Mortgage hacks

The most considerable expense in many people’s life is a mortgage. With rising housing costs, paying off a mortgage is difficult for many people. This post will explore some ideas on shaving off thousands of dollars of interest from a typical mortgage.

Disclaimer: The post is for educational purposes only and should not be taken as financial advice

How Canadian banks calculate interests on mortgages

Canadian banks differ slightly from US banks in two aspects – 1. Canadian banks compound interest semi-annually (v/s monthly by US banks), and 2. The interest for fixed mortgages is locked for up to 5 years, after which it must be re-negotiated.

We will use an Excel sheet calculator incorporating these nuances for our calculations. You may download it below to do the same analysis for your mortgage.

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Before we start with our analysis, let’s establish a baseline. Say we have a property that costs $1,000,000 and was purchased with a 20% downpayment of $200,000 for a 5-year term over 25 years with an interest rate of 3%. For simplicity, we will assume that the interest rate remains the same for the course of the mortgage. For your mortgage, you will need to re-calculate the amortization schedule for every renewal and term.

Vanilla mortgage

The vanilla version of any mortgage is monthly payments with no additional payments. If we go with the vanilla re-payment plan, our numbers would be –

Total interest$335,789.80
Per-payment interest rate0.248%
Number of years25

We will use this as a benchmark to compare our other strategies against.

Bi-weekly payments

Bi-weekly payments are probably the simplest way to pay more toward the principal without breaking the bank.

Total interest$335,030.66
Per-payment interest rate0.115%
Number of years25

We already see a drop in the per-payment interest rate by 0.133% and a slight drop in the total interest paid.

Bi-weekly + $100 additional pre-payment

If we add $100 extra to our bi-weekly payment schedule, we see a considerable drop in the total interest needed.

Total interest$306,304.74
Per-payment interest rate0.115%
Number of years23.08

Bi-weekly + + $100 additional pre-payment + $6000 annual payment

If we top-off every year with $6000 more, we reduce our total mortgage by about 100k and time to 19 years.

Total interest$258,260.48
Per-payment interest rate0.115%
Number of years19.69 years

Bringing it all together

Why did I choose those numbers? The median wage in Canada is about $70000, and the median house price is $670000. If one buys a million-dollar house (double the median house price), I assume they earn more than the median wage. The annual expense on a mortgage with this strategy comes up to $54000 approximately. Assuming a typical household spends about 50% of their income on housing, they would need to earn about $110000 (slightly less than double the median wage) to afford the house while being able to cover their other living expenses. In other words, it’s doable on average.

Of course, the math will vary based on the house price and income, but the same strategy may apply. If we can budget in a way that adds more in pre-payments along with regular monthly or bi-weekly payments, it can shave off tens of thousands of dollars of the cost of a property.

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