Mississauga Real Estate, Homes, TREB & MLS Blog by Mark Argentino: How can you save on the mortgage interest paid

Monday, June 02, 2008

How can you save on the mortgage interest paid

This page will give you ideas and examples on how you can lower the amount of interest you pay on your mortgage

Owning a home gives you many options. You get to choose the carpets, the paint colour, renovations and additions you make on your house. You also have opportunities to choose how you pay down your mortgage. Here are six ways to shave interest and time off your mortgage:

Increase your mortgage payment frequency
Shorten your amortization period
Increase your regular mortgage payment
Choose a mortgage with a prepayment option
Invest your tax refunds and cash windfalls
Keep your mortgage payments high

1. Increase your mortgage payment frequency*

If you increase the frequency of your mortgage payments from monthly to bi-weekly, your payment amount is halved. By making a payment every two weeks you then make one additional payment every year. That will cut your interest cost over the life of your mortgage.

Example:Mortgage amount: $200,000Interest rate: 5%Amortization: 25 years

	Total number of payments	Regular payment	Total payment	Total interest
Monthly payment	300	$1,163.21	$348,963	$148,963
Bi-weekly payment	650	$536.27	$348,577	$148,577
Interest saved				$386

2. Shorten your amortization period*

By shortening your amortization period to less than 25 years you can create big-time interest savings.

Example:Mortgage amount: $200,000Interest rate:
5%Payments: bi-weekly

Years	Number of payments	Total payments	Total interest
25	650	$348,577	$148,577
20	520	$315,072	$115,072
15	390	$283,411	$83,411

3. Increase your regular mortgage payment*

Increasing your regular payment helps you reduce your mortgage principal faster. And that means you save interest. Better still, you'll be mortgage-free that much sooner. A Citizens Bank mortgage lets you increase your payments up to 20% each year without penalty.

Example:Mortgage amount: $200,000Interest rate: 5%Amortization: 25 yearsPayments: bi-weekly

The table below shows the effect of increasing mortgage payments after only one year. Imagine what could happen if this was done in each year of your mortgage term?

Scenario	Bi- weekly pymnt	Total pymnts	Total intrst	Intrst saved	Yrs
No increase in payments	$536.27	$348,577	$148,577	N/A	25
Increase payments by 5% at end of first year	$563.27	$334,776	$134,776	$13,801	22
Increase payments by 20% at end of first year	$643.27	$306,799	$106,799	$41,788	18.5

4. Choose a mortgage with a prepayment option*

A prepayment option gives you the right to prepay specified amounts of your mortgage principal. A Citizens Bank mortgage lets you prepay up to 20% of the original principal. You can do this once each mortgage year without penalty. This may seem like a small thing, but even $100 applied against your principal will save you interest.

Example:Mortgage amount: $200,000Interest rate: 5%Amortization: 25 yearsPayments: bi-weekly

Scenario	Total payments	Total interest	Interest Saved	Years
No prepayments during normal term	$348,577	$148,577	N/A	25.0
Prepayment of $100 at end of each year	$346,307	$146,307	$2,270	24.7
Prepayment of $1,000 at end of each year	$328,872	$128,872	$19,705	22.0

5. Invest your tax refunds and cash windfalls

If you find yourself suddenly richer, think about investing the money rather than spending it. If you have a mortgage, you should consider making a lump-sum mortgage payment against the principal. Or, you could contribute the extra cash to your RRSP.

6. Keep your mortgage payments high

When the time comes to renew your mortgage and interest rates are down, the temptation is often to lower your monthly payment. But that can be short-term thinking. The short-term benefits will eventually be eaten up by extra interest charges.

If you're already making high mortgage payments, the smart choice is to keep them high. That way you'll pay off your mortgage faster. Your reward will be big interest savings over the life of your mortgage.

If you decide at some point to decrease your mortgage payments, you can do so at any time. You may, however, need to pay a small mortgage modification fee.

Note: CMHC (Canada Mortgage and Housing Corporation)If you hold a mortgage secured by CMHC, be aware of its limitations. CMHC mortgages do not offer you the flexibility to lengthen the amortization in the event that you find your payments are too high. When flexibility is important to you, consider using other techniques.

In conclusion

One of the best methods to pay down your mortgage quicker is to reduce your original or current amortization period and use accelerated bi-weekly payments. With these two options you will pay your mortgage off in about 17 years versus 25 years!

All the best,

Mark