Overpaying Your Mortgage: Dollars and Sense
When it is time to get your mortgage you need to decide which route to take – fixed rate mortgage or variable rate mortgage. Each has its strengths and each its weaknesses.
The experts’ rule of thumb usually is that there should be a 1.00% difference to switch from fixed to variable rate. So if your fixed rate mortgage is at 2.35% and your variable rate is 2.15%, then you would stick with the fixed rate mortgage.
The fixed rate mortgage payment rate will stay constant for the term of your mortgage (only change will be if your municipal taxes go up or down usually on a yearly basis)
Fixed Rate Mortgage:
Pro: This type of mortgage stays constant and eases any stress if you are trying to budget.
Con: If there is a significant difference with variable rate mortgage vs. fixed rate, the variable rate can save you more.
Variable Rate Mortgage:
Variable rate mortgage can fluctuate with the prime rate. Less stability as payment can fluctuate.
Pro: Historically variable rate mortgages has proven to be less expensive over the duration.
Con: Financial insecurity can increase cost of your mortgage payment with market fluctuation.
Overpayment of Your Mortgage:
Whatever route you decide to take with your mortgage, you will want to always look for ways to pay it off. Depending on your mortgage company, your lender may allow you to overpay without penalty. Here are some ways you can pay down your mortgage:
Increase the amount you pay when you first get your mortgage or any time during your term to pay down the principal faster
- Make accelerated bi-weekly or accelerated weekly payments instead of monthly
- Lump sum payments on your anniversary date
- Every time you renew you can add more money towards your mortgage
Here is an example of what overpayment can mean to you. (Does not include municipal tax; principle and interest only)
Let’s take the example that you have a $350,000 mortgage that is amortized over 25 years with an interest rate of 2.29%. Your payments monthly (principle + interest will be approx. $1531.32 making 300 payments over the course of 25 years.
Using the same mortgage, interest rate and increasing your monthly payment by 10% or $153.15 (new payment of $1684.67) will drop it to 265 payments over 23 years.
Better still let’s increase the mortgage payment to 10% over accelerated bi-weekly payments and you will now have 517 payments averaging about $842.34 over 20 years. You have just dropped 5 years off your amortization!
Some financial institution will allow you to add extra money (sometimes 5 or 10% overpayment on your anniversary day of your mortgage) and it will just make your mortgage go down even further over the years.
The Winch Walton Team will help you transition through the buying and selling process of your home right through to where you may need experts to contact for your mortgage needs. The Anne Winch Ottawa Real Estate Team has mortgage brokers on call to help provide you with financial details quickly and efficiently. Contact the Winch Walton Team today for all your real estate needs.