Four Ways to Lower Your Mortgage Payment
Some people believe you should pay off your mortgage as quickly as possible by having high monthly mortgage payments. Others believe that you should minimize your monthly mortgage payments to leave more cash in your pocket, so you can enjoy life while you’re young.
Financial advisors recommend that you keep your monthly housing costs under 30 percent of your before-tax income, so you won’t feel a financial strain each month. Housing costs include the mortgage payment, property taxes, condo maintenance fees, and utility bills.
If you feel like you don’t have enough money left over at the end of the month to handle an emergency or go on vacation, here are four ways to reduce your monthly payments.
1. Extend the Lifespan of the Mortgage
A simple way to lower your mortgage payment is to extend it’s lifespan, a mortgage broker would call this the “mortgage amortization.” Essentially, it involves stretching the time-frame over which you agree to pay off the mortgage. In Canada, you will need to refinance your mortgage to do this. The typical Canadian mortgage has a 25-year lifespan, but there are lenders who offer 30-year and 35-year mortgage lifespans. You’ll need to make sure you won’t trigger a penalty when refinancing your mortgage because refinancing is equivalent to paying-off a mortgage and replacing it with a new one.
Example:
So that you fully understand the impact of mortgage lifespan on your finances, we will compare two mortgages after the first 5 years that are identical except for the lifespan.
Loan Amount: $300,000
Fixed 5-year Mortgage Rate: 3.50%
Payment Frequency: Monthly
| 25 Year Lifespan | 35 Year Lifespan | |
|---|---|---|
| Monthly Payment | $1,500 | $1,240 |
| Loan Balance After 5 Years | $259,000 | $276,000 |
| Total Cost of Borrowing | $48,710 | $50,130 |
2. Refinance to Pay-off Non-mortgage Loans and Credit Cards
Typically, the interest charged on a mortgage is lower then what is charged for car loans, credit cards, and other loans. As well, these other debts usually need to be repaid within 3 to 5 years. This means that for the same amount borrowed, they have higher monthly payments than mortgage. This strategy involves refinancing to increase your mortgage amount so you can use the money to pay-off the other debts. Not only does this reduce your monthly expenses, but it also simplifies your life by combining all of your payments into one mortgage payment.
3. Have Your Home’s Tax Assessment Redone
If home prices in your neighbourhood have dropped or you think that you’re home has been assessed at too high a value by the tax authorities, you can challenge their valuation and lower your taxes. Normally, the savings will be equivalent to the value adjustment. For example, if you were paying $2,000 in annual property taxes for home assessed at $200,000, then successfully arguing the home is worth $190,000 will reduce your property taxes to $1,900. This isn’t nearly as impactful as refinancing your mortgage, but it means you may not have to give up your lattes.
4. Make Extra Payments Toward the Mortgage
If you have extra savings and use them to pay down your mortgage, you’ll pay less interest but your payments don’t reset until the end of the mortgage contract, the industry calls this the mortgage term. In Canada, this is typically three to five years.
There is a way around this, but it’s a bit complicated. It involves blending your existing term with a new one. This is often called a “blend and extent” or a “bend to term.” They take the weighted average of the interest rates and recalculate the monthly payments. Doing this after making a big repayment to your mortgage allows you to reset your payments without refinancing. Here are the steps you should take:
Find out if your mortgage lender allows these blended mortgage contract duration (i.e., term) options.
Make a big payment to pay down your mortgage, be careful not to trigger a penalty. Most lenders allow you to pay
down between 10 and 20 percent of the original mortgage amount without triggering a penalty.
Perform a “blend and extend” or “blend to term” to lower the payments.
A blend solution can only be negotiated with your existing lender.
Conclusion
If you are having trouble paying your mortgage, talk to a mortgage broker before you talk to your lender, they can explore more of these options, and more, to see which solution will help improve your situation. After speaking to a mortgage broker, you’ll be better informed for a discussion with your lender. We recommend the broker first, because the lender can only propose solutions allowed by their product and lending policies, whereas a broker will look across all of the lenders to select the lender that provides the best deal for your needs.
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