Five Tips to Lower Your Mortgage Payments
Some people believe you should pay off your mortgage as quickly as possible by doubling-up your mortgage payments.
Others believe that you should take advantage of low mortgage rates and borrow as much as possible. Pay the minimum monthly mortgage payment to leave more cash in your pocket, so you can enjoy life while you’re young.
Financial advisors recommend that you keep your monthly housing costs under 30 percent of your before-tax income so that you won’t feel a financial strain each month. Housing costs include the mortgage payment, property taxes, condo maintenance fees, and utility bills.
If you feel like you don’t have enough money left over at the end of the month to handle an emergency or go on vacation, here are four ways to reduce your monthly payments.
1. Extend the Lifespan of the Mortgage
A simple way to lower your mortgage payment is to extend its lifespan. A mortgage broker would call this the “mortgage amortization.”
Extending the life of the mortgage involves stretching the time-frame over which you agree to pay off the mortgage. In Canada, you will need to refinance your mortgage to do this. The typical Canadian mortgage has a 25-year lifespan, but there are lenders who offer 30-year and 35-year mortgage lifespans. You’ll need to make sure you won’t trigger a penalty when refinancing your mortgage because refinancing is equivalent to paying-off a mortgage and replacing it with a new one.
Example:
To illustrate the impact of mortgage lifespan on monthly finances, we will compare two mortgages after the first 5 years that are identical except for the lifespan.
Loan Amount: $300,000
Fixed 5-year Mortgage Rate: 3.50%
Payment Frequency: Monthly
| 25 Year Lifespan | 35 Year Lifespan | |
|---|---|---|
| Monthly Payment | $1,500 | $1,240 |
| Loan Balance After 5 Years | $259,000 | $276,000 |
| Total Cost of Borrowing | $48,710 | $50,130 |
2. Consolidate Your Debt
Typically, your mortgage rate is lower than the interest rate on your car loan, credit cards, and other loans.
As well, debts that are not supported by the collateral of a home usually need to be repaid within 3 to 5 years.
The combination of the higher interest rate and the shorter loan lifespan means that for the same amount borrowed, non-mortgage debt has higher monthly payments.
A debt consolidation strategy involves refinancing your mortgage and increasing your mortgage amount. You then use the extra mortgage loan to pay-off the other debts.
This reduces your monthly debt commitments and also simplifies your life by combining all of your payments into one mortgage payment!
3. Challenge Your Home’s Tax Assessed Value
Property taxes are calculated as a percent of the value of your home, so the less the government values your home, the less tax you pay.
If you believe home prices in your neighbourhood have dropped or you think that your home has been assessed at too high a value by the tax authorities, then you can challenge their valuation and lower your taxes.
Normally, the savings will be equivalent to the value adjustment. For example, if you were paying $2,000 in annual property taxes for a home assessed at $200,000, then successfully arguing the home is worth $190,000 will reduce your property taxes to $1,900.
This isn’t nearly as impactful as refinancing your mortgage, but it means you may not have to give up your Grande Frappuccinos.
4. Make a One-off Payment Toward Your Mortgage
If you have extra savings that earn you less interest than the mortgage is charging you in interest then consider using them to pay down your mortgage.
It will shrink the size of your mortgage but you will still pay it off over the same lifespan. This is best done at your mortgage renewal date.
Since you are paying off a smaller loan over the same timeframe, you’ll pay less mortgage interest. If you do this between renewal dates, your regular payments don’t reset until the end of the mortgage contract renewal rate. The industry calls this the mortgage term. In Canada, this is typically three to five years.
If you make the one-off payment the month before the end of the contract renewal date, then your payments will be reset right away.
5. Blend and Extend
If interest rates are lower than your contract rate or you recently made a large one-time payment and want to reset your payment early, then you can blend-and-extend your mortgage.
This is often called a “blend-and-extent” or a “blend-to-term” and only some lenders allow this option.
In a bland-and-extend, the lenders take the weighted average of the contract and market mortgage rates and recalculate the monthly payments with no penalty to the borrower.
Doing this after making a big repayment to your mortgage allows you to reset your payments without refinancing.
Here are the steps you should take:
Find out if your mortgage lender allows “blend-and-extend” or “blend-to-term”.
Pay down your mortgage as much as you like without exceeding the annual limit and triggering a penalty. Most lenders allow you to pay down between 10 and 20 percent of the original mortgage amount without triggering a penalty, so always ask them the amount of the maximum allowable payment.
Perform a “blend-and-extend” or “blend-to-term” to lower the payments.
A ‘blend-and-extend” solution can only be negotiated with your current lender.
Conclusion
If you are having trouble making your monthly payments, talk to a mortgage broker before you talk to your lender.
A mortgage broker can explore more of these options, and others. They can help you formulate a solution that will help improve your situation. We recommend the broker before a lender because a lender can only propose solutions allowed by their in-house product offering and lending policies, whereas a broker will look across all of the lenders to select the lender that provides the best features to meet your needs.
After speaking to a mortgage broker, you’ll be better informed for a discussion with your lender.
Like this article? Like us on Facebook to see future articles in your feed.
