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Posted Mortgage Tips

Do bi-weekly payments save you money?

Back in the mid 90’s, there was a huge marketing blitz by the Big Banks that promoted making bi-weekly payments instead of the traditional monthly payments.   The sales pitch was that you could save huge amounts of money and pay your mortgage off much faster….save 4 or 5 years off your amortization…. Sound familiar?   Well, BI-WEEKLY PAYMENTS DON’T REALLY SAVE AS MUCH AS YOU THINK!

And I’ll prove it…. here’s the straight facts!

Let’s use a $200,000 mortgage with a 25 year amortization, a 4.00% interest rate and a 5 year term.

MONTHLY PAYMENTS $1,052.04.  MORTGAGE BALANCE AT END OF 5 YEARS $174,107.86.

Now let’s calculate bi-weekly payments and the balance remaining at the end of the 5 year term.

BI-WEEKLY PAYMENTS $485.55.  MORTGAGE BALANCE AT END OF 5 YEARS $173,885.20

So you end up reducing your balance by only $222.66 over a 5 year period... Not much of a benefit…you really aren’t paying your mortgage off sooner.

You may have seen options by your Lender or Bank to pay an ACCELERATED PAYMENT.   This simply means you increase the amount you pay every month…  The normal acceleration formula is to make one more month’s worth of payments every year but spread it out over the 12 months… I’ll show you.

LET’S USE THE SAME MORTGAGE OF $200,000, 25 year amortization, 4.00% interest rate and a 5 year term.

ACCELERATED MONTHLY PAYMENT $1,139.71.  MORTGAGE BALANCE AT END OF 5 YEARS $168,300.27.

You end up with a balance that is $5,807.59 lower at the end of 5 years…but don’t forget, you paid and extra month’s worth of payments every year during those 5 years, totaling $5,260.20.  So the net benefit is really $547.39….

Now let’s look at ACCELERATED BI-WEEKLY PAYMENTS of $526.02….the  MORTGAGE BALANCE AT END OF 5 YEARS IS $168,121.95.

The net benefit is a little better… $725.71…

BOTTOM LINE…. increase your payments and you’ll pay your mortgage off sooner…go with a bi-weekly ACCELERATED payment… it is a better choice.. bi-weekly or weekly payments are not a mysterious formula for paying your mortgage off sooner… It’s the INCREASED PAYMENT that helps you pay it off sooner…… After all, the best mortgage is no mortgage.

Posted Interest rates

Historical Interest Rate charts

One of our Lenders, Firstline, sends out a monthly update on Interest rates  .. click here FLM-Historical- Rate-Sheets-May 2010 .  The Charts go back 25 years… some very interesting patterns…  Overwhelming data that shows Variable rate or short-term mortgages really do outperform Longer term fixed rate products…

Another benefit is a fixed or reduced mortgage prepayment penalty…. (anyone with a longer term fixed rate could face enormous penalties of 6, 7, 10 or even 12 months worth of interest)…. Variable rate or short mortgages usually have penalties of 3 months interest or less.

Not sure where you fit in?   Call me anytime with your questions or comments.

Posted Mortgage News

Are you one of these people?

Was reading this survey about First Time Home Buyers that TD Canada Trust did recently...

Thought the most interesting stat was that 3/4 of the people surveyed were opting for a Fixed Rate mortgage.   And in the same paragraph, the TD rep acknowledged that Variable Rate mortgages performed better… Does any of this sound familiar?

Here’s some more good news.. well, actually it’s bad news for the Stock Market and investor confidence but it’s good news for interest rates… The 5 year Canada Bond has dropped significantly…  We were at 2.33% at one point today… meaning 5 year fixed mortgage rates should really be hovering around 3.80%… but instead we are seeing best rates at around 4.29%…   WHY?  Pure profit taking by the Banks…

But don’t fret…this uncertainty means there is less chance for rates to increase and less chance they will increase significantly…. And for those in a Variable rate, rates of 3.80% and 4.29% are still too high….  Variable rate mortgage clients are enjoying 2.00% or better…   Enjoy the summer!

Posted Consumer Debt

Personal Debt levels are now better? Happy Canada Day!

Remember those reports in the media about how our Personal Debt levels were rising at an alarming rate?  There was huge concern that we were borrowing more than we should… that we could be headed for trouble…. The Bank of Canada warned about rising household debt levels….

And remember on May 13th, I reported that this needed a closer examination… that perhaps our debt levels were higher than other G20 countries for other logical reasons…..maybe we are borrowing at these record rates to invest, to do other practical things…??

Well, oddly enough, a new report from the CIBC states that Household credit is softening… we are not running wild and spending like drunken sailors….  The sky isn’t falling… hooray!

Happy Canada Day!

Posted Mortgage Rates

G20 Toronto smashes bank windows…Big Six lower their Fixed Rates

In case you’re wondering how the G20 Summit affected Canada’s mortgage business…. Most Lenders have their head offices in the heart of Toronto… and most all of them issued notices that turnaround times and disruptions may occur…Fortunately, Lenders have back up plans because of past emergencies likes 9-11, SARS and the Blackout.

Oddly enough, the Big Six Banks all lowered their Retail mortgage rates over the past few days…. 10bps is not a big drop, but any rate drop should be welcome news to all Canadians.

  • Posted 5 year fixed rate is 5.89%.  This is also the qualifying rate for mortgages with less than 20% down payment and terms less than 5 years and for Variable rate mortgages…..
  • The best discounted 5 year fixed rates seem to be around 4.39%…
  • No changes for Variable rate pricing… Big Six are advertising Prime less 0.35% as their best but wholesale rates are at around Prime less 0.60% and sometimes better.
  • Big Banks giving big push for Hybrid mortgages….and although I’m not a fan of these products for most of us, there may be a place for them for some of us….just make sure you are fully aware of all the pros and cons of this product.

Just a personal comment about the G20 Summit… as someone who was born and raised in Toronto, I was saddened by the images that flashed across our TV set…police cars on fire…broken windows, masked protesters…This isn’t a true reflection of our city…our city has the reputation of being one of the cleanest, safest and friendliest in the world… I hope that message made it’s way to the rest of the world….