July 2010

This article is provided by Brian Marling of Neighbourhood DLC – Canada’s #1 Mortgage Team  905.372.7222

Last month I shared with you an historic opportunity to better your personal finances, and predictably there are many who could have taken advantage but haven’t  yet. Although interest rates have started to creep up in recent weeks, rates and property prices remain on the low side, making now an ideal time to purchase a home, vacation or rental property, or refinance your mortgage to access equity in your current home to do some renovations, consolidate debt or put towards your children’s education.

To give you an idea of the savings you could capitalize on in the current market, following is an example of a home that cost $250,000 in November 2008 (just months ago) and what it’s worth now, as well as the average change in interest rates, and total savings based on a 25-year amortization:

Using the above example, you would have saved $113,000 in interest payments alone over 25 years. Imagine the comparison using a higher-end home as an example.

When does it pay to break your mortgage?

If you’re considering refinancing your current mortgage to take advantage of lower rates, your mortgage professional can determine if this will benefit you long term. In some cases, the penalty can be quite substantial if you aren’t very far into your mortgage term.

People often assume the penalty for breaking a mortgage amounts to three months’ interest payments so, when they crunch the numbers, it doesn’t seem so bad. In most cases, however, the penalty is the greater of three months’ interest or the interest rate differential (IRD).

The IRD is the difference between the interest rate on your mortgage contract and today’s rate, which is the rate at which the lender can relend the money. And with rates so low these days, the IRD tends to be greater than three months’ interest. Because this is a way for banks to recuperate any losses, for some people, breaking and renegotiating at a lower rate without careful planning can mean they come out no further ahead.

While breaking a mortgage and paying penalties based on the IRD can result in a break-even proposition in the short term, if you look at the big picture, you’ll see that the true savings are long term – as we know that rates will be higher in the years to come. Your current goal is to secure a long-term rate commitment before it’s too late, and here lies the significant future savings.

By refinancing now and paying off your debt, you can put yourself and your family in a better financial position.

Paying your mortgage off faster

It’s important to also keep in mind that by refinancing you may extend the time it will take to pay off your mortgage. That said, there are many ways to pay down your mortgage sooner. Most mortgage products, for instance, include prepayment privileges that enable you to pay up to 20% of the principal (the true value of your mortgage minus the interest payments) per calendar year. This will also help reduce your amortization period (the length of your mortgage), which, in turn, saves you money.

You can also change the way you make your payments by opting for accelerated bi-weekly mortgage payments. Not to be confused with semi-monthly mortgage payments (24 payments per year), accelerated bi-weekly mortgage payments (26 payments per year) will not only pay your mortgage off quicker, but it’s guaranteed to save you a significant amount of money over the term of your mortgage.

If, for instance, you have a $100,000 mortgage, an interest rate of 5% and an amortization period of 25 years, your monthly mortgage payment would be $581.60 and your total payments for a year would be $6,979.20 ($581.60 x 12).

To understand the savings accelerated bi-weekly mortgage payments can make, take the monthly mortgage payment of $581.60 and divide it by two ($581.60 ÷ 2 = $290.80).  Next, take that payment and multiple it by 26 to arrive at your total payments for the year ($290.80 x 26 = $7,560.80).

As you can see, by using the monthly mortgage payment plan, you’ve made payments totalling $6,979.20 for the year, while using the accelerated bi-weekly mortgage plan you’ve made payments totalling $7,560.80 – a difference of $581.60. 

Using this example, you would reduce the amortization on your $100,000 mortgage from 25 years to just over 21 years and your total savings on interest over the life of the mortgage would be just over $12,000.

Here at Neighbourhood not only do we provide Award Winning Service and the best selection of mortgage products in the country, but we also provide our Free Financial Fitness Seminars and have also added Personal Financial Coaching for those who truly desire a change but would like some assistance along the way. If you don’t change something then don’t expect different results.  As always you can call us anytime to discuss how we may be able to help you.

Here at Neighbourhood, & the home of the Brian Marling Mortgage Team, we are concerned for the total well-being of our clients. That’s why we are taking the years of experience from our award winning office and offering a series of  FREE Seminars to our clients and their friends & families and to the public at large. The seminars, entitled ‘Financial Fitness’, will be offered free of charge and will cover all the secrets of successful personal financial freedom. If interested please call our office at 905.372.7222 to reserve your spot as seating will be limited.