How to maximize your mortgage
By: Michael Anthony Lloyd: Guest Post for Canadian Budget Binder
Many people get into their first home and are so busy fixing it up, moving in and just getting used to their new home they quickly forget about their mortgage, other than that big chunk of cash that goes out of their account every month.
They are losing money by ignoring it!
Many banks don’t explain much in the way of “best practices” with mortgage repayment. One of the simplest is paying your mortgage on either a Weekly or biweekly basis to speed up the repayment process, but beware, some banks offer non-accelerated weekly or biweekly which do nothing to pay back your mortgage faster!
Follow this simple system when setting up your payments:
- If you are paid every 2 weeks, pay your mortgage with biweekly accelerated
- If you are paid any other way, pay your mortgage weekly accelerated.
The reasoning is simple, say your mortgage is $1000 per month, paying biweekly accelerated puts more onto your mortgage in a year ($500 x 26 = $13,000 vs. $1000 x 12 = $12,000), same with weekly accelerated ($250 x 52 = $13,000).
So apart from your mortgage payment, what else can you do to pay your mortgage down faster? Obviously making extra “prepayments” will help, but you may be surprised how much of an impact they can have.
First you will have to check with your lender to confirm how prepayments are allowed. Some only allow the prepayment on the anniversary date of the mortgage each year, some allow them to be taken pretty much at any time, as long as you don’t go over the “free” prepayment allowable with your lender (once again, check with your lender, most are 10 – 15% of your original mortgage balance, some more, some less).
If your lender is easy-going, make a regular extra payment every month or quarter, based on what your budget allows. If you find after a month or quarter you have an extra $100 or more (this is the general minimum prepayment allowed), advise your lender and make this as an extra payment. It makes a difference, take a look at this comparison:
On this $300,000 mortgage amortized over 30 years, simply paying your payment on biweekly accelerated drops it down to 26.3 years…paying an additional $100 per month (or $300 per quarter) drops it to 23.5 years.
- Obviously prepaying more will knock the mortgage down even faster.
So what else can you do to get rid of your mortgage sooner?
Most lenders will not contact you when it makes sense to break the term of your mortgage and move into a lower rate. Just because you took out your mortgage a year or so ago, doesn’t mean you have to stick with it regardless.
Depending on your lender, how they charge penalties, and the current mortgage rate environment, it may make sense for you to pay the penalty (and even include it into the mortgage) and move to today’s historically low rates. I’m obviously biased, but a good Mortgage Broker can easily run the numbers for you and let you know if it makes sense to make a break.
With today’s small fluctuations in fixed rates, you may be surprised how much the penalty can drop when rates go up, making it more economical to make a change. Once you make that decision, really take advantage of the lower rate on your new mortgage by keeping your payments at the same level (or higher if you can afford to) to maximize the rate savings.
I think we would all agree that it is not about “if” mortgage rates will go up, but “when”. With this in mind, we wanted to help our clients and others pay their mortgage down faster and came up with what we call “Money in Your Mortgage” or the “Inflation Hedge Strategy” it’s a software program we have written that is built to make the most of the low rate environment we are all living in and ensure you don’t suffer payment shock in the future.
What’s payment shock?
It’s what a number of our American friends suffered when their teaser rate mortgages in the US came due and their payments skyrocketed, causing a number of the foreclosures we are all too used to seeing there. This program is pretty simple and is explained in detail on the link, but in a nut shell, whenever the rate at your lender goes up, we email you to remind you to increase your payment accordingly, so that at the end of your term, you are paying the same amount you would be then, you won’t have any shock, and you will have made extra payments on your mortgage, paying it down faster and maximizing your low rate…we call this mortgage Optimization.
This is a free service, and you are under no obligation…we just feel strongly we as Canadians need to do everything we can to help each other not suffer through what the US has.
Tell me what you think…link
Michael Anthony Lloyd is a Mortgage Expert with DLC Canadian Mortgage Experts and has been helping Canadians with their mortgages as a Mortgage Broker since 1999. Helping Canadians reach their “Mortgage Freedom Day” sooner is his goal. He writes a Blog called The Daily Dig as well as leading the DLC CME team of 75 brokers.
All Photos: Copyright 2012 Michael Anthony Lloyd