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Reducing the borrowing costs of your mortgage

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As housing in Canada keeps getting costlier, there are ways you can save on your mortgage to maximize every dollar you make.

There are 2 ways to reduce the overall borrowing costs on your mortgage.

  1. Reduce the amount borrowed (the “principal”)
  2. Get lower interest costs

Reducing the principal when you buy a home

It seems like common sense: the less you borrow, the less interest you’ll pay overall. A larger down payment will decrease the original amount you have to borrow, lowering the amount of interest you’ll pay.

When it comes to deciding how much to pay up front, insurance also comes into play. You’ll need to make a down payment of at least 5% of the amount you’re borrowing. If you make a down payment of 20% or more, you’ll avoid mortgage insurance costs, bringing down your overall cost of borrowing.

If the down payment is less than 20%, though, your lender will require you to purchase mortgage insurance. These mortgages are known as ‘high ratio.’ The fees for mortgage insurance can be as much as 4.5% of the mortgage value. On a mortgage of $350,000, that would mean $15,750.

Reducing the principal once you own a home

As a homeowner, you can usually take advantage of pre-payment options or payment frequency options that allow you to make extra payments on the principal amount.

Adjust your payment frequency

By moving to an accelerated biweekly payment, you can make extra payments towards your principal each year. Over time, that leads to more savings for you. In this example, the client saves $18,598 and reduces their amortization (the amount of time they’re spending paying off their mortgage) by almost 3 years.

In this example, we’re assuming:

  • Mortgage: $350,000
  • Amortization: 25 years
  • Interest rate: 3.0%

Frequency

Payment

Time to pay down

Total interest costs

Total paid for mortgage

Savings vs. monthly payments

Monthly

$1,656

25 years

$146,908

$496,907

-

Accelerated bi-weekly   

$828

22 years, 4 months

$128,309

$478,309

$18,598

Weekly

$414

22 years, 4 months

$128,115

$478,115

$18,792

Take advantage of pre-payment

A pre-payment arrangement in a mortgage contract allows you to make extra payments on just the principal.

The amount you’re allowed to pre-pay can vary from 5-20%, depending on your lender. It can be based on your original mortgage balance, or on the mortgage balance you have at the beginning of each year.

It can also be made in different ways, such as one-time annual payments or double-up payments.

How does this translate into savings?

Let’s use the same example. This time, the mortgage holder makes a $5,000 pre-payment to their mortgage each year from an employment bonus they receive.

  • Mortgage: $350,000
  • Amortization: 25 years
  • Interest rate: 3.0%

Frequency

Time to pay down

Total interest costs

Total paid for mortgage

Monthly scheduled

25 years

$146,908

$496,907

With annual pre-payments

18 years, 3 months

$102,664

$452,664

Here, the homeowner saves $44,243 and is able to reduce their mortgage amortization by 6 years and 9 months.

Interest rates

A lot of people focus only on the interest rate when it comes to their mortgage. Let’s look at an example to see if the impact of the lowest rate is that significant.

We’ll use the same numbers as the previous examples, but with a 0.10% lower rate.

  • Mortgage: $350,000
  • Amortization: 25 years
  • Interest rate: 2.90%

Interest rate

Payments

Total interest costs

Total paid for mortgage

3% rate

$1,656

$146,908

$496,907

2.9% rate

$1,638

$141,537

$491,536

A 0.10% lower rate over the length of the mortgage could help save $5,371, which is certainly nothing to throw away. A great rate definitely has an impact, but from these examples we can see that it’s often more important to have a mortgage with the features and flexibility you need to match your unique financial goals.

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