Easing the pain of rising mortgage interest rates
By ATB Financial 22 June 2023 3 min read
Everyone knows that paying down your mortgage faster is a great way to save money in the long run—but what’s the smartest way to do it when interest rates are rising?
Over the last year, interest rates have increased significantly and continue to fluctuate. While the terms of your mortgage depend on your lender and the type of mortgage you have, rising interest rates could affect both the size of your mortgage payments and the rate at which you’re scheduled to pay off your mortgage.
Here are two strategies that may help you pay off your mortgage faster, despite rising interest rates. Before your mortgage comes up for renewal, talk to your mortgage advisor about increasing your payment frequency and/or taking advantage of prepayment privileges.
Increase payments now so that your balance is paid down more quickly.
You can make your mortgage payments monthly, semi-monthly (twice a month), accelerated bi-weekly (every two weeks) or weekly. Semi-monthly and accelerated bi-weekly may seem like identical frequencies, but accelerated bi-weekly payments can save you thousands in interest and help you pay off your mortgage years earlier. Let’s do the math: With semi-monthly payments, you'll make 24 payments every year (two per month). With accelerated bi-weekly payments, you’ll make 26 payments every year (one payment every second week for 52 weeks)—that's two extra payments every year.
While accelerated bi-weekly payments offer a significant advantage to monthly and semi-monthly payments, weekly payments will allow you to pay off your mortgage only slightly faster. If you choose to make weekly rather than accelerated bi-weekly payments, it will take six years to slip an additional payment into the rotation, which will make little difference over the span of your amortization period.
For many Albertans, it's most convenient to align mortgage payments with paycheques. But even if you get paid semi-monthly, if your budget can accommodate the extra two payments of the accelerated bi-weekly option, you should go for it. As you can see, the savings can be significant:
Using a $300,000 mortgage at 5 per cent (per annum):
|Payment frequency||Monthly payment||Actual amortization (years)||Total interest costs (over the life of the mortgage)||Interest saved|
If possible, make a lump sum payment so when you renew your mortgage, it’s at a lower balance.
If you have a closed mortgage, pre-payment privileges are another option that may be available to you.
While open mortgages can be paid off at any time, lenders generally impose a penalty on a closed mortgage if you pay it off before the end of your term.
Thankfully, closed mortgage owners aren't stuck with their regular payments: many lenders allow you to increase your payments by a specified amount or “prepay” a percentage of your principal each year.If you go over these limits, you will have to pay a penalty. ATB, for example, offers some mortgages which allow you to increase your payments by 20 per cent each year or prepay up to 20 per cent of your loan each year .
As with the previous two options, these prepayment privileges allow you to pay down your mortgage faster.
Again, using a $300,000 mortgage at 5% (per annum):
|Pre-payment choices||Standard 25-year amortization||Increase mortgage payments once by 20% and increased payment maintained||Make payment of 20% ($60,000 at end of 1st year only)|
|Mortgage repaid in months||300||217||208|
|Total interest cost (over the life of the mortgage)||$223,444.49||$154,570.50||$121,925.68|
|Interest saved vs. standard 25-year amortization||N/A||$68,873.99||$101,518.81|
Keep in mind that not all of these options apply to every mortgage. It’s always wise to consult a mortgage specialist before you sign up for a mortgage or make changes to your existing mortgage. Before your mortgage comes up for renewal, connecting with a specialist can help you determine the best plan in times of uncertainty.
Ready to start paying down your mortgage faster? Get in touch with one of our mortgage specialists.