In this infoletter we have share our top four money saving tips on mortgages. These tips can shave years off of your mortgage and potentially save you tens of thousands of dollars in interest.
Biweekly versus monthly payments
Making your monthly payments as stated on your mortgage contract will pay off your mortgage in the amortization period set out in your contract. Switching to a biweekly payment can save you money and shorten your amortization as long as you pick the right biweekly payment method.
There are two types of biweekly payments: Regular and Accelerated. The regular biweekly payment pays off the mortgage in exactly the same amortization as you would if you were paying monthly payments so it doesn’t benefit you in terms of savings only in terms of convenience to line up with your paycheques. Accelerated biweekly payments take your monthly payment and divide it by two. This biweekly payment will take approximately four years off of the amortization of a regular mortgage and is the one to choose if you can handle payment.
Extra Bulk payments
Most lenders offer prepayment privileges on your mortgage. These range from 5% – 30% of the original mortgage amount and can be applied every year. Some lenders will allow you to simply make extra payments whenever you want. Some allow you to double up your payments and others will allow you to increase your payments. Any combination will help you save a lot of money in interest. Even a simple payment of $1000 can help you. Did you know that if you made an extra payment of $1000 in the first year of your mortgage it would save you approximately $800 in interest over the life of your mortgage? That’s a great return on your money.
Mortgage penalties are something to consider when choosing your mortgage. Variable rate mortgages fluctuate with prime rate however they only carry a 3 month interest penalty in most cases. Fixed rate mortgages carry a penalty of the greater of the interest rate differential or 3 months of interest. If you are with a big 5 bank, that interest differential penalty can easily be 5 times that of your 3 month penalty or more. Other virtual banks we work with don’t have such large penalties and therefore the penalty on their fixed rate mortgages can often be as little as 3 months interest.
Unsecured loans/lines of credit/credit cards
Unsecured loans & lines of credit usually carry interest rates of at least 5% – 6% while credit cards are usually in the 18% range. By putting these debts into your mortgage at current rates under 3% you can save a significant amount of money in interest. The key with this though is that by putting them in your mortgage you don’t want to take 25 or 30 years to pay off this debt. What you need to do is take the payment that you would have been making on these debts to pay them off in a normal time period (ie up to 5 years) and add that payment onto your regular mortgage payment. This ensures that the unsecured consumer debt will get paid off in the shorter amount of time while the rest of your mortgage gets paid off in the normal amortization.
Start implementing these money saving tips into your life today and you will save thousands of dollars in interest and take many years off of your mortgage. If you have any questions regarding your own personal situation please contact our office at 604-556-3893 or email at [email protected]
For more information on our mortgage products and your preferred Abbotsford Mortgage Broker please visit our website at www.ymscanada.ca.