Cut mortgage costs to save thousands: more frequent payments, pre-payments and shorter amortization periods can slash costs

Money Digest, August, 2000 by Talbot Stevens

Mortgage payments are one of the largest voluntary expenses of our lives. Fortunately, there are many ways to reduce this huge expense and literally save tens of thousands of dollars over the life of your mortgage.

Weekly or bi-weekly payments, shorter amortization periods, and prepayments are all standard ways to slash mortgage interest costs. There is nothing magical about these approaches. They all amount to repaying the debt faster than originally scheduled.

The beauty of paying one fourth of the monthly payment every week is that you won't notice the difference in annual payments. Since there are an average of 4.35 weeks in a month instead of 4, you painlessly pay a tiny bit more every month.

A $100,000, 8%, 25-year mortgage paid weekly instead of monthly saves almost $32,000 in interest and is paid off in about 20 years. If monthly payments are more convenient, simply reducing the amortization period from 25 years to 20 saves the same amount.

With such a competitive market, it makes sense to shop around to see if someone else has a better offer, or to encourage your current lender to sweeten theirs. Check out mortgage brokers, where you can access many lenders at once, and can often get rates as much as 1 percentage point below banks' posted rates.

Negotiating, including asking for the renewal fee to be waived, is now common. Most people should get 0.5 of a percentage point off just by asking. If you have a lot of business with your lender, you might get higher discounts of up to one percentage point off the posted rate, but only if you ask.

If your current lender doesn't seem eager to keep your business, competitors offer ways to transfer to them, often covering most or all of any transfer fees involved.

To attract you to switch, some lenders are offering cash back or big up-front discounts with rates below prime. Getting a cash rebate or a rate discount, even if it is a temporary one, is obviously better than paying the posted rate. But you'll have to be a math-savvy consumer to properly evaluate which mortgage offer is best.

Always remember one of the common realities of advertising: "What the big print giveth, the little print taketh away."

The fine print for the 3% cash back offer says you must take out a term of at least five years at the full posted rate. Depending on the discount you are able to negotiate, a 3% rebate up front might be better or worse.

Without getting too complicated, we can see that saving 3% at the start is better than saving half a percentage point per year over five years. On the other hand, if you can negotiate a one percentage point discount per year for five years, you would be better off passing on the 3% cash offer.

After crunching the numbers, a 3% rebate is better unless you can negotiate at least .8 of a percentage point off the regular rates. This assumes that the 3% rebate is paid against the mortgage at the start, not spent, and that you want a 5-year term.

Bank Fast Facts

Total # of Banks in Canada 49

Total # of Bank branches in Canada 8,423

Total # of Bank ABMs in Canada 16,626

Total # of ABMs(*) in Canada 26,727

Total # of banking industry employees in Canada 222,000

Taxes paid in Canada in 1999(*) $5.2 billion

Taxes paid worldwide in 1999(**) $6.8 billion

# of Interac Direct Payment Transactions(*) 1.7 billion in 1999

More than 85% of all banking transactions are now done electronically.

It is estimated that one in two working Canadians is a shareholder in a Bank either directly or through mutual funds, pension funds or RRSPs

Did you know? Banks generate 49% of their earnings outside of Canada, while about 90% of their employees are located here and 77% of their taxes are paid in Canada

Source: Canadian Bankers Association Bank Fast Fact.

(*) All financial institutions (**) Figures are from the largest bank