Update On the Bank of Canada’s Latest Commentary with Implications for Canadian Mortgage Rates
December 19, 2011Happy New Year!
January 9, 2012
When the calendar flips to a new year, many of us make resolutions to improve our lives.
Judging by how busy the gyms get during the first three weeks of January, I’d bet that improving physical fitness is the most popular resolution, but improving one’s financial fitness is probably not far behind.
To that end, this post will offer a simple mortgage tip to help existing mortgage borrowers with a below-market rate pay off their mortgage more quickly and prepare for higher rates at renewal.
Topping up your regular payments helps to chip away at your principal over time, and this “set it and forget it” method often works better for borrowers than waiting until they have saved up a chunk of money for a large extra payment. (For many of us, the latter plan never actually sees the light of day.)
Here is an example of the impact that topping your mortgage payment can have for a borrower with two years left on their five-year fixed rate of 2.89% who decides to add a top-up payment each month to make their mortgage payment equivalent to a rate of 5%.
Monthly payment for a $500,000 mortgage at 2.89% (25 yr. am) = $2,338
Monthly payment on a $500,000 mortgage at 5.00% (25 yr. am) = $2,908
Difference = $570
The chart below summarizes how making that extra payment of $570/month over the last two years of their mortgage term will impact this borrower’s balance at renewal, and the total interest saving that will accrue thereafter:
The additional $570/month will knock off an extra $14,062 of principal by the time this borrower’s mortgage comes up for renewal. Thereafter, even if this borrower goes back to making minimum payments for the remaining 20 years of their amortization period, they will save an additional $8,116 in interest.
That works out to 59 cents saved for each $1 of additional payment made.
If you are currently enjoying a mortgage rate of 3%, or less, bumping your monthly payment up to 5% will create a material interest-cost saving, and the required top up is often manageable. (To see what your mortgage payment would be at a 5% interest rate, check my mortgage calculator.)
If you’re looking to improve your financial fitness in 2026, my advice is to top up your mortgage payment using the magic of 5% (and to steer clear of the gyms until early February when there are always plenty of workout machines to go around).