Reducing the borrowing costs of your mortgage
Canada Life - Mar 25, 2022
What would a lower mortgage mean to you and your family?
As housing in Canada keeps getting costlier, there are ways you can save on your mortgage to maximize every dollar you make.
There are two ways to reduce the overall borrowing costs on your mortgage:
- Reduce the amount borrowed (principal)
- Lower interest costs
Reducing principal when buying a home:
The less you borrow, the less interest you’ll pay overall. A larger down-payment will decrease the original amount you have to borrow, lowering the amount of interest you’ll pay. The minimum down payment you need to pay on your mortgage is 5% of the principal amount. A down-payment of 20% or more eliminates mortgage insurance costs, bringing down your overall cost of borrowing.
If the down payment is less than 20%, lenders require borrowers to purchase mortgage insurance. These mortgages are known as ‘high ratio.’ The fees for mortgage insurance can be as much as 4.5% of the mortgage value. On $350,000, that means $15,750.
Reducing the principal once you own a home:
As a homeowner, you can usually take advantage of pre-payment options or payment frequency options that allow you to make extra payments on the principal amount.
Adjust your payment frequency:
Assumptions:
- Mortgage: $350,000
- Amortization: 25 years
- Interest rate: 3.0%
| Frquency | Payment | Time to pay down | Total interest costs | Total paid for mortgage | Saving vs. monthly payments |
|---|---|---|---|---|---|
| Monthly | $1,656 | 25 years | $146,908 | $496,907 | - |
| Accelerated bi-weekly | $828 | 22 years, 4 months | $128,309 | $478,309 | $18,598 |
| Weekly costs | $414 | 22 years, 4 months | $128,115 | $478,115 | $18,792 |
By moving to an accelerated biweekly payment (vs. current monthly payments), you can make extra payments towards your principal each year, which leads to savings over time. In this example, the client saves $18,598 and can reduce their amortization by almost 3 years.
Take advantage of pre-payment
A pre-payment arrangement in a mortgage contract allows you to make principal-only payments.
The amount of pre-payment allowed can vary from 5-20%, depending on your lender. It can be based on your original mortgage balance or the mortgage balance you have at the beginning of each year. It can also be made in different ways, such as one-time annual payments or double-up payments.
How does this translate into savings?
Let’s take the same example above. This time, the mortgage holder applies a $5,000 pre-payment to their mortgage each year from an employment bonus they receive.
- Mortgage: $350,000
- Amortization: 25 years
- Interest rate: 3.0%
| Frequency | Time to pay down | Total interest costs | Total paid for mortgage |
|---|---|---|---|
| Monthly scheduled | 25 years | $146,908 | $496,907 |
| With annual pre-payments | 18 years, 3 months | $102,664 | $452,664 |
Here, the homeowner saves $44,243 and is able to reduce their mortgage amortization by 6 years and 9 months.
Interest rates
A lot of people focus only on the interest rate when it comes to their mortgage. Let’s look at an example to see if the impact of the lowest rate is that significant.
We’ll use the same numbers as the previous examples, but with a 0.10% lower rate.
- Mortgage: $350,000
- Amortization: 25 years
- Interest rate: 2.90%
| Interest rate | Payments | Total interest costs | Total paid for mortgage |
|---|---|---|---|
| 3% rate | $1,656 | $146,908 | $496,907 |
| 2.90% rate | $1,638 | $141,537 | $491,536 |
A 0.10% lower rate over the length of the mortgage could help save $5,371. These savings are certainly nothing to throw away. A great rate definitely has an impact, but it’s more important to have a mortgage with the features and flexibility you need to match your unique financial goals.
Contact me to learn more.
The above example is for illustrative purposes only. Situations will vary according to specific circumstances.
This information is general in nature and is intended for informational purposes only. For specific situations you should consult the appropriate legal, accounting or tax advisor.
Canada Life and design are trademarks of The Canada Life Assurance Company.
Ask an advisor: Mortgage or individual life insurance? – Canada Life
Find out why individual life insurance is your most flexible option to help protect your family financially when buying a home.
View video script
Description: This animated video introduces a character named Aiko and her advisor with illustrated graphics to show the difference between mortgage insurance and life insurance.
Text “Ask an advisor” appears. The camera zooms out as the text lands in an outlined square. “Mortgage insurance or life insurance?” fades in below. An illustration of a shield with a checkmark draws on the right side of the frame.
Aiko: What’s better? Mortgage insurance or individual life insurance?
Description: Aiko appears in a video chat window on a computer screen. Her advisor’s head nods to the right of the frame.
Advisor: I’d always recommend individual life insurance.
Description: Cut to a split-screen of Aiko at home on the left and her advisor in his office on the right.
Advisor: With mortgage insurance, when you die, the money goes to the lender, and they use it only to pay down your mortgage.
Description: An illustration of home draws into the frame. The home moves over to the left and an arrow animates in, pointing towards a box labelled “Mortgage.”
Advisor: As well, your premium payments stay the same while the balance of your mortgage and your insurance coverage decreases.
Description: Cut to a line graph labelled “Mortgage insurance” showing coverage over 10 to 50 years. The coverage decreases over time. The advisor’s hand enters the frame and draws a straight line from the top of the coverage to 50 years, dollar signs pop in to show payments. The camera zooms out to show a line graph of “Individual insurance” where the coverage and payments stay the same.
Advisor: But with individual life insurance, you decide who receives the money and how it’s used. It could be to pay off the mortgage. But it could also pay off other debt, or fund an education or a retirement plan.
Description: An illustration of a shield draws into the frame. A dotted line connects the shield to four boxes labelled “Mortgage,” “Debt,” “Education” and “Retirement.”
Advisor: You also get to say how long your coverage lasts – for a short term or for your lifetime, even after your mortgage is paid.
Description: Cut to bar graph displaying the length of insurance coverage from “Present” to “Lifetime.” The advisor’s hand moves into frame, adjusting the bar from 10 years to lifetime coverage.
Advisor: That’s just a couple of the ways individual life insurance gives you more choice and flexibility in how you protect yourself and your loved ones.
Description: Cut back to the split-screen of Aiko and her advisor.
Text “Contact me today to talk about your insurance needs.” appears onscreen with the Canada Life logo and legal line: “Canada Life and design are trademarks of The Canada Life Assurance Company. canadalife.com 1-204-946-1190.”