By Geoff Kirbyson
Buying a house is the biggest investment you’ll ever make but don’t let the euphoria about your future living conditions distract you from the flip side — you’re taking on the biggest debt of your life, too.
With the average house price in Winnipeg topping $300,000, that means homebuyers will be paying off roughly $285,000 — assuming a five per cent downpayment of $15,000 — for the bulk of their working career.
Remember how great you felt when you paid off your first car loan? All that money you were used to seeing vanish out of your bank account every month was now staying put. Now multiply that 10, 20 or 30 times and you’ll have an idea what it’s like to pay off your mortgage.
A typical mortgage has a five-year term with a 25-year amortization period. For most of us, that seems like a lifetime away. So, what can we do to speed up the process and pay it off sooner?
There are two primary ways to do so. First, you can make payments more frequently than once a month, such as bi-weekly (good) or weekly (better).
“Increasing your frequency of payments gets
in the equivalent of a couple of extra payments
per year. Over the amortization period, it makes a huge difference,” said Chris Dudeck, president of WinnipegREALTORS®.
You can also make additional lump-sum payments over and above your regular monthly outlays. Most lenders will allow a lump sum payment of between 10 and 20 per cent of your mortgage balance every year without incurring any kind of financial penalty.
“You can shave months to years off your mortgage if you employ as many of these strategies as possible. You build your equity faster. You could move up to another (bigger and more expensive) property if you chip away at the principal faster,” he said.
Until recently, historically low — and often falling — interest rates, meant that homeowners could break their mortgage, incurring significant penalties in the process, because the lower overall payments for the following five years would make it all worthwhile. But with interest rates ticking upwards over the last year - the Bank of Canada left its key overnight rate at 1.25 per cent last month — that option no longer makes sense.
A popular rule of thumb is your monthly mortgage payment shouldn’t exceed 28 per cent of your household’s gross monthly income (which is your income before your taxes are deducted).
For example, if you have an annual income of $80,000, your mortgage payment should be capped at $1,866.
Virtually every financial website has mortgage calculators which enable you to personalize things by plugging in numbers for your own situation.
Many homeowners simply go on autopilot when it comes to paying their mortgage and therefore go the full 25 years. Every month, the same amount comes out of their account and every five years they renegotiate. But with a little planning and discipline, you can find financial freedom sooner than you planned.
“There is no reason to not pay it off faster, if you have the extra cash. It’s a good idea for people to consult with their financial planner. Some people have RRSP strategies that take precedence over paying off your mortgage but my personal gut feeling is it’s always best to pay off debt first,” Dudeck said.