Are you in the market for a mortgage renewal this year? Then pull up your socks, grab a mortgage calculator, and get ready to start saving some serious cash! If you’re one of the many Canadians who settled for a fixed-rate five-year mortgage back in 2007, chances are you’ve been kicking yourself ever since. At the time, locking in a 5 percent or higher interest rate seemed like a bargain – the market was hot, housing prices were high, and interest rates were on a continued climb.
And then the bubble burst, the U.S. economy toppled, and interest rates dropped to historic lows. Five-year fixed mortgage holders were left with massive payments while the rest of the country took advantage of some of the best mortgage rates ever.
But the tides are about to turn.
Surveys indicate that about one-third of mortgage holders are actively trying to terminate their current agreement early by making extra payments. But what’s more interesting is what homeowners plan to do once they renew at their new rate.
Those who opted for a five-year fixed-rate mortgage have a golden opportunity to accelerate their payments and tackle a large chunk of their principle – without taxing their current budget.
Instead of letting today’s vastly lower mortgage rates reduce your monthly payment, consider leaving your payments where they are. This way, you can use the differential to pay down your principle.
Numbers Don’t Lie
Five years ago, a well-discounted five-year fixed mortgage was set at about 5.79 percent. Today, first time home buyers and mortgage renewal customers are enjoying rates around the 3.29 percent level. In order to get a better understanding of your potential savings, here’s a hypothetical situation.
Let’s say you started with a $300,000 five-year fixed-rate mortgage in 2007. If you’d gone with a 30-year amortization, your monthly payments would have been roughly $1,745. When it comes time to renew, you will have paid down roughly $21,816 of your principle. If you renewed today, locking in a five-year fixed rate mortgage, your monthly payments would come in at roughly $1,358. If you were to leave your mortgage payments as is instead of pocketing the differential ($387), your mortgage principle in 2017 would be $213,914. If you decided not to roll the additional money into your payments, you’d be looking at a principle of $239,087 in five years – that’s a difference of more than $25,000.
The Great Pay Down
If you’re mortgage isn’t due this year, but you’re still eager to pay it down quickly, you have some options.
1. Pay More Each Month
The simplest way to pay off your mortgage, as is exhibited in the above example, is paying more each month. Adding $50 to $500 to each monthly payment will help you pay down your debt, freeing up money down the road sooner rather than later. If you’re planning to overpay each month, make sure your extra money is being applied directly to your principal, not interest or an escrow account. The only way you’ll shorten your mortgage payoff date is by tackling the principal.
2. Make Extra Payments
If you can’t manage to pay more each month, try to schedule in an extra payment quarterly. The faster you can pay down your debt, the less you’ll have to pay and the sooner you’ll free up your cash flow.
3. Pay a Lump Sum
It isn’t often that we come into a large sum of money, but if you’re ever confronted with a large inheritance, bonus, or income tax refund, consider putting some of it towards your mortgage pay down. This strategy works best if you don’t have any other, more costly debt to consider.
4. Refinance to Speed Up Payments
It’s no secret that mortgage rates are going to start increasing. It might not be tomorrow or next week, but eventually the tides will turn. So, instead of waiting to refinance your rates at your renewal date, consider refinancing now in order to take advantage of current best rate mortgage products. To maximize the benefits of your refinancing, shorten the term of your mortgage. For example, if you’ve managed to take 10 years off of a 30 year amortization, refinance with a 15-year mortgage rate this time around.
Whether you’re ready to renew your mortgage now or are looking for ways to reduce your mortgage costs, accelerating your payments is always the best way to go.