Payment Frequency And Interest Costs - What You Can Save
There is a commonly held belief that that increasing the frequency of your mortgage payments pays your mortgage off significantly faster. For example, paying bi-weekly versus monthly will allow for much faster mortgage paydown. This all stems from confusion around the fact that there are two types of payments - regular and accelerated. Here are the definitions of the various payment frequencies and an example of the impact of payment frequency on interest costs.
Payment Frequency Options
Monthly - one payment per month; 12 payments per year
Semi-Monthly - Monthly payment x 12 / 24 (or half the monthly payment); two payments per month; 24 payments per year
Bi-Weekly - Monthly Payment x 12 / 26; payments every two weeks; 26 payments per year
Accelerated Bi-Weekly - Monthly Payment x 13 / 26; payments every two weeks; 26 payments per year
Weekly - Monthly Payment x 12 / 52; payments every week; 52 payments per year
Accelerated Weekly - Monthly Payment x 13 / 52 payments every week; 52 payments per year
Interest Savings By Payment Frequency
Lets break out the total interest savings over 25 years for each payment frequency versus the base required monthly payment. This is for a mortgage of $300,000 amortized over 25 years at 4%. This is a bit simplistic because it does not take into account the varying terms and rates within the life of a mortgage, but it will still illustrate how much payment frequency drives interest savings.
Monthly payment = $1578 ($173,420 interest paid over the life of the mortgage...GULP)
Semi-Monthly payment = $789; interest savings $390
Bi-Weekly payment = $728; interest savings$420
Accelerated Bi-Weekly payment = $789; interest savings $24,550 and mortgage paid off 3 years 1 month early
Weekly payment = $364; interest savings$605
Accelerated Weekly payment = $395; interest savings $24,820 and mortgage paid off 3 years 1 month early
While there is a slight benefit to paying more frequently this is a very minor amount. The amount you pay extra, above your base mortgage amount, is what has the big impact. This can be done by setting your mortgage payments to be accelerated, or by using other pre-payment options such as lump sum payments or by calling to increase your payment.
You shorten your mortgage and save significant interest costs by increasing your mortgage payments, not by paying more frequently.
If you have goals for paying off your mortgage faster, lets come up with a plan! Small amounts over time add up to a big impact later.
Separation And Your Mortgage - The Matrimonial Home
As the largest asset in most relationships, the matrimonial home often becomes a major focal point in a separation. In turn, mortgages become a key part of separation discussions. Here are some common options for dealing with the matrimonial home in a separation:
This is definitely the simplest way of putting joint debts behind you by releasing all ownership and mortgage obligations.
One Party Stays Mortgage Lender Releases Other Party
If one person would like to stay in the home you can start by contacting your mortgage lender to get the other person released from the mortgage. They will generally confirm that the remaining person can handle the mortgage on their own. This only works if you do not need to pull equity out of the property to pay out the person leaving the home. You do not want to be removed from title until you are removed from the mortgage loan. You would still be responsible for the debt and any fallout from missed payments or default (including impact on your credit!) but have no ownership rights.
One Party Stays - Refinance To Remove Other Party
If you do need funds to pay out the party leaving or if your current mortgage lender will not release them from the mortgage loan, then you should consider a refinance. This is where the mortgage is fully restructured to take one person off the mortgage. This only works if you have significant equity in the property because refinances are limited to 80% of the current value of the home. The person who will keep the property needs to be able to qualify for the home on their own.
One Party Stays - Spousal Buyout
If one party would like to stay but you do not have 20% equity in your property for a refinance, there is still an option to buyout your spouse. This is an insurer program than not all banks use, so you want to speak to a mortgage broker about this option. One party can purchase from the other with the minimum required down payment (5% down payment on the first $500,000 of value and 10% down payment on any value above $500,000). It is treated as a new purchase so the amortization can be up to 25 years and there is no limitation on the type of term or product. Here are some conditions and features of a spousal buyout:
The down payment can be equity in the house
Valid for marital and common law separation, and some joint ownership situations
Only available on the primary residence in the relationship (no investment properties)
Both individuals must have been on title prior to the separation
There must be a legal separation agreement in place
The purchaser must still qualify based on income, credit, etc.
An appraisal determines the sale price
No realtor involvement
Standard mortgage insurance premiums apply
The current mortgage lender must allow it. Some value mortgages do not allow a private sale to a related party (ex. BMO Low-Rate Mortgage)
The seller is now off the property title and off the mortgage, allowing them to move on to a new purchase if they choose.
If you are going through a separation or know someone who is, I can provide information about the mortgage options available and help prepare you to qualify for the new financing you may require.
Interest Rate And Your Buying Power - What Is The Impact Of Increasing Rates?
The story of 2018 was one of increasing interest rates and a tighter lending environment. I was recently asked - how much are buyers impacted if rates continue to move up? Your maximum mortgage is determined by two calculations. The first, called GDS (Gross Debt Service) is the percentage of your gross income going towards your housing costs, including the mortgage payment, property taxes, heating, and half of the condo fees. Under standard guidelines for an insured mortgage (less than 20% down payment) GDS can be no more than 39%. Your TDS (Total Debt Service) is the percentage of your gross income going towards your housing costs and other debts. TDS can be no more than 44% of your gross income. As interest rates increase the mortgage payment factored into these calculations goes up, pushing down your maximum mortgage amount.
For this example, I assumed a household income of $80,000, property taxes at $3500/year, no condo fee, and for simplicity, no debt. I also assumed this was an insured mortgage, so a maximum amortization of 25 years, and GDS/TDS ratios of 39%/44%.
Here are the maximum mortgage calculations for a range of interest rates:
4.34% - maximum mortgage $400,900
5.34% - maximum mortgage $363,200 - $37,700 less or a 9.4% drop
6.34% - maximum mortgage $330,700 - $32,500 less or an 8.9% drop
7.34% - maximum mortgage $302,600 - $28,100 less or an 8.5% drop
Rule Of Thumb
Based on this range of interest rates here is a good approximation or rule of thumb:
When rates increase by 1%, buying power drops by 9%.
Its All About The Qualifying Rate, Not Your Interest Rate
When looking at these calculations it is important to remember that the interest rate you actually get is not what is important for your qualifying mortgage amount. The stress test implemented in fall 2016 required lenders to qualify insured mortgages at the Bank of Canada Benchmark Rate, not the rate you actually get. That rate is currently 5.34%. The stress test on conventional mortgages (those with 20% or more down) implemented in January 2018 are even harsher, requiring you to qualify at 2% above the rate you actually get or the Benchmark Rate, whichever is greater.
Get pre-approved today under current rates and guidelines and find out where you stand. If you wait to purchase and rates have increased, you may find you no longer qualify for the purchase price you are targeting. By knowing where you stand you can be ready to jump on a good opportunity as it comes up.