Powerful Strategies for Saving on Your Mortgage

By J.D. MacRae, CFP

For many Canadians, their homes are one of the largest and most important investments they will make during their lives. Ironically, we spend more time thinking about our mutual fund returns than we do about our mortgages. Remember that a financial plan encompasses not only assets, but also debt.

The basic definition of wealth is assets minus debt. Implementing strategies to minimize debt can be a powerful way to increase your wealth. The most dramatic savings can be found in your mortgage. Here are some strategies to consider.

• Read the fine print carefully. Most people believe that bargaining for the best interest rate is the most important thing they can do. However, there are terms and conditions to your mortgage that can drastically change the cost and flexibility of this long-term commitment. For example, we were recently shopping the market for variable-rate mortgages on behalf of our clients. We found two institutions that offered a variable-rate mortgage of prime minus one-half of one percent. Although they looked the same, there was a major difference in how the interest-rate compounding was calculated. The interest on the first mortgage was compounded monthly, while the other compounded semi-annually. As an investor, I would be happy to choose the monthly compounding, but as a borrower, I would clearly choose the semi-annual compounding.
  
  
• Choose a shorter amortization period. Another important savings strategy can be found in the amortization period – the time you take to pay back the entire mortgage, principal, and interest. The shorter the amortization, the more money you can save. For example, assume that you have a mortgage for $80,000 at an annual interest rate of 7%, compounded semi-annually. The total interest cost on a 15-year mortgage is $48,628, versus $88,096 on a 25-year mortgage – a savings of $39,468.
  
  
• Increase frequency of payments. One of the easiest ways to reduce the cost of your mortgage is simply to move from monthly payments to biweekly or even weekly payments. This strategy can reduce the total interest cost over the life of your mortgage.
  
  
• Increase your payments. Increasing your mortgage payment – on a regular basis or through lump-sum payments – can also save you money. Consider making annual pre-payments during the life of the mortgage. If this is asking too much, try to round up your regular payments to the nearest $10. For example, if your payment is $751 per month, round up to $760. You may not miss the $9, but it will make a modest difference in the long run. Talk to a licensed mortgage consultants about ways in which you or your children can save on a mortgage.
  

J.D. MacRae is a Certified Financial Planner with Investment Planning Counsel of Canada, London, Ontario (519) 663-9662 E-mail: jdmacrae@jpccherryhill.com

Published in Networking Today, November 2002.