How Much Difference Will Extra Payments Make Towards My Mortgage?
Jackson Middleton • December 5, 2019
Have you ever wondered how much difference extra payments actually make in paying down your mortgage? Let's take a look and maybe do a little math.
The first (and largest) factor to look at is the amortization, which is the remainder of your mortgage’s life. A majority of mortgages today start with 25-year amortizations. If you have made only regular payments for 5 years on a 25-year mortgage, your remaining amortization will be 20 years. Pretty simple, right?
Someone making an extra payment on a mortgage with 20 years left will save WAY more interest than someone making the same payment on a mortgage with 5 years left. The more years remaining on a mortgage, the more impact your extra payment will make.
The second factor to keep in mind is the mortgage interest rate. Your interest rate will change many times over the life of your mortgage, divided up by mortgage terms. If you agree to a 5-year term, you will only have that interest rate for 5 years, and then it will be time to renew at a different interest rate. At the time of this writing, mortgage rates are exceptionally low (even after some recent increases in 2018), and based on the last rate decision from the Bank of Canada on April 24/2019, they do not appear to be increasing anytime in 2019.
So what does that mean for you? Well, it depends if you are renewing this year, or 3 years from now. If you are renewing this year, you may want to consider your investment options for a lump sum amount, as opposed to paying down your mortgage. Paying down your mortgage makes the most sense when your amortization is high, and interest rates are also high (or going higher). If you’re renewing in three years time, then you may still want to consider paying down your mortgage, especially if you think mortgage rates will be higher at your renewal. The more you can pay when your mortgage is below 4%, the better payoff it will be if rates increase above 5%.
This is all conjecture and guesswork, especially when deciding between paying down your mortgage or investing more. However, mortgage rates have been abnormally low for a while now, and for whatever reason, the government of Canada selected a benchmark rate above 5% to qualify for a mortgage. Where interest rates go is anyone’s best guess, but it’s nice to be ahead of the game on your mortgage than trying to play catch-up with higher interest rates.
So let’s talk dollar amounts. For all of my examples, I’m going to use a $250,000 mortgage at 3.49% with 20 years remaining - that works out to a payment of $1445.40. If you switch to an accelerated bi-weekly, you’ll pay $722.70 every two weeks (half of the monthly amount), but you’ll save over $12,000 over the next 20 years because you will be making a couple of extra payments per year. Those payments really add up.
With the same mortgage (back on the regular monthly payment), let’s say you have $10,000 floating around your accounts, and you decide to use that money to pay down your mortgage. You’ll have saved around $9,500 in interest thanks to that payment. If you did BOTH the accelerated bi-weekly schedule and the $10,000 payment, it combines to over $20,000 of saved interest.
One more calculation with this mortgage - let’s say that, instead of any of the options described here, you decide to increase the monthly payment from $1445.40 to $1600 even. In just the 5 years time, you would save almost $6000 in interest over the life of the entire mortgage. But if mortgage rates stayed the same for the entire life of the mortgage, and you kept up the additional payment of only $154.60/month, you would pay off the mortgage 3.5 years sooner, AND save almost $15,000 in interest.
In summary, paying down your mortgage can feel good, both in your mind and in your wallet. It makes the most sense to pay down your mortgage when both amortization and interest rates are high. It can sometimes be difficult choosing between investing more and paying down your mortgage, but you can think of your mortgage interest rate as a guaranteed return, which is typically better than your GIC options.
If you'd like to discuss your financial situation and and want to review your mortgage to make sure you have the best mortgage available, contact me anytime!
Okay, so here we are... we have worked together to secure financing for your mortgage. You are getting a great rate, favourable terms that meet your mortgage goals, the lender is satisfied with all the supporting documents, we are broker complete, and the only thing left to do is wait for the day the lawyers advance the funds for the mortgage. Here is a list of things you should NEVER do in the time between your financing complete date (when everything is setup and looks good) and your closing date (the day the lender actually advances funds). Never make changes to your financial situation without first consulting me. Changes to your financial situation before your mortgage closes could actually cause your mortgage to be declined. So without delay, here are the 10 Don'ts of Mortgage Closing... inspired by real life situations. 1. Don't quit your job. This might sound obvious, but if you quit your job we will have to report this change in employment status to the lender. From there you will be required to support your mortgage application with your new employment details. Even if you have taken on a new job that pays twice as much in the same industry, there still might be a probationary period and the lender might not feel comfortable with proceeding. If you are thinking of making changes to your employment status... contact me first, it might be alright to proceed, but then again it might just be best to wait until your mortgage closes! Let's talk it out. 2. Don't do anything that would reduce your income. Kinda like point one, don't change your status at your existing employer. Getting a raise is fine, but dropping from Full Time to Part Time status is not a good idea. The reduced income will change your debt services ratios on your application and you might not qualify. 3. Don't apply for new credit. I realize that you are excited to get your new house, especially if this is your first house, however now is not the time to go shopping on credit or take out new credit cards. So if you find yourself at the Brick, shopping for new furniture and they want you to finance your purchase right now... don't. By applying for new credit and taking out new credit, you can jeopardize your mortgage. 4. Don't get rid of existing credit. Okay, in the same way that it's not a good idea to take on new credit, it's best not to close any existing credit either. The lender has agreed to lend you the money for a mortgage based on your current financial situation and this includes the strength of your credit profile. Mortgage lenders and insurers have a minimum credit profile required to lend you money, if you close active accounts, you could fall into an unacceptable credit situation. 5. Don't co-sign for a loan or mortgage for someone else. You may have the best intentions in the world, but if you co-sign for any type of debt for someone else, you are 100% responsible for the full payments incurred on that loan. This extra debt is added to your expenses and may throw your ratios out of line. 6. Don't stop paying your bills. Although this is still good advice for people purchasing homes, it is more often an issue in a refinance situation. If we are just waiting on the proceeds of a refinance in order to consolidate some of your debts, you must continue making your payments as scheduled. If you choose not to make your payments, it will reflect on your credit bureau and it could impact your ability to get your mortgage. Best advice is to continue making all your payments until the refinance has gone through and your balances have been brought to zero. 7. Don't spend your closing costs. Typically the lender wants to see you with 1.5% saved up to cover closing costs... this money is used to cover the expense of closing your mortgage, like paying your lawyer for their services. So you might think that because you shouldn't take out new credit to buy furniture, you can use this money instead. Bad idea. If you don't pay the lawyer... you aren't getting your house, and the furniture will have to be delivered curbside. And it's cold in Canada. You get the picture. However just in case you don't, I included it below.
So, you want to buy a home. Or maybe you want to sell your home. Either way, working with a real estate professional or REALTOR® is a really good idea. But with all the agents out there competing to earn your business, how do you find the right one? Here is a quick list of tips that should help you narrow down the list of potential suitors. From there, it's up to you! Do Your Research. Hands down, the best advice available is simply do your research. It sounds so basic, but regardless of how many more of these tips you read and follow, if you do your homework and gather as much information about working with a potential REALTOR®, you will lessen the chance of getting a dud while increasing the chance of finding someone who will really work hard for you. Ask your friends and people you trust. If you know someone who has recently bought or sold a property, ask them who they used. From there, ask about their experience, get them to explain both the positives and negatives, ask how the agent communicated, were they easy to reach, were they responsive. And so on. If you feel comfortable with their recommendation, get the agents name and proceed to google them. Just Google Them. This is great advice on almost any subject. If you are looking at hiring an agent, you will want to google them first. Don't simply look at the first few results, take a look a couple pages deep. You will be surprised by what comes up down the line, maybe they have been involved in legal action in the past, these things are good to know and discuss with them if you want to extend an interview to them. Check Out Online Reviews. A lot of sites like Google, Facebook, Yelp, and various local media publications will have sections where client testimonials are shared. Because these are shared publicly on independent 3rd party sites, they tend to be more reliable than say the testimonial section on an agents website. The more reviews you can find the better, just as you shouldn't let one rave review sell you, don't let one bad review deter you. The key here is balance. Check Out Their Website and Social Media Presence. It's no longer 2006, a good website that is mobile friendly is necessary. A REALTOR'S® job is to sell your property or find you the best property available on the market before someone else scoops it up. How they communicate online and how they use technology is a window into how well they will be able to represent you in an online world. You want to find an agent who is up to speed and understands how information is shared online. Check Out Their Credentials. Have they won any industry awards? Have they won any local awards or people's choice awards? There is probably a reason for it. Good agents tend to get recognized. Do they Sell Real Estate Full Time? In order to be extremely successful at selling real estate, they have to put in the time. It is very hard to do that working part time hours. You will want to find an agent that works full time in real estate so they are available when you need them to be. Have an interview. After you have spent the time finding an agent that comes highly recommended by friends, and you have done your research, you should have an informal interview to see if you get along with them. If you are looking to buy a property, you might want to meet in a local coffee shop in the area you would like to buy in and ask questions about the area. If you are selling, consider having the agent over to your property and have them provide you with an estimated sales price. You can also discuss their commission structure and the plan they would have to sell your place. Don't Feel Any Pressure. Finding a great agent is important, if you feel uncomfortable with someone, chances are other people will as well. Sometimes it works out and you simply "click" with a certain agent, while other times you might have to interview 3 or 4 agents before finding someone you want to work with. Not all agents are created equal, some are better than others, and some are A LOT better than others. The key to finding a great REALTOR® is to do your research ahead of time. Make sure this is someone you feel comfortable with. This will save you time, heartache and money down the road. The last thing you want to have to do is find another REALTOR® half-way through the process. Of course if you would like an introduction to a REALTOR® or two that I have worked with in the past and highly recommend, please let me know, I would be happy to pass some names on to you. Contact me anytime!
Recently the good people over at Nest Wealth published an article called "The Worst Money Advice We've Ever Heard". On the list was "Always keep a small balance on your credit card". What they have to say on the subject is spot on: Someone, somewhere, starting telling people that keeping a small balance on your credit card is a good idea… and unfortunately it stuck. Man is that terrible advice. Why would you want to purposely pay interest on something when you don’t have to? People claim it helps your credit score, and although credit utilization is a factor in determining your score (the balance on your card versus your credit limit), the idea that carrying a balance month to month helps you out is a myth. Paying your bills on time every time is one of the best things you can do to keep your credit score up. So although the idea of carrying a small balance to build your credit is nonsense, it is however a good idea to use your credit card at least once every 3 months (even if you don't have to). This will ensure the trade line is being reported to the credit agency and the card remains active. If you have any other questions about your credit, or you would like to discuss your personal financial situation, please don't hesitate to contact me anytime!