The uncertainty of job loss racing through many people’s minds these days, taking a proactive approach to this issue by putting mortgage payments aside while you’re still actively employed can help set your mind at ease.
Planning for the future and potential job loss is one of the most important undertakings you can make to ensure you can pay your mortgage in an uncertain economy.
Mortgage professionals often suggest you put money aside each pay period so you can place six to 12 months’ worth of mortgage payments into a short-term GIC as security for a possible job loss.
And, best of all, if your job remains secure, you can take the money out of your GIC and make a pre-payment back on your mortgage on your anniversary date, which can end up saving you thousands of dollars in interest payments.
Refinancing to access your home’s equity
If it’s not plausible to save money each pay period, refinancing to access the equity you’ve already built up in your home is another valid option for planning ahead in uncertain times.
In addition to freeing up money to store future mortgage payments in a GIC, some of the money can also be used to pay off high-interest debt – such as credit cards – and get you and your family off to a fresh financial start.
You will find that taking equity out of your home to pay off high-interest debt can put more money in your bank account each month.
And since interest rates are at historic lows, switching to a lower rate may save you a lot of money – possibly thousands of dollars per year.
There are penalties for paying your mortgage loan out prior to renewal, but these could be offset by the extra money you acquire through a refinance.
With access to more money, you will be better able to manage your debt. Refinancing your first mortgage and taking some existing equity out could also enable you to make other investments, go on vacation, do some renovations or even invest in your children’s education.
Keep in mind, however, that by refinancing you may extend the time it will take to pay off your mortgage.
Options for paying your mortgage down quicker
There are many ways to pay down your mortgage sooner that could save you thousands of dollars in interest payments throughout the term of your mortgage.
Most mortgage products, for instance, include prepayment privileges that enable you to pay up to 20 per cent of the principal (the true value of your mortgage minus the interest payments) per calendar year. This will also help reduce your amortization period (the length of your mortgage), which, in turn, saves you money.
Another way to lower the time it takes to pay off your mortgage involves changing the way you make your payments by opting for accelerated bi-weekly mortgage payments. Not to be confused with semi-monthly mortgage payments (24 payments per year), accelerated bi-weekly mortgage payments (26 payments per year) will not only pay your mortgage off quicker, but it’s guaranteed to save you a significant amount of money over the term of your mortgage.
If, for instance, you have a $100,000 mortgage, an interest rate of 5 per cent and an amortization period of 25 years, your monthly mortgage payment would be $581.60 and your total payments for a year would be $6,979.20 ($581.60 x 12).
To understand the savings accelerated bi-weekly mortgage payments can make, take the monthly mortgage payment of $581.60 and divide it by two ($581.60 ÷ 2 = $290.80). Next, take that payment and multiple it by 26 to arrive at your total payments for the year ($290.80 x 26 = $7,560.80).
As you can see, by using the monthly mortgage payment plan, you’ve made payments totalling $6,979.20 for the year, while using the accelerated bi-weekly mortgage plan you’ve made payments totalling $7,560.80 – a difference of $581.60.
Basically, with accelerated bi-weekly mortgage payments, you’re making one additional monthly payment per year.
Using this example, you would reduce the amortization on your $100,000 mortgage from 25 years to just over 21 years and your total savings on interest over the life of the mortgage would be just over $12,000.
By refinancing now and paying off your debt or putting money aside for future mortgage payments, you can put yourself and your family in a better financial position.
Barbara Ten Bos is a mortgage professional with Dominion Lending Centres. She provides a monthly column about mortgage options, for publication in The Observer. Email her at btenbos@dominionlending.ca or call 604-819-5845.
