Know How Much Mortgage Interest You Will Pay Over 25 Years? Nobody Else Does Either. Here's How To Change That.
Thirty-five years is the maximum mortgage amortization period allowed in Canada, yet, this number will often fluctuate for each individual borrower because some people prepay their mortgage before the total amortization period has ended while others make the terrible and common mistake of inadvertently resetting their original amortization period keeping them trapped in a lifetime of mortgage repayment.
Either way, not many Canadians know how much mortgage interest they will pay or that they have paid on their mortgage loan. This obviously creates financial setbacks during the mortgaging process which will be discussed here.
A mortgage commitment or contract usually allows borrowers to prepay their mortgage in two different ways. The first way is through added extra payments to each scheduled mortgage payment and the second way is through lump-sum payments made each calendar year.
In Canada, although the mean amortization is quite lengthy, a mortgage is only allowed in terms, which cannot exceed 10 years. The most popular mortgage term is 5 years. In contrast, in the United States, a mortgage term is the same length as the amortization period which can simplify the math about how much total interest will be paid. This can help borrowers plan their prepayments more effectively and avoid common pitfalls that re-mortgaging and renewing present.
In Canada, a borrower could have up to 30 (think one-year mortgage terms) different mortgage terms within their total amortization period making it difficult to keep track of how much interest they are paying or have paid.
One area we see this, in particular, is mortgage renewals on the mortgage maturity date. For example, a mortgage may be initially set up at a 25 year amortization and so on the first maturity date of the first term, the remaining effective amortization is 20 years. A borrower will renew with another financial institution for a better rate but instead of renewing at the remaining amortization of 20 years, they re-set their mortgage amortization to 25 years because the monthly payments appear to be less.
What they have done in this instance is effectively reverse the progress they have made with respect to principal payments and unknowingly establish a way to pay far more interest. Remember: ‘Mortgage interest’ is considered top-heavy with most interest being paid at the beginning of the mortgage amortization period.
All things being equal, a borrower should not be deterred from renewing their mortgage with a better interest rate and with another financial institution if they are offering one since paying less interest is extremely cost-beneficial in the long run. They should, however, be extremely cognizant of the remaining amortization period at the end of their existing mortgage term and be cautious not to revert back to the original timeline allowed for repayment.
Additionally, each time a borrow renews their mortgage or refinances (borrowing more money against their property) they should obtain a copy of the amortization summary which outlines how much interest is paid during the term. If any prepayments are made during the mortgage term, borrowers should request a revised amortization summary for their records.
It’s not uncommon for banks to fail to provide revised amortization summaries to clients in person or by regular mail and the onus usually falls on the borrower to tally up the interest they are saving and paying. Of course, this can leave wide open areas for borrowers to falter on their mortgage repayment, which is the likely reason more people are indebted to financial institutions for much longer than they’ve hoped or even realize.
As a mortgage professional governed by the Financial Services Commission of Ontario, it is our mandate to provide amortization summaries at each step of the way. One of the benefits of working with an independent mortgage professional is the added service that is provided within the consultation area.
Have questions about your mortgage? Feel free to contact us at 647-773-4849 or by email at email@example.com.
Together, we can achieve mortgage-free for you!
The line of credit is therefore a profit-making instrument that accentuates the banking model and often at the expense of the misinformed consumer.
Major banks mandate the sale of secured lines of credit because they generate significant annual profits for banks and shareholders. According to Royal Bank of Canada’s 2016 Annual Report, RBC had secured just over $41 Billion of collateralized lines of credit products on real estate across Canada.
Because a line of credit is an open credit product, it's technically supposed to be used to borrow short-term funds that can be repaid relatively quickly or to provide an interim hedging strategy, for example, and yet, today, many borrowers are stuck making long-term interest-only payments at double the current interest rates, instead.
According to CIBC’s website, “a line of credit is for you if you want":
A borrower can indeed find all of these claims enticing but that doesn’t mean a line of credit facility remains the best financial product for them or even the wisest for that matter.
Unfortunately, there is not much research that exists that studies the spending habits via the line of credit after borrowers get approved. There is only anecdotal evidence that can be provided by the professionals who work within the financial industry who can objectively verify the results and who currently work to help borrowers who have found themselves in a hot spot.
For example, some important questions which are often not asked by financial banking representatives include:
When it comes to banks and profits, it’s evident that banks only want to make money and banking representatives are not trained to deliver the vital learning that is required to help borrowers make the best financial decisions.
Unfortunately, many borrowers currently stuck in the line of credit trap haven’t caught on to the fact that the secured line of credit product is often useless if it can’t be repaid in a short period of time (and in most cases it can't) because it will likely transform into an expensive monthly interest-only payment that doesn't pay down mortgage principle in the long-run.
The line of credit is therefore a profit-making instrument that accentuates the banking model and often at the expense of the misinformed consumer.
In closing, the financial sector is well aware of the dangers lines of credit products expose borrowers to such as “having access to additional credit that doesn’t cost anything until it can be a hard temptation to resist, especially when the interest charges on lines of credit are still low”, the impact of rising interest rates, and the inability to repay the money borrowed. And yet, despite the financial risks to borrowers, they are still sold over and over again to those who don’t fully grasp all of the benefits and disadvantages.
Therefore, if you or someone you know have a line of credit that is currently costing more money than anticipated, we can help. Contact us today.
Rbc.com. (2019). [online] Available at: http://www.rbc.com/investorrelations/pdf/ar_2016_e.pdf [Accessed 9 Nov. 2019].
Personal Line of Credit | Lending | CIBC Cibc.com. (2019). Personal Line of Credit | Lending | CIBC. [online] Available at: https://www.cibc.com/en/personal-banking/loans-and-lines-of-credit/lines-of-credit/personal-line-of-credit.html [Accessed 9 Nov. 2019].
The hidden dangers of using a line of credit to consolidate debt The Province. (2018). The hidden dangers of using a line of credit to consolidate debt. [online] Available at: https://theprovince.com/opinion/columnists/the-hidden-dangers-of-using-a-line-of-credit-to-consolidate-debt [Accessed 9 Nov. 2019].
Borrowers Can Now Get A Mortgage Loan in 24-28 hours Without An Appraisal, Lawyer Or Income Verification.
If you need a loan of $40,000 or less, here's a solution for you that doesn't require a lawyer, an appraisal or income verification.
The Prompt Financial (“Prompt”) loan has recently been made available by Prompt Financial through the broker channel in Ontario.
The main benefits of the loan, which can range from $5,000 to $40,000 (recently increased from $30,000) is the short turnaround time for funding. Funds are directly deposited into a borrower's account in 24-28 hours. In addition, borrowers can be approved without income verification, a property appraisal or even the need to incur costs associated with hiring a real estate lawyer. Add this to the fact that it reduces the total cost of borrowing, the Prompt loan is surely a win.
In order to qualify, borrowers must meet the following requirements:
Why is the Prompt loan better than a private mortgage?
Although private mortgages are usually approved based on equity alone, which does make it easier for borrowers to qualify, a private mortgage still requires an appraisal and a lawyer to register the mortgage on title.
Additionally, private loans have stricter, more rigid terms. For example, most private lenders do not allow prepayments without a three-month interest penalty and tend to include other built-in costs in the commitment which can drive up the total cost of borrowing. Although Prompt’s loan also has fees involved, the base interest rate is substantially lower than that of a private lenders’ and it is considered “open”, which means it can be repaid at any time during the term without penalty.
If a borrower requires $40,000 or less, the Prompt loan is a no-brainer.
If a borrower is looking for a loan that is $40,000 or less, the Prompt loan can be a very convenient solution.
Private mortgages can take weeks to administer and fund due to the different steps needing to occur in order to successfully complete funding.
These can include an appraisal being completed to verify property value, the time it takes the mortgage file to be sent to a lawyer (sometimes two lawyers when a different lawyer is required to act on each side), the final signing at the lawyers’ office and the completion of final registration through land titles. In contrast, the Prompt loan is deposited directly into a borrower’s account within 24-48 hours without the added legwork and timelines.
It Saves Borrowers From “Breaking” Their Existing Mortgage.
Most borrowers tend to seek out refinancing when they need some extra funds to perform a complete debt consolidation, or to fund a project such as a renovation or a child’s education. Refinancing can be costly because in addition to having to pay for an appraisal as well as a real estate lawyer to register the new mortgage on title, borrowers are often subjected to prepayment penalties by their existing financial institutions which can range from a few thousand dollars to $20,000 or more depending on their original mortgage amount and the interest rate differential calculation charged by their financial institution.
When the penalty is deemed too costly, borrowers tend to be inadvertently pushed to borrow from alternative or private lenders which can add substantial costs to the entire mortgage process.
The Prompt loan allows borrowers to access money quickly and conveniently without sacrificing the interest rate held on their first mortgage or paying any penalties to break it early.
What Are Some Reasons Someone Would Need A Prompt Loan?
The Prompt loan can provide fast money in the following situations:
How To Apply.
It’s very easy to apply for a Prompt loan. Simply fill out the application HERE, and have the following documents on hand.
Driver’s Licence or other Government-issued identification.
Once the application is completed, we will call you to finalize the process on the same day. If approved, funding will be completed within 28 hours right into your bank account.
In Canada, the minimum downpayment required to purchase an owner-occupied home is only 5% of the purchase price if it is under $1M. Yet, despite the requirement, many purchasers still want to know how much they “should” put towards their purchase price if they have more than 5% down.
In the past, the general mentality about mortgage loans was to pay them off immediately because having a larger mortgage meant much more interest paid to the banks, especially if it was amortized out over twenty to thirty years.
But with mortgage interest rates at an all-time low, does this approach to paying off one’s mortgage still work and make sense? If investments can now yield 7-13% returns, would it make sense that someone pays 3% in mortgage interest, instead?
A common reality that home buyers experience is becoming “cash poor.” According to the Vancouver Courier, “Over half of Canadians live paycheque to paycheque, and carry credit card debt.”
Therefore, it’s important that a purchaser asks two fundamental questions: 1. How much money down is absolutely required to qualify for a mortgage? and 2. Is there any possibility of keeping a portion of it in the bank instead?
Why it's smart not to deplete your savings account on closing.
Unforeseen circumstances are often lurking around the corner after the purchase of a new home such as unexpected maintenance costs, repairs or some other financial emergency. Without a rainy day fund to combat the unpredicted, homeowners can easily fall prey to the “credit card trap”, having no choice but to tap into their credit cards to pay for the expenses, and can therefore get stuck making minimum payments.
Depleting one’s savings is never a good idea and it’s important to understand all the options that exist when purchasing. Speak to a mortgage professional like myself about qualifying, and how much of a down payment is required.
A common misconception is that borrowers have to use all of their savings towards their down payment but it may be possible to set some of it aside.
Maintaining liquidity is very important and should also be considered when making an offer to purchase and contemplating one’s downpayment.
A Rent To Own is an Agreement that involves a plan to move towards property ownership.
The Agreement is usually between an Investor who owns a property and a Tenant. Unlike a standard lease agreement, a Rent to Own allows the tenant to have the “option” to purchase the property after a certain amount of time has lapsed for a predetermined sale price.
Investors can use this strategy to sell their home for a very fair price while capitalizing on rental income and homebuyers can use it to buy time to work through issues that may prevent them from obtaining mortgage financing such as having bruised credit or an insufficient downpayment.
Usually, the tenant will have to put forward an upfront “premium” or a small part of what would eventually make up their down payment to purchase the property. Typically, at the end of the Rent To Own Agreement, the tenant can choose to purchase the property for the pre-determined sale price or not.
How Does A Rent To Own Work: the logistics.
Why Rent To Owns Fail...for Tenants.
Rent To Own Agreements have a high statistical probability of not working in the tenant’s favour, which is why they have often been considered lucrative business endeavours for investors willing to bet on the odds that tenants won’t complete the transaction.
If tenants fail to purchase, their initial premium would be forfeited as well as the extra money they paid each month towards their down payment.
Inflated Monthly Rent With A Portion To Act As A Downpayment
Firstly, tenants are required to pay an inflated rental fee. A portion of it is saved by the landlord, and the accumulated money is set aside as their downpayment.
What happens if the tenants cannot purchase the property after all?
One of the major disadvantages of "Rent To Owns" is the fact that should the tenants not be in a position to complete the purchase transaction as agreed, the money that was set aside to act as their downpayment would likely be forfeited in addition to their initial premium. This practice has often undermined the benefits of rent-to-owns since tenants could walk away empty-handed while their landlord was able to turn a large profit.
Overcoming the reasons for agreeing to Rent To Own
Most people who want to purchase a home know they have to save a downpayment in order to get mortgage financing. But more importantly than just savings, the reasons people enter rent-to-own agreements is to buy time to overcome difficult circumstances such as bruised credit, unemployment or income verification. All of these situations cannot be guaranteed to be fixed before the agreement date arises and can leave tenants at a major disadvantage and unable to fulfill their end of the bargain. Further, many tenants are unaware of lender guidelines and the hesitancy to approve financing of "rent-to-own properties. "
This largely has to do with what is considered acceptable forms of downpayment which must come from personal resources, gifted money, etc. If the landlord, who is the owner of the property is also giving the down payment back to the purchasers, this can disqualify the transaction altogether and often does.
Rent To Own Agreements can be as long as five years, which can create several opportunities for changes to the real estate market to affect property value. If property prices go up, then this could be a win for tenants. If they go down, however, tenants may find themselves in a position where they either have to buy an expensive, overpriced home or lose the money they put it into it by way of forfeiture.
It is a Contract.
Tenants must not forget that a Rent-To-Own Agreement is a contract, and like any signed contract, all parties must uphold their end of the bargain. If not, legal action can ensue. It is imperative to have ALL contracts reviewed by a lawyer to ensure all terms are carefully understood and considered.
Mortgage Financing For Rent-To-Owns
Not all lenders will approve rent-to-own purchase transactions and this can create a lot of headache near the end of the rent-to-own agreement that may result in a failed successful purchase. It's a critical step in the process for anyone thinking of getting into a rent to own to verify prior to signing the contract whether or not they can get mortgage financing.
Sarah A. Colucci is a Mortgage Agent with Mortgage Edge
She has extensive experience with Rent-To-Own Agreements.
Here's Some Advice From A Member of Million Dollar Round Table (MDRT): Meet Iryne Thian, Certified Financial Planner.
Many Canadians struggle with financial planning for their future. But as we must all retire at some point in our lives and slow down, it’s important to have a plan that allows for a comfortable lifestyle at an older age.
As a mortgage professional, I always emphasize the importance of not only becoming mortgage free while leveraging real estate to one's financial advantage but also saving sensibly.
I recently had an opportunity to interview a very well-known financial planner who has worked with insurance companies such as Sun Life Financial and currently Assante Wealth Management, about her take on financial stability.
Meet Iryne Thian.
Q. Can you tell us a little bit about yourself? When did you start? How long have you been in the business? What associations are you apart of?
A. My name is Iryne Thian, and I am a certified financial planner and wealth advisor. I have been in the financial industry for over 20 years. I manage two things: money and risk. I assist people in making clear financial choices for investments and insurance. My clients don’t hire me to make them rich — they hire me to make sure they are never poor. Most of my clients today come from referrals of satisfied clients. My areas of specialty involve planning for individuals, families and small businesses.
As a member of The Financial Advisor Association of Canada (Advocis) and Financial Planners Standards Council, I have earned several professional designations including Certified Financial Planner (CFP) in 2003, Elder Planning Counselor (EPC) in 2005, Certified Health Insurance Specialist (CHS) in 2011, Chartered Life Underwriter (CLU) in 2014 and Certified Professional Consultant on Aging (CPCA) in 2018. Since 2005, I have been a qualifying member of the Million Dollar Round Table (MDRT), an international association representing the world’s top sales professionals in the life insurance-based, financial services industry.
Q. Where would you say people go wrong with most with their finances? What are they investing in that they shouldn't be? Where could they be getting more returns?
A. One of the biggest challenges today I find is the lack of financial literacy a and the plethora of options and products out there. People often find it difficult to navigate through all the financial and tax considerations to arrive at what is best for their situation. That’s precisely why it’s important to seek a trusted professional to help assess your current state and needs, along with your future goals, to guide you through this process.
As a financial planner, my practice is to:
1. First Identify my clients goals, dreams and challenges.
2. Help them understand the financial implications of the life decisions that they make.
3. Educate on the products and services needed to achieve their goals.
4. Work out a personalized plan and put them in place.
5. Monitor as time goes by.
No one can promise future investment returns. What I can offer to my clients is the peace of mind in regards to their (and their family's) financial well being.
Q. In your opinion, what is the biggest misconception people have about investing and financial planning?
A. While investing can impact the success of your financial plan, and sometimes dramatically, it is not the sole determinant. Investing is only one of the many key components to a solid financial plan.
Investment planning is about creating an investment plan and sticking to it. An investment advisor will factor in the client’s unique risk profile in recommending a diversified portfolio aimed at maximizing returns given their risk tolerance. An investment advisor can help their client stay the course and/or make necessary adjustments during market volatility.
Financial planning involves a holistic approach that takes into consideration every aspect of a client’s financial life. Other than investments, a comprehensive financial plan also involves budgeting, insurance, taxes, estate and retirement planning etc. By taking all these into account, you will be able to create effective strategies for meeting your short and long-term financial goals.
"I describe myself as a financial pilot. When I first meet clients, I often find that they are at the wrong airport or about to get on the wrong aircraft. My job is to help the financial traveler arrive at their desired destination safely, on time and with everything they could possibly need - including a parachute. After all, there can be turbulence."
Q. Where do you think people struggle in terms of money in the bank/savings...?
A. Revisiting my comment about the general lack of financial education, many risk-averse people believe that “saving” is just regularly setting aside money in their bank’s saving account or spending less money. What they don’t realize is that in our low interest rate environment, the money in our bank accounts are shrinking in value – also known as Inflation risk or purchasing power risk. What you used to buy with $10 you can no longer buy with the same $10 because its shrunk in value or purchasing power. It’s important to be informed of our options based on our unique situations.
Q. What advice would you give to first time home buyers and people who are already homeowners?
A. Be aware of your financial situation and properly assess the impact that a home purchase or any other big purchases would have on you and your family’s financial well-being. Every client and their situation is unique so it is hard for me to give generalized advice.
I consider Iryne to be a trusted source for financial planning and I would not hesitate to refer her to anyone looking to create a successful investment portfolio.
Please call my office for more information.
Sarah A. Colucci
Mortgage Agent Lic. M14000929
Mortgage Edge, Broker 10680
In partnership with Iryne Thian, Certified Financial Planner.
CMHC's Shared Equity Program targets those who are likely to know very little about real estate, equity and mortgages.
The Shared Equity Program targets those who are likely to know very little about real estate, equity and mortgages.
Not many astute homeowners feel 'warm and fuzzy' about sharing their property ownership with anyone let alone the Government of Canada. First-time buyers may not realize that's exactly what CMHC's shared equity program is - it's sharing ownership of property and the profit/potential loss of property value with the Government in addition to having to pay back its second mortgage within twenty-five years.
Although this program can be enticing for new buyers because it boasts help with affordability, is interest-free and doesn't have to be repaid for a long time, it hasn't been very helpful in the long run as we have seen in other countries where it artificially drove prices up and created problems for homeowners who decided to later sell and/or refinance. And like any second mortgage, it will likely come with plenty of red tape, which can put homeowners in a bind.
By targeting the group of the home buyers who know the least about real estate, equity and mortgages, first-time buyers should be made aware of what this program can mean for them now and in the future.
It's no secret that first time home buyers tend to refinance their mortgage or sell their homes within the first five years of purchasing. Naturally, as their families get bigger, jobs change and lifestyles demand more, it's not unusual for them to either perform a major renovation, debt consolidation or move into a larger home. So it's likely this second mortgage from the Government will have to be repaid much sooner than twenty-five years since refinancing or selling with trigger a mandatory repayment of the loan.
And since the Government will expect their share of the profit, even in a refinance situation, this can hamper plans and dimish gains. So, as you can see, although the program boasts itself as interest-free, it clearly still does come with a price tag when the Government is expecting to share in your profits!
Furthermore, the accessibility to interest-free second mortgages may very well drive up property prices making homeownership all the more unattainable for the cohort of purchasers who need it the most. So think about it. While a purchaser may save one to two hundred dollars on their mortgage payment, they can also expose themselves to red tape and turmoil in the future along with giving away more than they bargained for!
I'm Sarah Colucci from Mortgages by Sarah! Let me know your thoughts! And remember, if you have questions at any time, I'm here to help!
Sarah A. Colucci
Sr. Mortgage Agent
Mortgage Edge, Broker 10680
Direct: (647) 773-4849
New Government rules have made qualifying for a mortgage challenging by reducing the maximum mortgage loan amount to five times a person’s income instead of the original seven.
Accordingly, after completing a thorough mortgage pre-approval, borrowers may learn they don’t qualify for the mortgage amount they want and wonder whether or not they can use a co-signor to help strengthen their application to obtain a larger mortgage loan.
As a side note, the alternative to using a co-signor is waiting until mortgage rules change, a higher income is earned or property prices decrease. All of these situations are certainly unforeseeable which could result in a very long wait for the desired mortgage approval a borrower is seeking.
How can a co-signor help you?
If you’re someone who recently started a new job or a business and don’t meet the necessary income requirements, you can use a co-signor or guarantor to add income to the application. In the same way, you can also use a co-signor who has good credit if you have less than desirable or bruised credit.
If you’re on the edge of qualifying, it may be beneficial to consult a co-signor like a parent, sibling or other relatives.
There Are Two Ways To Co-Sign A Mortgage
What Co-Signors Need To Know
Most co-signors of mortgage loans are parents and immediate relatives, and so there’s an innate need to help with mortgage financing. However, it’s equally important to consult a lawyer and mortgage professional such as myself about what it means to co-sign in terms of liability to the lender as well as overall financial health. For example, some parents may need flexibility within their credit tolerance risk to access more loans in the future to help other children purchase property or obtain a student or car loan. If they are tied to another mortgage loan this may prohibit them from being able to co-sign or guarantee other loans or even access more loans for themselves.
Co-Signors Can Be A Very Short Term Solution
Most buyers take a five-year mortgage loan because of its security and lower interest rate, but that doesn’t mean that a co-signor has to be in the co-signing game this long. I usually coach my clients to get themselves into a position where they can apply to their lender to simply remove the co-signor once they are able to support the loan by themselves. This can be when their credit is within lender requirements or they are earning more income.
If approved, their lender will then release them from the mortgage debt obligation.
Are you currently looking for a property? Need a pre-approval or want to double-check your pre-approved amount? Call me today for free, without commitment, credit consultation.
Call us directly at (647) 773-4849
How do bond yields affect fixed-rate mortgages?
Many factors affect the health of the economy such as unemployment rates, inflation, consumer confidence and real estate as just some examples.
The main factor that affects mortgage fixed rates is the Government of Canada's Bond Yields. A Bond Yield is a return an investor realizes on a bond.
Fixed-rate mortgage rates are usually in line with bond yields for the same term. For example, on Government bonds, the investor is guaranteed a certain yield or coupon for a certain amount of time. This is similar to when a borrower obtains a five-year fixed-rate mortgage and the rate stays the same for the entire five years.
The reason banks usually follow bond yields is that bonds and mortgages compete for the same investors such as those through mortgage-backed securities. Mortgages, however, usually make investors more money than bonds which is also why mortgage rates are always higher than bond yields.
When the stock market is booming, most investors do not take much interest in bonds since there are better returns elsewhere. Therefore, bonds remain cheaper and offer higher yields. In turn, banks raise their interest rates in line with rising bond yields.
When the economy is uncertain like it is today, investors flock to bonds because they are considered a safer investment vehicle. This pushes up the demand for bonds which drives the prices up and pushes yields down. In this situation, banks lower their interest rates in line with decreasing bond yields.
If you've been following the bond yield curve, you probably noticed that our bond yields have been going down lately. This is precisely the reason we have come to a time when our fixed mortgage rates are actually lower than our variable rates (which are governed by the overnight lending rate, not bond yields).
In some countries, the bond yield has moved into the negative which is why we have recently witnessed a Danish bank deposit a small interest payment into their mortgage borrowers' accounts to help pay for their mortgage.
It sure is a crazy time especially when not too long ago we were told the economy is great and interest rates will rise!
By: Sarah Colucci, Senior Mortgage Agent
Have a question? Drop a line below or call (647) 773-4849.
Do you want to be debt free? Who doesn’t, right?
There are not many Canadians who own their home outright. In fact, according to a study conducted by Stats Can in 2008, only 13% of homeowners across the country were mortgage-free. This means that out of 36.7 million people, and 63% who own homes, over 50% have mortgage debt. That's quite a lot of mortgage people. The good news: it doesn’t have to be this way.
Most people have to take out a mortgage to purchase their home as they don't have 100% of the purchase price in cash. And, although mortgage rates have been lower in the last decade, borrowers will still pay hundreds of thousands in interest over the life of their mortgage debt which is often 25 years.
Helpful suggestion: You don't need to pay your mortgage for 25 years!
Can I Pay Off My Mortgage Early?
Thankfully, in Canada, most lenders allow you to prepay your mortgage sooner through lump sum payments. When it comes to personal finance, taking an approach that will save you from making high interest payments and having a mortgage for 30 years is critical if you want to enjoy financial freedom while you're still young.
Here are the steps you should take to pay off your mortgage sooner by using privileges built into your mortgage contract:
1. Verify how much of a prepayment you are allowed. Lenders usually allow between 5 to 25% of the original mortgage balance to be prepaid without penalty each year. If you pay more than the allowed privilege within the year or pay off your mortgage completely, you will have to pay a prepayment penalty if you are still within mortgage term. Usually, the penalty is based on either three months worth of interest or the Interest Rate Differential (IRD).
2. Increase Your Mortgage Payment: Any amount of extra money you add in addition to you set principal and interest monthly payment will automatically go towards reducing your outstanding principal balance interest-free. For example, increasing your payment by $100 can reduce your amortization period up to four years or more depending on your mortgage balance. In the long term, this makes for an excellent approach to be debt free sooner than your friends and neighbours.
3. Change Your Payment Frequency: The less time in between mortgage payments, the faster you will pay your mortgage down. The best payment frequency to choose to make your regular payments, which will also shave down your amortization schedule, is both accelerated bi-weekly and weekly payments.
Bi-Weekly, Accelerated Payments mean making a payment every two weeks or 26 times a year instead of 24. This results in one extra mortgage payment going towards reducing your principal mortgage balance every year without interest.
By changing your payments to an accelerated frequency you will drastically reduce your mortgages’ amortization period.
How To Change Your Mortgage Frequency:
Contact your mortgage provider or mortgage broker to learn how to change your payment frequency. Most times, there is no fee to do so. You may have to make an interest adjustment payment prior to your mortgage frequency taking effect, however, your lender will explain this to you in more detail once you phone in.
It’s important to understand that every single payment you put towards your mortgage that is over and above your current set principal and interest payment will go towards reducing your principal balance. You don’t have to add astronomically large mortgage payments - just adding a few extra payments a year can significantly lower your principal outstanding balance.
Examples include tax refunds, $100 a month which would have gone towards purchased lunches, inheritance etc.
If your in the market to buy a home, please do not hesitate to contact me to discuss your mortgage options.