Patrick and Janna: The mortgage on our condo is coming up for renewal, and we want to make sure we make the best choice. How can we pay off our mortgage faster and still have the cash flow we need to live comfortably?
"Renewal is a good time to review and rethink your mortgage," advises Patrick and Janna's CIBC advisor. Considering several factors can help Patrick and Janna determine the right solution to help them become mortgage-free faster:
Fixed versus variable interest rate
"A fixed-rate mortgage locks in your current rate for the duration of your mortgage term, providing certainty." he explains. "With a variable rate, the interest rate is generally lower than a fixed rate but will fluctuate."
Open, closed, and convertible mortgages
An open mortgage can be paid off, renewed, or refinanced at any time. A closed mortgage has a set term and payment plan. A convertible mortgage is a short-term, closed mortgage that can be converted to a longer-term, closed mortgage at any time.
This is the number of years needed to pay off the mortgage in full. The shorter the amortization, the less interest is paid over the life of the mortgage.
Size of payment
Increasing the size of their regular payment by even a small amount will help in becoming mortgage-free sooner.
Working with their CIBC advisor, Patrick and Janna find that they can save a surprising amount just by making some small alterations to their daily spending habits - taking their lunch to work rather than eating out and cutting down on their store-bought "designer" coffees. He also shows them how using their line of credit to pay down their outstanding credit card balance will cut their interest costs substantially.
With these changes, they figure that they can increase their monthly payment by $100. They choose a variable interest rate, which is lower than the fixed rate being offered. "You can lock in a fixed rate later, if rates rise," their advisor assures them. And finally, they switch to an accelerated bi-weekly payment schedule.
Over the life of their mortgage, these small changes will save them thousands of dollars in interest and help them own their home, debt-free, years sooner.