How to Pay Off Your Mortgage Faster

A mortgage is often the largest debt that one undertakes and as a result, many homeowners look to pay it off as soon as they can. In addition to reducing overall debt, paying off your mortgage early enables you to purchase a second home or investment property. Try one of these strategies to reduce your mortgage principal.

  1. Make bi-weekly mortgage payments: Bi-weekly payments involve 26 half-payments each year instead of the standard 12 full payments. By making 13 full payments each year, you’ll pay down the principal sooner and reduce the amount of interest you’ll pay over the long run.
  2. Increase your mortgage payment: You can also increase the amount you pay towards the principal of the payment each month. Most people have higher incomes a few years into their mortgage than they did when they first took it out. Keeping your payment on par with your increases in income will help reduce your mortgage amount significantly and may also reduce the amount of your monthly payment over time.
  3. Make additional payments: If bi-weekly payments or increasing your monthly mortgage payment are not feasible, try to make extra payments when you can. If you have extra money at the end of the year, put it toward your principal.

The majority of consumers who have a mortgage feel it’s important to pay it off as soon as possible, especially if nearing retirement.

*Sources: Scotiabank, US News and World Report

If you’re considering paying off your mortgage early, consider the following:

  • Do you have the cash available to pay down the debt? If you’ve accumulated six months in emergency reserves and have paid off other loans and credit cards, your mortgage should be the next debt you target.
  • Will you have enough cash to save for retirement and other financial goals?
  • How long do you plan to stay in the home? It may make more sense to keep your money liquid and not tied up in a home you might sell in a few years.

Bank of Canada interest rate cut: 5 ways consumers may be affected

Today news hit that the The Bank of Canada surprised financial markets by cutting its key interest rate by 0.25 per cent on Wednesday.  Here is what CBC said about how it may affect us… the consumer 🙂

1. Cheaper mortgages for some, but not all

“This is good news if you’re a variable-rate mortgage holder,” said Penelope Graham, editor at RateSupermarket.ca.

Variable-rate mortgages are determined by the prime interest rate, which is in turn linked to the overnight interest rate the Bank of Canada just lowered. “It remains to be seen just how much [the banks] are going to cut the prime rate, but it will be cut,” said Graham.

However, in a surprise move Wednesday evening, TD Bank said it will not cut its prime interest rate. “Today’s announcement by the Bank of Canada was unexpected,” said Mohammed Nakhooda, a spokesman for TD Bank. “Our decision regarding our prime rate is impacted by factors beyond just the Bank of Canada’s overnight rate. Not only do we operate in a competitive environment, but our prime rate is influenced by the broader economic environment, and its impact on credit.”

Holders of fixed-rate mortgages, of course, won’t enjoy an immediate cut in monthly payments. Canadians taking out a new fixed-rate mortgage or renewing their old one right now could see rates edge down. Fixed mortgage rates are linked to long-term government bond yields. Those bond yields have already begun to fall in light of the Bank of Canada’s interest rate cut.​

Graham warned Canadian home buyers that what goes down, must come up.

“When rates do eventually go up, when the economy recovers, [mortgage holders] are going to see their monthly debt servicing costs go up,” said Graham. “If they can’t handle that, they could see themselves underwater on their mortgages.”

2. Borrowing on lines of credit, credit cards

Like variable-rate mortgages, interest rates for lines of credit are generally tied to a bank’s prime interest rate, which is usually tied to the Bank of Canada’s overnight rate. That means Canadians borrowing money through a line of credit may see their borrowing costs to come down, depending on whether their bank cuts its prime interest rate.

Canadians hoping for a break on their credit card bills, though, are out of luck.

“Your credit card interest [rate] is actually a stated amount,” explained Craig Alexander, chief economist at TD Bank. “So when the Bank of Canada cuts rates or raises rates it doesn’t have an influence on them.”

As with mortgages, Canadians shouldn’t necessarily take further advantage of cheaper borrowing costs just because they can.

CIBC deputy chief economist Benjamin Tal sees a potential risk to the Canadian economy if Canadians start racking up even more debt. A credit-fuelled spending spree is “something that the Bank of Canada would like to avoid,” said Tal.

“Our debt-to-income ratio, at 165 per cent, is relatively high,” said Tal. “That’s a risk that the Bank of Canada is taking.”

3. The loonie flies south

The Canadian dollar fell dramatically against a variety of major currencies as soon as the Bank of Canada made its announcement, and that means Canadians immediately have less purchasing power abroad. That’s bad news for snowbirds with homes in the U.S., or any Canadian planning an international trip.

If Canadians are wondering when to transfer money to a foreign bank account, they can try to take advantage of short-term volatility in exchange rates, according to Karl Schamotta, director of foreign exchange research at Cambridge Mercantile Group.

“Typically exchange rates do not follow a nice linear trend,” said Schamotta. “There’s certainly potential to harness any gains that might occur over the coming months, but at the same time it’s very important to look at that overall backdrop and understand that the Canadian dollar is likely to remain depressed for a long period of time.”

How long could the loonie fly so low? Schamotta sees a clue in the Bank of Canada’s own outlook, which says lower oil prices will have an “unambiguously negative” effect on the Canadian economy for 2015 and beyond.

“What we’re looking at here is a relatively bearish outlook for interest rates and for growth in Canada for at least a one- to two-year period here, and that is likely to keep the Canadian dollar contained,” said Schamotta.

That negative outlook could turn more positive, added Schamotta, if some kind of geopolitical shock causes oil prices to surge once again.

4. No immediate effect on auto loans

Auto loans tend to be fixed-rate, not variable-rate. That means the Bank of Canada’s interest rate cut won’t have an immediate effect on auto financing, according to Canadian Auto Dealers Association chief economist Michael Hatch.

“I don’t think that tomorrow automotive consumers are going to wake up necessarily to easier or harder financing conditions,” said Hatch. “It’s going to remain par for the course.”

Still, Hatch didn’t rule out cheaper auto financing in the near future. “It’s a very competitive [interest rate] environment out there. It could well happen in the next few months, going into the spring selling season.”

5. A bad time for savers

If you enjoy interest generated from a traditional savings account, the Bank of Canada’s move is bad news for those returns.

“We saw when the Bank of Canada cut interest rates during the last recession that interest rates on savings accounts went down almost linearly with the decline in the Bank of Canada overnight rate,” said Randall Bartlett, senior economist at TD Economics.

“There’s not going to be a massive change, but at the same time … ifyou’re not earning much interest before, you’re going to be earning less interest now,” added Bartlett.

This could be a good time for savers to think about changing their strategy, said Bartlett.

“As interest on things like savings accounts and government debt … comes down, at the same time it does provide incentives for people to invest in other types of assets that have higher returns,” said Bartlett. “Things like stocks, ETFs, mutual funds … tend to benefit from rate cuts” as businesses take advantage of cheaper credit to make investments that could improve their share prices down the line.