While the Bank of Canada has yet to raise their overnight rate—a rate that dictates what happens with variable mortgage interest rates—there are changes within the current Canadian mortgage climate.
In late 2016, TD Canada raised its variable rate mortgage—not just for new mortgage business, but also for existing mortgage holders. The rate increase was in response to three factors: the new mortgage rule changes introduced by the federal government in early October 2016, which add extra costs to lenders and these costs are then passed down to borrowers; the increasing probability that fixed mortgage rates will soon rise, following an increase in U.S. treasury bond yields; and TD Bank’s current exposure to the residential mortgage market.
It’s still important to negotiate the best rate possible (read more on how to do that, here), but now, more than ever, it’s vital that we consider how to crush the mortgage debt.
1. Add an extra sum each month
Each month add a set amount to your regular mortgage payment. Even an extra $15 or $25 per payment adds up. For instance, if you paid bi-weekly and added an extra $25 per payment, after five years you would have reduced the principal loan by 2.5% over the life of the debt (assuming a 2.85% fixed five-year rate on a $450,000 mortgage amortized over 25 years), for more than $7,350 in savings.
2. Put your raise to work
Do you get a bonus from work? What about an annual raise? When your annual, monthly or hourly payroll increases, consider applying the extra to your mortgage. You won’t miss the money as you’re already disciplined about living on the original sum you were earning—and the extra funds will go a long way to reducing the principal mortgage debt.
3. Make a safe bet
If you want to pay-off your mortgage debt faster, a good, safe bet is to double-down on your regular mortgage payments in any given year. By paying double the amount you typically owe, say four times per year, you can shave a thousand or more off what you owe and this translates into months or even years off the amortization.
4. Use your tax refund
Getting a refund this year? Use your refund to pay down your mortgage. Your regularly scheduled payments won’t change, but when it comes time to renew you’ll be thankful for the lump-sum prepayment.
5. Retire your fixed income
If you invest in bonds or GICs, consider using these investments to pay off your mortgage principal once they mature. You’ll be trading in one low-risk investment—for another low-risk investment (a return on bonds or GICs for a paid off mortgage), so you won’t be adding risk to your expected, future return.
6. Use a windfall
If you recently came into some unexpected money—say, through an inheritance or because you won the lottery, or even an unexpected investment gain—use the sum to pay down your mortgage principal. Keep in mind that every lender and every mortgage have their own prepayment rules. Some allow monthly double-up payments, some allow as much as a 20% lump-sum prepayment (of your original mortgage principal). To save yourself from incurring a prepayment penalty read your mortgage document or contact your mortgage lender.