Part 1 shows how simply increasing you regular mortgage can make a difference
Why pay it down faster when rates are so cheap? Isn’t this the time to reduce my payments and spend on other things and enjoy myself a little?
Why pay it down faster when rates are so cheap? Isn’t this the time to reduce my payments and spend on other things and enjoy myself a little?
Well yes, it is certainly a great time to free up some cash
to do enjoy yourself or top up the RRSP, TFSA or other investment
accounts. You may make more money there
if you, or your investment person, is good at watching the markets and making
the right calls. In fact, you could make
a great deal of money, but this article is more for the people who might need a
little more cash later and are not as confident about the markets, or whose job
or income security is not as certain in the future, or who might have heavily
leveraged themselves in this low interest rate market to get the house they
want.
Paying debt off now is easier because interest rates are
lower and at the very least paying down debt is a reasonable form of
diversification.
Think about it in this way.
The average borrowing cost for a 5 year mortgage from 1986-2011 was been
8.04%, from 2000 to 2011 it was 6.05%.
Today you might be lucky enough to be locked in at 2.99%. What would an increase of 3% to 5% do to your
ability to pay?
Double-digit mortgages (10% +) ran from the end of 1973
until November 1991 with a couple of months in 1992, 1994 and 1995 also tipping
the scale just to add to the fun. I
think we can all safely say we are glad not to be there.
Assuming a mortgage of $250,000, what do the payments look like
for a 25-year amortization and without going all that high? Let’s look at the impact.
Monthly – 1,181.83 1,606.95 435.12 5,221.44
Semi Monthly - 590.92 803.48 212.56 5,101.44
Bi-Weekly - 545.46 741.67 196.21 5,101.46
Accelerated
Bi-weekly - 590.92 803.48 212.56 5,526.56
Weekly - 272.73 370.84 98.11 5,101.72
Accelerated
Weekly - 295.46 401.74 106.28 5,526.56
$5,000 per year can go a long way for most people and while
your mortgage will not be as high when you go to renew, if the rates are higher
you will still feel the effect.
In this scenario at 2.99%
At the end of the 5 years, assuming monthly minimum payments
and no prepayments, your balance would be 213,645.52.
If at the end of that term rates have gone to 6.05%, then in
order to stay on track to pay down your mortgage in the 20 remaining years your
payments would jump to $1,527.56. That
is a pretty big jump for a lot of people.
If you make your payments monthly, on the 2.99% rate, but
pay them as if the rate were 4.5%, $1,383.68, then at the end of the first 5
years you would see some great improvements
- the balance would only be $200,605.93, so at renewal you are less exposed
- you would be 5 years closer to paying off the mortgage
- and for those benefits you still would have paid $928.59 less in interest payments meaning more has gone to principal
With that new balance and a rate of 6.05% and 15 years
remaining on the mortgage your payments would jump to $1,690.13, still a big
jump, but $128.67 less than if you had been making the minimum payments at
2.99% and you are still 5 years closer to being mortgage free.
If you are thinking about retirement or have kids with university or college plans, this might free up some cash just when you need it.
