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Interest Rates and Mortgages

Interest Rates and Mortgages

by Ted Crago, B.Eng., CFP

For many people, the number one financial goal is to pay off the mortgage on their home. In today’s low interest rate environment, many people are unsure about their best mortgage option. Interest rates have been low for a few years now, making the interest portion of the payments less and allowing greater principal payments. Where are interest rates going? The general consensus is flat to a slight increase. I don’t think we will be seeing a return to the large interest rates of the early 1980’s.

There are a number of ways to help pay off your mortgage sooner as an alternative to the standard monthly on the 1st payment. Of course, your choice will depend a great deal on your set of individual circumstances.

You can make each payment a little larger. But don’t make the mistake of making your payment so large that it has a negative impact on your ability to lead a normal balanced life. One method of painlessly paying down the mortgage is to round up the payment. For example, if your mortgage is $466.17 bi-weekly, round the payment up to $500. You can save thousands of interest dollars over the life of the mortgage.

One of the most popular methods of paying down the mortgage is to use the bi-weekly option so that you make 26 payments per year rather than 24 payments if you made 2 payments per month. The two extra payments will save you a lot of time and interest over the life of your mortgage.

You can make a balloon payment. Usually, the mortgage lender will allow you to pay a lump sum on the mortgage once a year. This payment is generally up to 10% of the mortgage. Some financial planners will recommend that you contribute as much as you can towards your RRSP and use the refund for the balloon payment.

A choice that could be very beneficial would be to use a combination. Round up your payments to start. Make a double payment early in the year as a balloon payment but equal to amount paid ahead in the bi-weekly option. In this method, the extra money is in early instead of gradually throughout the year resulting in great interest savings than paying bi-weekly.

The term ‘mortgage” is French for ‘death pact’. I believe that it doesn’t have to be. Make sure your mortgage is done by the time you retire and you have solved one of the largest financial planning problems that you may face.