swing the higher monthly payments every month? Then…
3. Make a principal prepayment against your mortgage. Most mortgages come with the flexibility to make an annual prepayment each year. It usually runs somewhere between 10 and 20% of the original mortgage amount. So on a $300,000 mortgage you could make somewhere between $30,000 and $60,000 principal pre-payment, assuming you could come up with the money. Hey, that’s what you can use a least a part of that bonus you’re getting for! But you don’t have to come up with a huge amount for the principal prepayment to work for you. You know that RRSP contribution you made that resulted in the $3,200 tax refund. Slap that sucker against your mortgage each year and you’ll save $112,348.58 in interest on that 35-year mortgage.
The Financial Consumer Agency of Canada has a terrific mortgage calculator tool that you can use to run your own scenarios to see just how much you can save on your mortgage. Spend a few minutes playing with the numbers. It might help you focus on a goal that will see your mortgage paid off up to ten years sooner! Invest a little time now and save a lot of time making mortgage payments, and scads of money too.
May 1, 2012 at 6:39 am
What about reducing your interest rate? You don’t want to ignore the 1st three ideas, but this is an important one too. I’m feeling pretty stupid, as we’ve been paying down the mortgage quite aggressively: extra payments each month, and then also at the end of the year. But: we haven’t gone to the effort of meeting with the bank to reduce our rate. We’re still at 5.5%. Probably quite dumb as quite honestly the extra interest rate we are paying may not even make up for the extra payments we are making!
May 1, 2012 at 6:44 am
Great tips, I did these things to get rid of my mortgage. I also did several Blend & Extends through out the life of my mortgage. I would watch out for a dip in mortgage rates and then go into my bank and have them blend my current rate with the a lower mortgage rate. By having a reduced rate and keeping my payments the exact same, it allowed me to get rid of my mortgage faster.
May 1, 2012 at 6:57 am
We paid bi-weekly when we bought our house in 1994 which dropped amortization from 25 to 19 years immediately. Then, four years later, the best thing that ever happened was interest rates tanked and we went from a 6 or 7 percent mortgage to around 4.5 – instead of going for the lower payments we reamortized and kept the payments at about $40 more than we had been paying – knocking almost 5 more years off the amortization. By the time of the next renewal, most of the payment was going towards principle and not interest that we just flowed with the lower interest rates by then and went for the lower payments. House paid in 14 years and we haven’t looked back.
We now put aside about half the money we spent on the mortgage into the house account for property taxes and household repairs and planned renos – being able to pay cash. The rest of what we used to put on the mortgage finances annual winter vacations in the Caribbean.
Freedom is no debt – and there’s even more freedom after paying off a mortgage.
May 1, 2012 at 7:44 am
Interesting points. Been doing all these. Not mortgage free yet but would like to add: when it came time to renew, we had a lower interest rate. He told me what the new payment would be and I said that I wanted to leave the payments the same. We could afford that and now, more money is going toward the principal instead of the interest.
May 1, 2012 at 7:57 am
Good advice. I had to figure this out myself years ago. I assumed an existing mortgage with 22 years to go on a 25 year amortization. At the first opportunity I reduced the amortization to 12 years, paid a lump sum and increased the monthly payments. I was able to pay the house off in less than nine years with one additional lump sum. I never calculated what I saved in interest, because I really didn’t know how to do the math, but I just knew that it made sense to get the mortgage paid off as soon as possible.
May 1, 2012 at 8:22 am
Good solid ideas for when we buy a house, Gail! Have you written anywhere (or maybe other commenters can help me) about what proportion of your savings to put in a downpayment? We are lucky to have quite a chunk of savings, more than we need for 20 percent down, but we don’t want to be foolish and put it ALL in the house. Or is this foolish?
May 1, 2012 at 8:37 am
Also, when you are renewing, SHOP AROUND! We make sure to check with different banks, and definitely with different mortgage brokers. It’s amazing the difference in interest rates. Even as a long time client at a bank, we got a better deal through a mortgage broker. Don’t go for the first deal your bank will give you – you can probably get it better elsewhere!
May 1, 2012 at 8:44 am
@Jen: Unless your prepayments are very small, they are doing more than a reduction of interest rate would – so take heart and maybe do the calculations if you’re concerned.
With regard to shortening one’s amortization, I’d actually recommend leaving it standard and making increased payments (most allow you to double up) to what one can afford each month. It has the same effect, but should something unexpected happen, one has the option of cancelling the increase. (Or in the worst case, some lenders like RBC will allow you to actually skip mortgage payments that you have doubled in the past.)
May 1, 2012 at 9:01 am
For those banking with RBC, this is what I did on my current mortgage. In 2009 we took a variable mortgage, amortization of 35 years. The original balance 343,974.00. The first thing I did after the first payment was to switch it to a WEEKLY ACCELERATED. Once that change was done and showed up on the online banking, I called back, and I asked for the payment to be increased by 10% (this new payment was based on the NEW WEEKLY ACCELERATED). Now, every year since then, we have been increasing our regular weekly payment by 10%. This has shed so many years off our mortgage and has saved us a ton of money. Today my mortgage is at 292,686.38, and the Actual Months Remaining: 150 (12.5 years). Obviously, if the interest rate move up, the years remanning might go up a bit, but in the meantime, we cut down 22 years of mortgage. (We did a lump sum last year of 10K, this accounted to 3 years less).
When I have an extra $ 100, I add it as a double up. In the past 4 years, I’ve done an extra 3 monthly payments as well. Every little thing helps.
Our mortgage is our only debt, and because our TFSAs and RRSP are maxed out, all extra money goes to the mortgage. We have a 6 month EF, a home account for reno-fixes, and our kids have an RESP that is funded by any credits received by the Feds or Prov gov. It cost out of our pocket about 60 per month. We make a less than average wage, but manage our money by budgeting and following Gail’s advise.
It is hard to budget and to keep on track, but it gives you options in life.
May 1, 2012 at 9:06 am
I think (within reason) that prepayment options are more critical than interest rates when shopping around. We’re paying 2.85% for a variable rate and could have got as low as 2.5%, except it didn’t come with the fancy prepayment options. Considering we both increase our bi-weekly payment and have made $10,000 in extra payments in the last couple months (small inheritance, plus tax refunds), we’ve more than made up for the difference in interest rates.
Oh, and one suggestion my parents made that has served us well – round up! Our biweekly payment should be $1148, but as of day one we arranged for a $1200 biweekly payment. A round number is simply easier to remember, and you don’t notice the loss of a small amount every couple weeks. If you’re that stretched to buy the house, then you can’t afford it – end of!
May 1, 2012 at 9:15 am
I do the bi-weekly accelerated payments. And every year I have increased my bi-weekly payments by the allowed 10%, which takes care of my yearly salary increase. I also use the points from my visa to buy the mortgage payments through the RBC.
May 1, 2012 at 9:21 am
@Bronwen, In my opinion, the more you have to put down on your home the less of a mortgage you have to take. Buy within your means and pay as much as you can with cash and get mortgage free sooner or if you have the luxury of saving longer pay for all of it in cash and live mortgage free….think of all that interest Gail was talking about…it would all be yours.
May 1, 2012 at 9:32 am
Have to add…when selling and buying again….dump most if not all (minus your fees and disbursements on closing) into the down payment of the new home. You’d be surprised how many still think to just put a bare minimum down and spend the rest! It sounds like a no brainer but many think that cash is best spent on “stuff” versus pouring it into the home. And don’t go bigger when buying. Get a good Realtor to find you what you desire and need but within or under budget.
May 1, 2012 at 9:42 am
We purchased our house last year for $330k with a BMO mortgage. We put 20% down and got a 20 yr mortgage at 2.73% with biweekly pymts. 11 months later we only have 8 yrs and 4 mths left on our mortgage. BMO allows you to increase your regular payment up to 20% each calendar year and 20% lump sum each calendar year. We have increased our payments by the 20% twice and have done the lump sums as well. We are on track to have the house paid off in 4 more years. It is an amazing feeling to see over 66k paid in principle in just 11 mths. I think BMO is top notch when it comes to mortgage options and getting you to mortgage free fast.
May 1, 2012 at 9:47 am
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May 1, 2012 at 10:00 am
When I bought I was only able to get a 35 yr amortization (dang low income). But I recently switched to bi-weekly payments so I can squeeze an extra payment in! I lined it up with my paycheque so the money comes out the day it comes in!
I also plan to add a monthly principle payment to my bi-weekly mortgage payments to really knock er down. When I get extra money, I try to pay down some principle that way too.
When it comes time to renew in a year I am going to try to negotiate some better terms for paying it down. I didnt have the selection the first time because I was higher risk and only one bank would take me. But now my income is doubled and my track record is perfect so I have some leverage behind me!!
May 1, 2012 at 11:03 am
We pay biweekly, rounded our payment up to the next even hundred dollars while still in the bank signing the papers, and make extra payments on a regular basis. Our next renewal is due September 1st so I’m researching whether or not to move to a different bank or stay where we are. This will be our last renewal and hope to have it paid off in the next 3-4 yrs.
Every Friday after pay is deposited and I’ve paid off that week’s VISA charges, I review the spending plan for the next few weeks to determine how much excess cash can be safely removed without causing a problem. If the markets are down (read on sale) I slide the money over to our RRSPs, if the markets are up I whack that cash against the mortgage. Every week I move whatever excess there is in the account, no matter how small.
Having our mortgage with our bank does make the transfers easy – just a click to move funds online from chequing to mortgage. Easy won’t be the deciding factor when it comes to renewing though. Five years ago at our last renewal they sent us a letter with our renewal rate, implying it was great… I spent 10 minutes calling three other lenders and got better rates with all the same prepayment options from every one of them. Our bank agreed to match the best rate so we stayed. This time I’ll be speaking to them well ahead of the Sept 1st renewal date. I haven’t chosen my words (or tone) yet, but the implication is that they get one shot to make their best offer. I won’t be giving them the opportunity to match what I can get elsewhere. With our history and credit rating there is no reason we shouldn’t qualify for their very best deal. I still feel like they tried to pull a fast one on me last time, assuming I wouldn’t check around and find out their offer wasn’t so terrific. No second chances this time.
May 1, 2012 at 11:24 am
Love your suggestions JMK! I agree banks should put their best offer forward right from the beginning. Still doesn’t hurt to shop around, but why let them get away with trying to be sneaky!
May 1, 2012 at 11:27 am
@Brownwen: I think it depends on what else were you gonna use that money for, if not the house? Calculate how much $ in interest you are going to save by putting it all on the mortgage, and if you can invest that cash so it guarantees (cos mortgage interest savings are guaranteed if you “put it ALL into the house”) an investment return that is higher than that, then by all means go for it. It’s hard to find such an investment though…
May 1, 2012 at 12:22 pm
@Bronwen – Don’t forget to leave yourself with a healthy emergency fund! We threw every penny to minimize our mortgage, and left ourselves with nothing for the emergencies that came up shortly after.
May 1, 2012 at 12:59 pm
Gail or anyone,
Why on the radio you told us that you would take a 10 year mortage?
We could have a 2.99% five year strating july 19 2012.
It does not make sense to me to go for 10 years at aroud 6%?
We have aprrox 158k and 20 years left.
Thank to anyone.
May 1, 2012 at 1:53 pm
We have 12 years and about $100,000 left on our 4.375% mortgage. As of July, we’ll have cleared out the last of our other debt which we’ve been paying down aggressively; we also have a solid emergency fund in place. At this point, I’m uncertain of the best way to achieve our goal of mortgage paid off. Refinance (again) to a 3% 10 or 15 year loan? Skip that and go right to additional monthly principle payments? The refinance is kind of a wash if we just make extra payments every month for 5 years. The refinance would be worthwhile if something happened in 5 years to impede our ability to make those extra payments. If we were to do nothing, we’d pay about $29,000 in interest over the next 12 years. Anything to diminish that is clearly a victory. Am I fretting over ‘nickles and dimes’, or is there a clear way to proceed?
May 1, 2012 at 2:29 pm
Gail not meaning to demean your message but don’t your examples require the non-existence of inflation? In other words, one dollar today is worth more than one dollar 12 years from now. So ’saving’ $55000 in payments you’d make between 2019 – 2026 is not exactly the same as saving $55000 in payments you make between 2011 – 2018.
May 1, 2012 at 4:16 pm
Not only is this great advice by Gail but I can’t get over how many smart people also have so many awesome ideas.
May 1, 2012 at 6:18 pm
@JMK…that is a renewal notice you get in the mail with the posted rates on them…you should also be getting a phone call from your branch to set up a meeting to do the renewal…at that time you can discuss rate…the rate they offer will be based on your overall financial portfolio …don’t be shy about asking for what you want…I always appreciate it when my clients let me know what they are looking for (and yes, if I can do even better than what they ask for I will)…the bank I work for has us calling our clients in the 120 days prior to the renewal date as that is the renewal cycle and you can renew at that time without penalty…so keep an eye on the date and if you haven’t heard from your bank in that time, give them a call and set up a meeting, you might just be pleasantly surprised:)
May 1, 2012 at 8:56 pm
We reduced our amortization at almost every renewal; pretty easy when interest rates were dropping and lower at every renewal; it’d be harder if rates were on the rise. Thus we were able to keep our payments the same. Our first renewal though, we lowered our payments. Sometimes life takes a turn that you didn’t want or expect. You do what you can, and make sure you’re not adding on to your mortgage with LOCs , etc. Our goal was to have our mortgage paid off before the eldest hits university. We’ll have achieved that goal. I’m not stressing about other things we could have done to shorten it further. Because other things would have been sacrificed.
May 1, 2012 at 10:00 pm
Thanks for the excellent post, Gail. And thanks to your readers for sharing their strategies for getting rid of the mortgages on their principal residences.
I’m hoping that you and your readers can give me advice and opinions on whether or not to use the same aggressive mortgage-paydown strategies in respect of my rental property.
The mortgage covers the condo’s expenses but I went with a 35-year mortgage at a rate of 3.75%. Should I be adding my money to the monthly rental amount in order to pay off the mortgage as fast as possible? Or should I keep the mortgage for as long as possible in order to reap the tax benefits?
Thanks in advance for your opinions, insights and advice.
May 1, 2012 at 11:14 pm
also @ JMK…Banks (all of them) are required to list the “posted” rate on renewal notices and not any specials or discounts. Call your Bank to discuss.
May 2, 2012 at 2:32 pm
@Geoff – if you have an interest rate lower than inflation this would be true. Current inflation in Canada is 1.9%. If you know where you can get a better rate on your mortgage, then go for it! Remember, interest rates go up as well as down. If you still owe $50,000 in 5 years, there’s no guarantee anyone will give you a rate comparable to today’s rates. But if you owe nothing, in 5 years you’ll be able to earn interest on the money you no longer owe, instead of dumping it all into debt repayments.
Think of it this way – there is a heck of a lot of room for rates to increase. And almost no room for rates to go down. They’ll never pay YOU to borrow money!
May 3, 2012 at 12:23 pm
Gail, the link to the calculator is broken. I went to your other link and found it, it is:
http://www.fcac-acfc.gc.ca/iTools-iOutils/MortgageCalculator/MortgageCalculator-eng.aspx
May 4, 2012 at 5:00 am
[...] Want to save money on your mortgage? Gail Vaz-Oxlade lists 3 Easy Ways to Save Money on Your Mortgage. [...]
May 4, 2012 at 4:57 pm
Very solid 3 Good ideas:)
Mine is almost done 15 months left give or take.
We put down 25% ( 11.5 years ago)
Then Once our car was paid off, we started to put that old payment onto the mortgage.
Then We again increased our morgage, and shortened the years.
We started out with a 25 years +
and will have it done in 13 years.
May 8, 2012 at 1:17 am
[...] 3 Easy Ways to Save Money on your Mortgage – Gail Vaz-Oxlade [...]
May 14, 2012 at 3:32 pm
Hi Gail,
I really enjoy your blog and show.
The mortgage calculator link is broken, it should be:
http://www.fcac-acfc.gc.ca/iTools-iOutils/MortgageCalculator/MortgageCalculator-eng.aspx