OTTAWA – When shopping for a mortgage, most Canadians focus on the interest and how much they can save with a lower rate.
But paying a few extra dollars every two weeks instead of the usual monthly payment or making an extra lump sum payment once a year can also save borrowers thousands in interest and shorten the time it takes to pay off a mortgage by years.
Wade Stayzer of Meridian Credit Union says homeowners need to understand of how much they can afford to pay and work from there.
“You really need to understand your personal financial situation and what it is you’re trying to accomplish,” said Stayzer, Meridian’s vice-president of sales and service.
The rules governing how much borrowers can increase payments or put down in a lump sum vary depending on the mortgage contract, so it’s important to read the fine print.
For those looking to pay off a mortgage faster and can afford it, Stayzer recommends increasing regular payments over saving up and making an annual lump sum payment.
“We all know that we’ll find things to do with money if it’s just sitting around waiting to do that,” he said.
Meanwhile, accelerated bi-weekly payments are calculated by taking what the monthly payment would be and dividing it by two and then making that payment every two weeks.
The effect is that you make the equivalent of an extra monthly payment every year compared with 12 monthly payments. The change could save you thousands in interest costs and shorten the time it takes to repay your mortgage by years.
Extra payments now might also serve as a cushion against future increases in mortgage payments if interest rates rise.
Omar Abouzaher, a regional vice-president at the Bank of Montreal, suggested that windfall gains from things like an increase in income or the end of another regular expense be used on the mortgage.
“If your kids are out of daycare or you get a promotion and you’re OK with your lifestyle, you’re OK with your cash flow, why not apply this extra money on your mortgage payments,” he said.
Abouzaher suggested another tactic could be to use your income tax refund to make an annual lump sum mortgage payment.
“This lump sum goes directly toward the principal and not towards the interest, so will allow you to save a lot of money in terms of interest,” he said.
With mortgage interest rates hovering near record lows, Stayzer noted that putting more money into investments rather than making extra mortgage payments may be tempting.
But, he says that choice will depend on your financial plan and risk tolerance.
“What’s going to help you sleep at night,” he said.
“I know people who are really comfortable with mortgage debt and people that are saying ‘I can’t wait to get this thing paid off.’”