MORTGAGE PLANNING PROVIDES SAVINGS
There are plenty of ways home owners can pay down their mortgage and lower their costs. All that’s required is some strategic financial planning from the moment you start saving for your down payment.
“Depending on the type of mortgage you have, there are several ways you can save mortgage costs over time,” says Barry Gollom, vice-president, mortgages and lending at CIBC. “It should be something to think about even before you decide on your mortgage solution.”
The first order of the day is determining how much of a down payment you can make. The higher the down payment, the less you will pay over the lifetime of the mortgage. Inmany cases, a larger down payment will also reduce upfront costs such as mortgage insurance, which is a mandatory charge for down payments amounting to less than 20 per cent of the purchase price.
Another step is testing what you can manage financially, says Scott McGillivray, real estate investor and host of HGTV’s Income Property. “You have to educate yourself in the process of paying a mortgage and how to construct your financing. I always tell people to practice the discipline before they actually buy a new home.”
He suggests that a first-time home buyer open a separate account and put aside the monthly mortgage amount they would be paying. “Do that for six months or even a year. It gives you an idea of what kind of lifestyle you will have when you do own a home, and it’s a great way to save for your down payment.”
Once a home buyer is in the swing of payments, there are additional opportunities to save thousands of dollars over the lifetime of the mortgage. “Most mortgages are paid over 25 years. But that doesn’t mean you can’t reduce the number of years as you go,” Gollom says. “The shorter the mortgage, the greater the savings.”
Buyers can reduce their costs or amortization in a number of ways, such as increasing the amount of the mortgage payments, increasing their frequency, making annual prepayments, or prepaying at renewal.
By way of example, interest costs on a $250,000 mortgaged amortized over 25 years at a 2.99 per cent interest rate would total $104,550. “Paying down an extra $2,000 lump sum a year on your mortgage will save you $20,291 in costs over the life of the mortgage,” Gollom explains. “The savings could be higher if interest rates increase.”
He cautions homebuyers who planto reduce their mortgage commitments to pay close attention to prepayment terms before signing. “Prepayment privileges are extremely important, becausethey could lead to prepayment charges if you don’t follow the rules. You could even incur high fees for paying off a mortgage ahead of time with certain types of mortgages. Or you might only be able to pay off only five per cent of your principal annually.”
Saving costs isn’t restricted to lump sum payments, he adds. “You can save thousands of dollars by doing something as simple as switching to bi-monthly or bi-weekly payments instead of monthly. CIBC has an online tool that will help you calculate how much accelerated payments will reduce your amortization and costs over the lifetime of your mortgage.”
Using the same mortgage example, monthly payments would be $1,182. Accelerating those to biweekly (i.e. $591 every two weeks) would reduce the amortization to 22.2 years and save $13,000 in interest costs. “Bi-weekly payment is the equivalent of making one extra monthly payment a year,” Gollom explains. “The nice part is you can layer on multiple strategies for even more savings.”
Whatever the interest rates may be, having flexible mortgage terms is key, especially for people anticipating lifestyle or financial changes. Renewal time provides ample opportunities to pay down your mortgage or renegotiate payment terms in your favour, as well as change the structure of your mortgage moving forward, Gollom says. “At those points, it’s always a good practice to revisit the terms of your mortgage and discuss the various options available to you with your adviser.” THIS STORY WAS PRODUCED BY POSTMEDIA WORKS ON BEHALF OF CIBC FOR COMMERCIAL PURPOSES. POSTMEDIA’S EDITORIAL DEPARTMENTS HAD NO INVOLVEMENT IN THE CREATION OF THIS CONTENT.