Buying a house can be costly, but owning your own home is a dream that's hard to ignore—and for most of us, taking out a mortgage is the only way to make that dream a reality. So what can you do to cut down on the interest and other costs of borrowing? Here are a few tips to save at least $25,000:
Increase your monthly payment and save on interest
Increasing your monthly mortgage payment can yield big savings in the long run. When you choose a shorter amortization period, you are committing to paying your mortgage down quicker and that reduces the time your bank can charge you interest. It may be tempting to go for a 25-year amortization period, but there are big savings when you opt for 20 years instead.
Take a look at this example from Canada's Financial Consumer Agency: you have a $200,000 mortgage with an interest rate of 6% and you plan to pay off your mortgage in 25 years. Your monthly payments are just $1,280 per month, but over that 25 years you will pay almost $184,000 in interest. If you go with a shorter amortization period, 20 years for example, the amount of interest you pay falls to about $142,000. Your monthly payments go up $144 per month, but you save $42,000 over the long haul.
Make a payment every two weeks and pay down quicker
Another way to see considerable savings is to change your monthly payments to accelerated bi-weekly payments. For example. if you're making a monthly mortgage payment of $1,000, and you change that to bi-weekly payments of $500, your total mortgage payment for the year changes from $12,000 to $13,000. This is because you end up making one additional payment per year. Not only will you pay down your mortgage faster this way, you will save interest on every instalment by making payments more often.
Make pre-payments when you can and benefit big
If you can sock away some extra funds, consider using them to make a mortgage pre-payment. Many banks will allow you to make a lump sum payment of up to 20% each year and if you can capitalize on this opportunity these payments can result in big savings.
Even relatively small amounts, like an extra $1000 per year, can make a difference and shave a few years of your mortgage. Many lenders will also let you make a lump sum payment of any amount at renewal time.
Shop around at mortgage renewal time and win
When your mortgage comes up for renewal, it's your chance to find a better deal. Look for other mortgage products from your bank or other lenders that provide a better interest rate, more pre-payment privileges or a different term that suits your life better. Fortunately with KANETIX.ca, there's never been an easier time to compare mortgage rate options. And while you're at it, don't forget to find out what mortgage you can afford using our mortgage payment calculator; it's a handy tool that let's you see how much you'll pay in interest depending on your amortization, interest rate, and payment frequency-it's worth a look.