Paying off a mortgage sooner
Dear
Money Lady Readers,
This week’s column came from a conversation with one of my ATML Partners,
Ana Cruz in Burlington, Ontario. Ana is a mortgage agent and shared a story about a good friend of hers who was able to reduce her mortgage and shed years off her amortization. Something we should all consider doing, especially due to the higher lending rates.
Here’s what Ana said: “In 2019, I reworked a mortgage for a friend who was buying out her partner with a new mortgage of $380,000. Let’s call this friend, Karen (not her real name and she did give me permission to share this story). In order to qualify, Karen would have to take a 30-year mortgage with monthly payments at $1,597. For the first year of Karen’s five-year mortgage term, she didn’t do very much other than move to accelerate biweekly payments. Now, you may think accelerated biweekly payments are a small change, but let me explain, this small move from $1,597 monthly to $798 biweekly means Karen could shave off 3 years of her mortgage and saved close to $9,000. The next year Karen increased her payments by 15%, ($120 bi-weekly) and made lumps sum payments of $3,000 every quarter towards her mortgage. After 5 years, upon her mortgage renewal, Karen’s mortgage balance was $312,575 with an amortization of 11.8 years. If she had only made her monthly payments on her original 30-year mortgage, she would have had a renewal balance of $337,668, and her amortization would be 25 years. Instead, by making a few simple changes and extra lump sum payments she had saved thousands of dollars in interest and reduced her overall amortization by 13 years.”
This is a great success story and one we can all do so simply. Often times we stick with the payment structure our banker or broker give us when we sign a new mortgage. We fit this payment into our lifestyle and don’t think about it anymore. Of course, this is to the benefit of the lender, not the borrower. Canadian mortgages are calculated “semi-annually, not in advance,” which means they are broken into two interest calculations with all banks working on a calendar year. So as of January 1, your interest is calculated based on the payment selection you chose, and interest is laid down over the first 6 months. On July 1, the mortgage balance is reviewed again, and interest is calculated on the remaining balance, based on your payment selection, until December 31. This is a basic analogy but demonstrates how Canadian banks calculate interest semi-annually. Obviously, the best payment selection to reduce the amount of overall mortgage interest would be accelerated weekly, and the best time to do your lump sum payments would be in November-December or May-June. Most banks provide on-line mortgage calculators for you to work out different payment options. At the very least, try to line up your amortization on your mortgage with the year you plan to retire since you want to make sure you are debt-free at retirement. For example, if you are 45 years old and want to retire at 60, then your mortgage amortization should be no more than 15 years. If you are able to manage the payments with an amortization to match your retirement, then push it a little more and go with accelerated weekly payments. After a while this payment should fit into your new monthly budget but be careful not to stretch your cashflow too much. Paying off debt, especially a big mortgage, is a tremendous accomplishment, one that we should all strive for sooner rather than later.
Christine Ibbotson is an author, finance writer and a national radio and television host. Send your questions through her website at askthemoneylady.ca