Posted in Between 2006 and 2012, amortizations of 30, 35 and even 40 years were offered on mortgages in Canada. For my clients, many first time buyers who ended up buying to the maximum of what they could afford at the time ended up taking this route. However this did put them on track to not have their mortgage paid off until well after retirement.
With fixed and floating rates (the margin vs. prime) having dropped so dramatically over the last few years, chances are on renewal you will end up with a much lower rate than what you had previously. So why not leave your payment the same and reduce the time to pay your mortgage to zero. Here is a real life example from one of my clients (with the names changed to protect the innocent).
Mr. and Mrs. Smith purchased a home for $225,000 in 2010, putting 10% down. Here was their mortgage situation:
Total amount borrowed: $207,360 Rate 4.39% 5 yr fixed Amortization 35 years Payment $962/mo
On renewal, the balance will be $193,205.
Should the Smith family opt for a 5 year fixed rate (currently at 2.79% today), their payment would drop to $791/mo at renewal but they would still have 30 years left to pay on their mortgage. Over the next 5 years, they would pay $22,105 off the principal and would save $10,260 from the lower payments.
However, the correct strategy would be to leave the payment the same (you are used to paying this amount anyway, so why not!) This would take an incredible 7 1/2 years off the amortization, with the balance dropping by $33,015 over the next 5 years.
So what is paying your mortgage off 7 1/2 years actually worth in terms of interest savings? $24,069. Not to mention the added boost of not having a mortgage payment would make for your retirement plans.
A simple step, but something most people don't take advantage of. If you aren't getting this type of straight forward advice from your current bank or mortgage provider, maybe you should consider giving me a call at (613)394-5810.
