Wednesday, 28 March 2012

Buyers getting creative

Many Canadian homeowners are putting compound interest in its place by accelerating their mortgage payments, potentially knocking years off their repayment schedules.

A report issued in November by the Canadian Association of Ac-credited Mortgage Professionals (CAAMP) indicates that about 36 per cent of 5.8 million mortgage holders accelerated their mort-gage payments during the previous year. That includes 16 per cent who increased their monthly payments, 17 per cent who made lump sum payments and five per cent who increased the frequency of their payments.

About six per cent of mortgage holders used more than one of these approaches to whittle their mortgages down.

"It's the most recent buyers - those who purchased from 2006 and 2011 - who are making the most additional efforts to speed up the repayment of their mort-gages," says Jim Murphy, president and CEO of CAAMP.

Reduction efforts made early in the history of the mortgage will have far greater effect than those made closer to the end.

A case in point: a property owner with a $200,000 mortgage amortized over 30 years at four per cent interest can pay off that mortgage four years sooner simply by switching from monthly to bi-weekly payments.

Murphy notes, however, that not all mortgages are created equal.

"Most mortgages will let you pay down 20 per cent of the principal on an annual basis without a penalty, which is great if you expect a windfall of cash that can be applied to the mortgage," he says.

"Some of the newer mortgage packages offer a low interest rate, but also limit lump sum payments to 10 per cent of the principal. Be careful of the mortgage features you choose and make sure they offer the best features for your circumstances."

With the days of double-digit interest rates relegated to the past, the focus of many mortgage holders has been on faster repayment and mortgage flexibility, says David Stafford, managing director, real estate secured lending, at Scotiabank.

"Canadians are really creative at paying down their mortgages, and with the advent of online mortgage calculator tools, it's be-come easy to see how even small efforts can accelerate mortgage freedom," he says.

While some property owners are simply using bonuses or tax refunds to pay down mortgage principal, or keeping their payments the same if interest rates drop, others are attacking their mortgages with death by a thou-sand cuts.

"You can lop 10 years off your mortgage without breaking a sweat," says Stafford.

"Some people are going on-line and rounding off the pocket change they see after the decimal place every chance they get, or rounding their mortgages down to the nearest $10 or $100 increments. Others are increasing their monthly payments by $10 for each year of the mortgage. It's all part of chipping away at the base of that mountain."

Why would a bank want borrowers to be mortgage-free faster?

"When you pay down your mortgage faster, you're building up equity," says Stafford. "If you've paid down that mortgage in 15 years instead of 29 we can move you to the next stage sooner, where you're examining your balance sheet and making it work for you by looking at the investment side."

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