Tag Archives: Financial Consumer Agency of Canada

How to pay off your mortgage sooner

By Sheryl Smolkin

A continuing debate among personal finance pundits is whether you should pay off your mortgage first or save for retirement, particularly in a low risk environment. The fact is you should probably do a little of both as frequently as possible. One strategy some experts advocate is to make an RRSP/SPP contribution and then use your tax return to decrease your mortgage balance, thereby reducing your amortization period and minimizing the total cost of your loan.

But whatever you decide to do, your goal should be to eliminate your mortgage entirely before you retire. By doing so, you will reduce your monthly expenses and minimize the impact the drop in income at retirement will have on your lifestyle.

How much you can pay down your mortgage and when will depend on the terms of the loan secured on your property. That’s why it’s important when you are negotiating or re-negotiating your mortgage to clearly understand the terms and what if any penalties you might incur if you deviate from the prescribed payment schedule.

Here are four ways to pay off your mortgage faster with examples as suggested by the Financial Consumer Agency of Canada:

1. Increase the amount of your payments

One of the ways to pay off your mortgage faster is to increase the amount of your regular payments. Normally, once you increase your payments, you will not be allowed to lower your payments until the end of the term. Check your mortgage agreement or contact your mortgage lender for your payment options.

For example, if John is getting a mortgage of $150,000 amortized over 25 years with a fixed interest rate of 5.45% for five years, minimum monthly payments amortized over 25 years are $911.  If John pays just $50 a month more, it will only take 22.5 years to retire the mortgage and he will save $14,000.

2. Renew at a lower rate, keep payments the same
At the end of your mortgage term, when you renew or renegotiate your mortgage, you may be able to obtain a lower interest rate. Although you will have the option to reduce the amount of your regular payments, you can take advantage of this situation to pay off your mortgage faster. Simply keeping the amount of your payments the same will make you mortgage-free sooner.

Stephanie adopted this strategy when she renewed her $100,000 mortgage after five years and the interest rate dropped from 6.45% to 5.45%. While the lower interest rate would have reduced Stefanie’s monthly payments to $924, she decided to keep the monthly payments at $1,000 in order to reduce the total amount of interest payable over the term of the mortgage.By keeping the monthly payments at $1,000 per month with the lower interest rate for the rest of her mortgage, Stefanie will save over $12,000 and will pay off the mortgage two and a half years sooner.

3. Choose an “accelerated” option for your mortgage payment
You can spend approximately the same amount of money on your mortgage each month and still save money by choosing an accelerated option for making your payments. Most financial institutions offer a number of payment frequency options:

  • Monthly
  • Semi-monthly
  • Biweekly
  • Accelerated biweekly
  • Weekly, and
  • Accelerated weekly

Accelerated weekly and accelerated biweekly payments can save you thousands,  or even tens of thousands in interest charges, because you’ll pay off your mortgage much faster using these options. The reason is that you make the equivalent of one extra monthly payment per year.

Let us assume that Richard has a mortgage of $150,000, amortized over 25 years, with a constant interest rate of 6.45%. If he chooses an accelerated payment frequency equivalent to one extra monthly payment a year, Richard will pay off his mortgage over four years sooner and save more than $29,000 in interest over the amortization period.

4. Making lump-sum payments: Prepayments
A prepayment is a lump-sum payment that you make, in addition to your regular mortgage payments, before the end of your mortgage term. The prepayment reduces your outstanding balance and allows you to pay off your mortgage faster.The sooner you can make the prepayment, the less interest you will pay over the long term, and the sooner you will be mortgage-free.

5. Key things to remember:

  • Your mortgage agreement will specify whether you can make prepayments, when you can do so and other related terms or conditions. Read it carefully, and ask your mortgage lender to explain anything you don’t understand.
  • If your mortgage lender is a federally-regulated financial institution such as a bank, as of January 2010, it must show your prepayment options in an information box at the beginning of your mortgage agreement.
  • Your mortgage agreement may specify minimum and maximum amounts that you can prepay each year without paying a fee or penalty.
  • The prepayment option is generally not cumulative. In other words, if you did not make a prepayment on your mortgage this year, you will not be able to double your prepayment next year.
  • A closed mortgage agreement may require you to pay a penalty or fee for any prepayment.

Nov 3: Best from the blogosphere

By Sheryl Smolkin

November is Financial Literacy Month (FLM) in Canada, and the Financial Consumer Agency of Canada is playing a role in raising awareness and mobilizing organizations across Canada to take part. Here are some blogs and other commentary on financial literacy.

Financial literacy means having the knowledge, skills and confidence to make responsible financial decisions. The FCAC recently released its “National Strategy For Financial Literacy Phase 1: Strengthening Seniors’ Financial Literacy.

The Toronto Star’s Ellen Roseman writes that, “Financial literacy for seniors is crucially important, but it’s not a panacea. Let’s put money into enforcing consumer laws and protecting the vulnerable from tricksters.”

Redux: Real World Example: Kids Allowances is one of Big Cajun Man’s (Alan Whitton) first bits of writing where he commented on how a simple idea about making his childrens’ allowances easier to administer taught him more about money.

Savewithspp.com also previously dealt with financial literacy for children in Your kid’s allowance: Financial literacy 101 and Back to school shopping: A teachable moment.

Back in November 11, 2011 in Financial Literacy Week teaches us about financial success Jim Yih shared 26 simple ideas to grow, manage and protect your wealth. Some of my favourites are:

  1. Know yourself first.
  2. It all starts with planning.
  3. Pay down and manage your debt.
  4. Save money automatically and regularly
  5. Understand how your money is taxed.

And last but not least, the Government of Saskatchewan’s Financial and Consumer Affairs Authority has a website with links and tools supporting financial literacy for young people/parents/educators, adults and seniors.

Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information with us on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.

Make budgeting a family project

By Sheryl Smolkin

SHUTTERSTOCK
SHUTTERSTOCK

Think of a realistic budget as the GPS that will help you reach your financial objectives. Unless you know how much money you have available and make a plan to spend less than you earn, paying off debt, saving for a down payment on a house or getting ready for retirement may seem like insurmountable goals.

Budgeting is not rocket science, but it requires discipline. Where you have a partner, both of you should participate in the process. Any children should also be involved to a more limited extent, depending on their ages. If the whole family understands and agrees to budget priorities established by the group, it is more likely that they will follow the roadmap. 

Keys to successful budgeting: 

Some keys to successfully budgeting are:

  1. Understand how much net income your family has every month.
  2. Identify your fixed and variable expenses.
  3. Build debt repayment and savings into your budget.
  4. Establish family priorities.
  5. Develop a plan to control costs as required.
  6. Record all expenditures to help you stay on plan.

Two techniques for staying on plan that money maven Gail Vax Oxlade uses successfully with couples on her television program “Til Debt Do Us Part” are:

  • Cut up debit and credit cards and spend only cash.
  • Allocate the amounts you have available to spend for each category like food, clothes, rent etc. into a series of “jars” for every pay period. 

Getting started

First of all, gather up all your payslips, bills and credit card statements so you have the information you need all in one place. There are lots of online tools that will allow you to enter your data and play around with the numbers until they add up to something that will work for your family.

For example, the Financial Consumer Agency of Canada offers an online budget calculator.  Vaz Oxlade has a no-cost guide to building a budget and an interactive online spread sheet available on her website.

There are many other calculators and specialized spreadsheets available online, but I’m a big fan of googledrive. This free application allows you to create an online spreadsheet and give other family members access from different devices.

While you may choose to have only one person enter or delete data, if each person can record money spent on an ongoing basis, anytime someone is contemplating an expenditure, he/she can get a clear picture of the state of the family’s finances. 

Fixed expenses

There are certain unavoidable family expenses that recur on a regular basis. These may include rent or mortgage payments, house insurance, property taxes, utilities, car payments, gas, car insurance, other transportation life insurance etc. You get the picture.

While you could move to less expensive accommodations or take the bus instead of driving if you have to, these expenses cannot be easily reduced in the short term. Therefore, make sure you account for them carefully up front when you are developing your budget.

Food, clothing

Food and clothing are important components of your budget. If you use a credit or debit card for most purchases, it should be fairly easy to track these expenditures over the course of several months. If you use cash, you may have to make a conscious effort to record how much the family spends over a specific period to gain a good understanding of the family’s spending patterns.

Perhaps you eat out frequently and bring home fast food several times a week. This is an area where you may be able to control your costs and at the same time provide more nutritious meals for your family.

Adults can often declare a moratorium on buying clothes for a considerable period. Where growing children need bigger sizes in clothing and shoes, consider clothing swaps of gently used items with family and friends. They are very easy to arrange online. 

Technology 

Land lines, smartphones, internet, cable TV, electronic games, tablets and laptops. You may be shocked to discover how much you spend on technology and connectivity. Contact your service provider and ask for a better deal or a better bundle. Consider getting rid of cable TV and subscribing to Netflix for $7.99/month. Resolve to keep your current technology for longer. And resist the temptation to buy the latest new gadget on the market.

Entertainment/Travel 

Add up how much you spent on entertainment last year. By attending community events instead of buying more expensive tickets to professional theatre or big name sports teams, you can save a bundle and still have a lot of fun.

Rather than spending thousands of dollars on international travel, plan a “staycation” or a long weekend at a local tourist attraction you have been meaning to check out but never got around to visiting. 

Savings 

The money you save for your children’s education or your retirement should not be left to chance if you happen to have enough money around at the end of the month. Build RESP, Saskatchewan Pension Plan, RRSP and TFSA contributions into your budget and “pay yourself” first every time your paycheque is deposited.

Are there free or low cost budget tools that work for you? Have you recently turned your finances around? Send us an email to socialmedia@saskpension.com and share your ideas with us. If your story is posted, your name will be entered in a quarterly draw for a gift card. And remember to put a dollar in the retirement savings jar every time you use one of our money-saving ideas.

If you would like to send us other money saving ideas, here are the themes for the next three weeks:

30-May Wedding How much should you spend on a wedding gift?
6-June Bringing home baby How to prepare financially for a new baby
13-Jun Fathers Day Frugal gifts your father will love