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Example of How to Pay Down Your Mortgage Faster for Variable Rate Borrowers

Assume that you need a $150,000 mortgage, that you want to amortize your loan over 25 years and that the discounted variable rate on offer is 2.25% (we can get 1.75% today but let’s be a little conservative here).

Since you are borrowing 85% of the value of your property you need to pass CMHC’s income test for high-ratio variable-rate borrowers and show that you can afford to pay your mortgage if rates rise to the central bank’s current posted 5-year rate (5.5%).

Congrats. You passed the test!

Your monthly payment is $653.42 based on the variable rate and $915.59 based on the posted 5-year rate.

Compare your mortgage balance at the end of 5 years using the different payment rates. (For simplicity, we are assuming that your variable rate stays at 2.25% for 5 years.)

By setting your variable-rate mortgage payment at the fixed-rate level, you will reduce the life of your mortgage loan from 25 years to 16 years and 3 months. If variable rates eventually rise to the 5-year fixed-rate level you could have originally locked in, you will still have saved money in the interim, and because you reduced your principal faster, rates would actually have to go higher still before you would have been better off choosing a fixed rate.

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