How much money can you save? It depends on which strategy you use. Here are four that can put a surprising amount of extra money in your pocket over time:
strategy 1: increase the amount of your paymentsThrowing just $100 a month extra at your mortgage can result in formidable savings. Let's assume a $250,000 mortgage at 3.49%, amortized over 25 years. Monthly payments would be $1,247.
Boost that payment by $100 to $1,347, and something magical happens. You'd save $15,400 in interest charges over the life of the mortgage (assuming a constant interest rate of 3.49%) and you'd pay it off three years sooner.
strategy 2: when you renew, keep your monthly payments the sameLet's assume you took out a $250,000, five-year fixed mortgage in 2009 at an interest rate of 5%. Your monthly payments have been $1,454. Now, it's time to renew and your bank is offering you 2.99% for the next five years. As a result, your monthly payments would drop to $1,224.
Great! But what if you keep on with the $1,454 payments you're used to? That extra $230 a month over the remaining life of the mortgage will allow you to pay off your mortgage four years sooner and you'll save $15,700 in interest. Not bad for just maintaining the status quo.
strategy 3: choose an accelerated payment optionThis is almost painless. Let's use the example of the $250,000 mortgage described in strategy one. Your monthly mortgage payment is $1,247. Divide that by two, and you get $623.50. Now arrange to pay this amount every two weeks. Because a pay-every-two-weeks strategy results in 26 payments of a half-month's mortgage payment, you end up paying the equivalent of 13 monthly payments a year – or an extra monthly payment every year.
This is what's known as an accelerated bi-weekly payment. Don't just opt for bi-weekly – you want the method that forces you to pay the equivalent of an extra monthly payment each year.
This strategy alone would save the borrower more than $16,300 in interest over the 25-year life of the mortgage. And that 25-year mortgage would also be paid off in a little more than 22 years.
strategy 4: make a lump-sum paymentMost closed mortgages (but not all) allow borrowers to pay off up to 10%, 15% or 20% of the original principal in each calendar year without penalty.
Thanks for nothing, you say. "I don't have $50,000 to throw at my mortgage." The good news is that you don't need to pay down the entire 20 per cent. Throwing even a few hundred dollars at it here and there can make a big difference.
One popular suggestion is to put your tax refund to work this way. Assuming we have the $250,000 mortgage described in strategy one, and applying a $1,600 annual payment that the Canada Revenue Agency says is the size of the average refund, that manoeuvre alone would see that mortgage paid off three and a half years early and the mortgage holder would save $20,000 in interest.
Combining two or more of these strategies would result in even bigger savings.
Fortunately, it's easy to virtually play around with various payment scenarios. Most financial institutions, banks, and mortgage brokers have online mortgage calculators that can spit out the savings for you.
Here's a particularly useful one
And here's a good one
from the federal government's Financial Consumer Agency of Canada.