Nine steps to mortgage heaven
It is possible to get that debt paid off quicker. Here’s how
About 48 per cent of Canadian homeowners would have trouble paying their mortgage if interest rates rose significantly, according to a 2012 study by the Canadian Institute of Chartered Accountants. Of those, 29 per cent would struggle to cover an interest rate rise of two per cent or less.
“That’s not a lot,” says Lise Andreana, a certified financial planner based in Niagara-on-the-Lake, Ont., and author of No More Mac ’n’ Cheese!: The Real World Guide to Managing Your Money for 20-Somethings. “Canadians need to prepare for a higher interest rate environment, even if it is still a few years off.”
The good news? With careful planning and a little scrimping, you can pay down your mortgage quicker, improve your overall financial health and save yourself thousands of dollars in the process.
1. Go with the flow when it comes to interest rates. Right now, you’ll pay about 3.29 per cent for a five-year fixed rate mortgage (the interest rate is guaranteed for the term) and 2.4 per cent for a five-year variable mortgage (the interest rate fluctuates with prime rate), says Toronto mortgage broker Kim Gibbons.
“That’s almost one per cent difference.” Over the life of your mortgage, one per cent would save you about $12,580 in interest. The key: you should be prepared to lock in if interest rates start rising.
“If you’re risk-averse and you’re going to be monitoring rates on a weekly basis,” says Gibbons, “then a variable-rate is not for you.”
2. Get double duty from your RRSP payment. Most mortgages allow you to make a lump-sum payment of15 to 20 per cent of the original mortgage amount without penalty.
Can’t scrape together an extra cent? Gibbons suggests immediately plunking down your RRSP refund on your mortgage.
Just by paying down an extra $1,000 per year over one five-year term, you’d pay off your mortgage seven months sooner and save yourself $5,179 in interest, she says. (All calculations assume a $300,000 mortgage at 3.29 per cent amortized over 25 years.)
“Those funds go directly toward the mortgage principal,” says Gibbons.
3. Round up. “Even small increases make a huge difference over time,” says Gibbons.
Over the life of your mortgage, for example, bumping a $1,750 monthly mortgage payment to $1,800 would enable you to pay off the mortgage five years sooner and slash a hefty $24,200 in interest payments.
4. Count your pennies. It’s easier to save cash to pay down your mortgage if you think in terms of daily, rather than monthly expenditures. Aim to put aside an additional $14 per day, rather than $400 a month, advises Andreana: “If people are prepared to forgo a few of their daily luxuries, it adds up quickly,” she says. Afew ideas: dispense with a daily $5 cappuccino and opt for a brown-bag lunch. Take the TTC to work to save money on parking; opt for Netflix (you’ll pay less for a month of movies than you would for one night at the cinema) and browse the shelves of your local library for extensive (and free) reading materials. “When we’re working out a financial plan with clients, we try to identify the areas that are just draining money away with no return,” says Andreana. “It’s really not going to have dramatic impact on your wellbeing if you go without a latte.”
5. Pay weekly or bi-weekly as opposed to monthly. Consider that by paying $732 accelerated bi-weekly as opposed to $1,464 monthly, you’d save $696 in interest payments over each five-year term. “Most people get paid bi-weekly anyway,” Gibbons points out.
6. Become a landlord. In today’s overheated rental market, even a basement apartment brings in $800plus a month in Toronto. “If you want that detached house but you can really only afford a condo, sharing the cost will really help,” says Andreana.
7. Reallocate resources. Consider carefully before you commit to something like a Registered Educational Savings Plan. A contribution of $50 minimum per month would allow you pay off your mortgage five years sooner. Instead, why not suggest that doting grandparents and aunties ditch the idea of riding toys and Disney pyjamas for a contribution to an RESP, Andreana suggests.
8. If you’re renewing your mortgage at a lower interest rate, keep the payment the same.
“I have clients who started at 4.15 per cent on a variable-rate mortgage and there were times when it went down below two per cent,” says Gibbons. “They kept their payment at 4.15 per cent so all the excess went directly to the principal.”
9. Know when to back off. While resolving to pay off that mortgage is a noble goal, don’t overdo it to the extent that you’ve got zero cash flow and you’re running up your credit cards. While your mortgage likely carries an interest rate less than 4 per cent, credit cards may charge18 to 28 per cent. As a rule of thumb, says Andreana, “always pay off high-interest debt first.”