Renewing Your Mortgage? Keep your Payments the Same!
9 April, 2012 / by Bryan Jaskolka
There’s an interesting thing happening with Ottawa mortgages, Oakville mortgages, and mortgages all around the country right now – and it has many homeowners who obtained their mortgage in 2007 asking themselves some pretty tough questions.
In 2007, the Canadian mortgage market looked slightly different than it does today, although there were some similarities, too. The financial crisis hadn’t hit, and mortgages were in a fairly stable place. Like today’s market, the discounts between variable and fixed was minor and also like today’s market, homebuyers and owners thought that interest rates would be going up very soon. Unlike today however, it was thought that rates were going to rise fairly substantially and fairly quickly. Because of these reasons, many homebuyers in 2007 chose the fixed rate mortgage over the variable rate to save some money and keep their peace of mind.
Of course, interest rates were dropped to historical lows when the financial crisis did eventually hit a year later. Still, those homeowners that took a five-year fixed rate mortgage were only paying somewhere in the neighbourhood of 5.79% – not to shabby for a mortgage. But – and here’s where it gets really interesting – now many of those homeowners are left with a choice. Today, that same five-year fixed rate mortgage is being offered at 3.29% by some lenders, and at only slightly higher with other lenders, and it’s time for 2007 homeowners to renew. They can change the terms and the rate to take advantage of the lower rates, or they can continue making the same payments they have been all along. The latter option of course, will allow homeowners to save their money and be mortgage-free even faster.
How much exactly could you save by continuing to make the payments you’re used to? Well, consider that you originally took out a $300,000 mortgage on your property with a 30-year amortization. The monthly payments from 2007 until now (or your time of renewal) would be $1,745 and the amount remaining on the mortgage at renewal would be $278,184. Moving to a five-year fixed rate mortgage at 3.29% would make the new monthly payments $1,358 – a savings of $387 a month. That’s a nice chunk of change, so why do you want to use it to pay down your mortgage early?
If you continue to apply that $387 towards your mortgage, the balance on renewal would be $213,914. If you chose to keep the savings and apply them elsewhere, your mortgage balance on renewal would be $239,087 – a difference of almost $30,000! This of course doesn’t just come off the principal amount, but also means that you’ll be paying less interest – much less interest over the long term.
With mortgage rates so low today, there are a number of ways to save money on your mortgage payments. But with the difference in mortgage rates over the past five years, now seems to be an especially good time for 2007 homebuyers to seize the opportunity and pay down their mortgages even faster!