Save on Your Mortgage

My wife and I popped into the bank yesterday to renew our mortgage. Which led me to today's article - how to save on your mortgage. The amount of money you pay in interest on a mortgage usually is greater than the amount borrowed in the first place.

Consider a mortgage of $100,000 amortized over 25 years at 8% paid monthly. You'll end up making payments of $771.82 a month. That adds up to $231,546 for the life of the mortgage. That's a lot of interest - $131,546.

There are a number of ways to reduce that amount, but not everyone uses them, usually because they simply do not know about them. So let's go over a few of them

Note: These examples are based on mortgages compounded monthly which is the standard practice in most countries including the United States. Canada, however, is different. Here mortgages are compounded semi-annually, which actually gives Canadians an advantage. The $100,000 mortgage at 8% that costs Americans $771.82 a month, only costs Canadians $763.22.

The easiest way to save on your mortgage is to make the same monetary payment per month, but to make it in smaller more frequent payments. The savings are nominal, but get larger as interest rates increase.

If you make payments of $178.12 weekly (which amounts to the same annual payments), you reduce the total amount paid to $229,596.68, a savings of $1949.32. Not only that, you pay off the loan eleven weeks earlier. If you saved the amount you would have paid for those weeks, you would have $1959.32 in the bank as well as your house paid off.

You can reduce the amortization period for a nominal increase in your payments. Not only will you pay less interest, but you will have mortgage free years during which you can accelerate savings.

Suppose you want to reduce your mortgage to 20 years. In our example, an increase in the monthly payment of just $64.62 to $836.44 will knock five years off. Your total payments for the loan will be $200,745.60, an incredible savings of $30,800.40. If you then continued paying the same amount into a savings account for the five extra years that you are mortgage free, you'll have a house and $50,186.40 in cash (not counting accrued interest) instead of just a house.

If you smoke three packs a week, give up smoking and put the savings towards increased mortgage payments. You'll have over $50,000 extra in your pocket at retirement!

Suppose you combined weekly payments with the reduced amortization period? If you make weekly payments of $193.03 (which amounts to the same annual payments), you would pay only $199,399.99, bringing the amount of interest paid to less than the amount of the loan. The additional savings? $1345.61, and you knock seven weeks off the mortgage. That adds another $1351.21 to the amount you can bank when the mortgage is paid off.

But suppose you can scrape together an extra $100 a month instead of just $64.62. Combined with weekly payments, you would pay out $201.19 a week for a total of only $188,716.22. And you would reduce the payment period to 18 years and two weeks. If you continued to pay the amount of your mortgage payments into savings, you would accumulate $72,830.78 in additional savings after 25 years.

Increasing payments, as you can see, not only reduces the total paid to the bank, it reduces the length of the amortization.

Most lending institutions will let you make annual lump sum payments without penalty up to a certain amount. My bank allows an annual payment of 15% of the principal amount.

Suppose contributions to a Registered Retirement Savings Plan nets you $1200 a year in tax refund. Using our original example, if you pay that onto your mortgage every year on the anniversary date, you reduce the amortization period by six years and ten months. And your total payments are reduced to $189,363.52, a savings of $42,182.48.

If you were to invest the usual mortgage payments of $771.82 a month for the six years and ten months after the mortgage has expired, you would have a house and $63,289.24 in the bank after 25 years, not counting interest on the banked savings.

If, instead of paying a lump sum, you bank the money and use it to cover increased payments of $100 a month starting immediately with last year's refund, you would save the same as adding $100 a month to your payments or $41,489.

Making the requisite contributions to a tax sheltered savings would provide the additional funds to increase the weekly payments if you're not a smoker and can't raise extra funds by kicking that habit! It's a far better habit besides!

Lending institutions are competitive. They all want your business, so shop around. Many will knock a half a percent or more off the interest rate, waive transfer fees, and even offer a cash incentive to move to their institution.

When your mortgage comes due, you have the right to pay it off completely. So check out the competition. And let your current financial institution know. They may well match any offers from competitors.

If you are a good long-standing customer of the institution in question, they may well be open to negotiating a lower rate.

$100,000 borrowed at 7.5% and repaid monthly at $738.99 over 25 years results in a total payout of only $221,697, a savings of $9849.

Click on button below for a table that summarizes the savings available on a $100,000 mortgage and gives you a grand total for using all of the methods together.

Most lending institutions will ask you if you want to insure your mortgage in case you or your partner die. Most people casually go along with this seemingly good advice. In fact, the insurance premiums charged by banks to insure mortgages are usually exorbitant.

Insurance is well worth getting, but you should check out the cost of declining term insurance in the amount of the mortgage instead. Perhaps you can get additional group insurance through work at a lesser rate. In any event, don't buy insurance from a lender without shopping around first!

Some analysts, notably Garth Turner, have advocated mortgaging the equity in your home and investing the proceeds instead. The rationale is that the value of housing will decline and the money is better invested in the stock market.

Turner is not the only one. Others have advocated a similar strategy - even promoting the idea of doing the opposite of what I've suggested above - extending the amortization period of your mortgage to reduce payments and investing the savings on mortgage payments in the market. Is this sound?

Below is a table showing the results of investing $200 a month at various rates of return for 25 years (300 months) and investing the full mortgage payments for 11 years and 3 months (135 months) after paying off the mortgage.

Rate of Return	Accumulated from Investing	Accumulated from Investing Mortgage Savings
5%	$118,546.95	$174,443.17
6%	$137,888.05	$185,483.33
7%	$161,098.13	$197,409.09
8%	$189,019.09	$210,298.59
9%	$222,684.66	$224,237.19
10%	$263,365.33	$239,318.20
12%	$372,385.19	$273,324.86
15%	$633,210.80	$335,781.50
20%	$1,670,245.78	$480,917.94

As you can see, the strategy of paying off your mortgage early is superior to investing instead if the rate of return is 9% or less. If you can make 10% or better, then it's better to invest. But consider this - the strategy of paying off the mortgage early is less risky than investing. In fact, there is hardly any risk at all.

The increased returns of investing only show up at higher rates of return. This requires riskier investment. Such investment is best accomplished when investing over the long haul.

The advantage of paying off the mortgage early is also psychic. There is considerable satisfaction to being debt free and owning your house free and clear.

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