Part 1 on Paying Mortgage down faster

  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?

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.

                                     2.99%                     6.05%                   Difference              Diff. Annual

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

1. the balance would only be $200,605.93, so at renewal you are less exposed
2. you would be 5 years closer to paying off the mortgage
3. 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.