Strategies to Reduce Your Mortgage Payment
Looking to reduce the impact of your future renewed mortgage payment? Look no further! This article will go in the different options on how you can be proactive to reduce your mortgage installments in the upcoming years. At CYF we understand individual’s financial situations are different so these solutions are not one size fits all. The following options are not considered advice but rather directions you may take depending on your personal lifestyles.
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OPTION #1 - Accelerate Mortgage Payments
While putting an annual lump sum payment or increasing mortgage payments on a low interest rate mortgage might seem counterintuitive, this could save you hundreds of dollars per month upon mortgage renewal. Lump summing or accelerating payments could be achieved in different ways and its recommended to review the agreement with your lender. That said, the two most typical ways are by putting annual lump sum payments or by increasing your payment by a specified percentage to meet your payment goals upon renewal.
The main thing to be aware of is ensuring you DO NOT pay more than the privilege amount on the loan annually. This varies depending on the agreement but usually will range between 10%-20% per year.
OPTION #2 - Save and Lump Sum at Renewal
This strategy will be more beneficial for individuals with very low fixed mortgage interest rates. Since interest on mortgages are front end loaded, it almost always makes more sense to implement option 1. However, there are good fixed rate savings tools (ie. GICs, HISAs) that provide steady returns on a future lump sum payment.
Depending on the situation, it might be worth holding the annual lump sum and collecting a 3-5% generated in these tools. This in addition to the amount generated can be used as a lump sum payment at renewal.
Please review this strategy with your financial planner/advisor to see if this can be tailored to your situation.
OPTION #3 - Re-amortization
This option was left for last because it might be the toughest to accomplish and it extends the term of the loan. If the new interest rate is too much to stomach, it might be worth having a conversation with your mortgage broker/advisor to see the re-amortization options that are available. For this to occur a new loan application must be submitted and therefore stressed tested at the current interest rates. If the applicant is successful, the new payment will be lower in comparison to the renewed mortgage at the original amortization timeline.
Stress test rules state that borrowers are approved for a rate of either the interest rate they were approved for by their lender plus 2%, or 5.25% (the minimum qualifying rate), whichever is higher. Currently, this would most likely be 2% more than the approved lender rate.
Option #3 is great if you are okay with extending debt to have a lower monthly mortgage cost. This might not be the best long term financial move but can help get through a higher interest rate environment.
Again, please review this strategy with your financial planner/advisor alongside your mortgage broker/advisor.
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To summarize, these strategies can aid in reducing the impacts of increased interest rates for borrowers with existing low interest rates. Options #1 and #2 will require more capital and time to decrease the future impacts while Option #3 can assist people looking for strategies “now”.
If you are looking to maintain your mortgage payment and would like to develop a strategy, send Patrick Clinton an email at patrick@cyfinances.ca or book an appointment today!
