Pay Down Your Mortgage More Quickly
Jarrett McKay - Nov 14, 2016
Some of the best advice that may be given to new home owners relates to the value of paying down a mortgage more quickly. Over the past decade, housing costs have risen substantially. Current low interest rates have made it easy for many people to ob
Some of the best advice that may be given to new home owners relates to the value of paying down a mortgage more quickly. Over the past decade, housing costs have risen substantially. Current low interest rates have made it easy for many people to obtain a mortgage. As a result, Canadians have been taking on more and more mortgage debt, which doesn't come without risk.
In 1984, the average price of a Canadian home was about $76,000, which is about $158,000 in today's dollars. Today, the average house price is about $502,600. In Vancouver, where prices are the highest nationally, it is $708,500.*
As the economy continues to recover, interest rates are expected to rise which may pose a significant risk to many mortgage holders as mortgage interest payments increase. Recall that in 2008, mortgage interest rates were above 6 percent.** If interest rates were to rise by 3 percent, the monthly payments on a 25-year, $160,000 mortgage would increase by over $265. Over the life of the mortgage, this equates to $80,000 of additional interest costs.
The change in the financial position of a mortgage-holder may also create risks. Many mortgage holders fail to contemplate a potential loss of income. A sudden job loss or an unexpected illness could put a strain on meeting mortgage obligations. This may be further complicated by other expenditures such as the cost of supporting a child's post-secondary education.
Here are some thoughts about home purchasing and opportunities for retiring a mortgage sooner:
1. Buy within your means. Make sure that you can afford the mortgage. One way to measure this would be to determine if you can afford the mortgage payments on a five-year fixed mortgage with a 20-year amortization. If so, a 25-year amortization could be used to allow for a bit of room should interest rates rise.
2. Familiarize yourself with the terms of the mortgage. Understand the terms of conditions of the mortgage before entering into it. Be sure you have liberal pre-payment privileges.
3. Set up "accelerated" weekly/bi-weekly payments. An accelerated payment allows for extra payments to be made against the principal as part of the regular payment stream. This step alone may save around three to four years on a 25-year mortgage.
4. Use tax refunds. Tax refunds, such as those received after contributing to a Registered Retirement Savings Plan (RRSP), can be applied to "retire" a mortgage earlier.
5. Give your payment a raise when you get one. It may be surprising how additional dollars contributed to each payment can impact how quickly a mortgage is paid over the long run.
6. Use the annual lump sum option. Most mortgages allow for an additional annual lump sum payment. Extra funds, such as a work bonus, can be effectively used to make a one-off payment.
*Canadian Real Estate Association figures, August 2015. **Canada Mortgage and Housing Corporation, Average Residential Mortgage Lending Rate – 5 Year.
CANACCORD GENUITY WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA
This newsletter is solely the work of the author for the private information of clients. Although the author is a registered Investment Advisor at Canaccord Genuity Corp., this is not an official publication of Canaccord Genuity Corp. and the author is not a Canaccord Genuity Corp. analyst. The views (including any recommendation) expressed in this newsletter are those of the author alone, and are not necessarily those of Canaccord Genuity Corp. The information contained in this newsletter is drawn from sources believed to be reliable, but the accuracy and completeness of the information is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability. This information is given as of the date appearing on this newsletter, and neither the author nor Canaccord Genuity Corp. assume any obligation to update the information or advise on further developments relating to information provided herein. This newsletter is intended for distribution in those jurisdictions where both the author and Canaccord Genuity Corp. are registered to do business in securities. Any distribution or dissemination of this newsletter in any other jurisdiction is prohibited. The holdings of the author, Canaccord Genuity Corp., its affiliated companies and holdings of their respective directors, officers and employees and companies with which they are associated may, from time to time, include the securities mentioned in this newsletter.
The preceding information is for general information only and does not constitute tax advice. All investors should consult with a qualified tax accountant. Tax & Estate advice offered through Canaccord Genuity Wealth & Estate Planning Services. FOR DISTRIBUTION IN CANADA ONLY