When it comes to mortgages, $100 isn’t going to get you very far. But what if you paid an extra $100 a month towards your mortgage? It’s not a lot of money these days, but it can add up to some solid savings over time.
Let’s look at a $300,000 mortgage with a 2.89% rate and a 25-year amortization. At the end of five years, you’ve paid off an extra $6,444. The balance owing is $249,435. And the remaining amortization is 17 years and 9 months instead of 20 years. This also represents an interest savings of $11,423 over the life of the mortgage. Not bad!
Now let’s look at paying an extra $200 per month. At the end of five years, you’ve paid off an extra $12,888. The balance owing is $242,991. And the remaining amortization is 15 years and 11 months. This represents an interest savings of $20,708 over the life of the mortgage!
But what about higher interest rates? Today’s rates are extremely low and we all know they’re expected to increase gradually over the next couple of years (click here for more on rising rates). Let’s look at the same $300,000 mortgage, but with a 4.00% interest rate. The results may surprise you.
At the end of five years, you’ve paid off an extra $6,624… balance owing is $254,537… and the remaining amortization is 16 years and 11 months. This represents a savings of $17,282 over the life of the mortgage. Remember… this is achieved just by paying an extra $100 per month.
And if we increase that payment by $200 per month, at the end of five years, you’ve paid off an extra $13,256… balance owing is $247,905… and the remaining amortization is 15 years and 7 months. This represents a savings of $31,130 over the life of the mortgage.
As interest rates rise, you benefit even greater from your prepayments. So, the next time you think $100 doesn’t make a difference, think about these examples. Small extra payments can add up to big savings… and they’ll add up much quicker when interest rates increase.
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Steve Garganis: 416-224-0114; firstname.lastname@example.org
As an industry insider, Steve will share info that the BANKS don't want you to know. Steve has appeared on TV's Global Morning News, CBC's "Our Toronto" and The Real Life TV show. He's also been quoted in several newspapers such as the Globe and Mail, The Toronto Star, The Vancouver Sun, The Star Phoenix, etc.