Interesting article....check it out
3 tips that could save you thousands on your
mortgage, as interest rates rise
By Erica Alini National Online Journalist, Money/Consumer Global News
Sean Cooper wiped off his $255,000 mortgage in exactly three years and two months, at age 30.
He took on two extra gigs, in addition to his daytime job as a pension plan analyst in Toronto. He
lived in the basement of his own house, while tenants “thumped around upstairs.” And he threw
every spare penny at his quarter-million loan.
Two years later, Cooper is mortgage-free and has written a well-reviewed book about it. But he
is still working 70-hour weeks and living in the basement. The goal now, he told Global News, is
to amass enough cash to retire extra early, if he so chooses.
Clearly, the workaholic, frugal lifestyle suits him. And clearly, Cooper isn’t your average
But the advice he has is aimed at the more common species of mortgage-holder. You know, the
kind with one job, and possibly a family, as well as a taste for things like work-free weekends,
vacations and the occasional dinner out.
It’s advice to which Canadians should pay particular attention now, as interest rates begin what
most economists believe is a gradual but potentially long march upward.
“It makes sense to pay down your mortgage now,” Cooper said.
If you’ve been coasting along with your mortgage payments, now is the time to kick it into high
gear, he argues. And if you’re looking to get a new mortgage or renew the one you have, doing
some research is more important than ever.
Cooper saved around $100,000 in interest with his extreme mortgage pay-down plan. You
probably won’t be able to replicate that, but might still be able to shave thousands off your own
mortgage interest by following his top three tips:
1. Shop around – and not just for the lowest rate
Of course, you should get the lowest interest rate that you can. But rates aren’t the only thing to
consider when comparing options. The point is to get the best deal, he notes, which isn’t
necessarily the same thing as the lowest price.
In addition to interest rates, pay attention to what Cooper calls the three Ps:
• Prepayment privileges: As interest rates rise, a bigger chunk of your mortgage payments
will go toward interest rather than the principal. That’s why it’s important to get a
mortgage that will allow you to make large lump-sum contributions and increase your
monthly payments if you decide to pay down your debt faster. Non-bank lenders might
both lower rates and offer more generous prepayment privileges than the big banks, noted
Cooper. “Non-traditional lenders with a solid track record are worth considering,
especially if it means paying down your mortgage sooner,” he writes in his book, Burn
Your Mortgage: The Simple, Powerful Path to Financial Freedom.
• Penalties: What would happen if you were to break your mortgage? That’s a question
every mortgage applicant should ask herself, argues Cooper. People wind up having to
break their mortgage for any number of reasons: They move, they get divorced, they lose
their jobs. And that can cost them thousands of dollars in mortgage penalties, which is
why it’s important to look at the fine print. In Canada, if you have a variable-rate
mortgage, the penalty is generally three months’ interest. If you have a fixed rate,
however, you could get dinged for much more than you think. That’s because you’ll have
to pay the greater of either three months’ interest or something called the interest rate
differential (IRD), which is based on current mortgage rates and your remaining
mortgage balance. If you’re going for a fixed-rate mortgage, it’s important to ask your
lender whether the IRD is calculated based on their discount rate or their considerably
higher posted rate. “The big banks calculate fixed-rate penalties using their posted rates,”
• Portability: Speaking of mortgage penalties, one way to avoid them if you move is to
have a portable mortgage. This means you can transfer your mortgage to your new home
and combine it with a new loan, if necessary. Another great feature that could save you
thousands of dollars in penalties is having an assumable mortgage. That would allow you
to leave your mortgage behind for another qualified buyer instead of breaking it.
2. Make lump-sum payments whenever you can
• Here’s a crucial nugget about lump-sum payments: Unlike your regular monthly
instalments, all of the money goes toward reducing your principal. That’s why Cooper
advises making lump-sum payments whenever you can.
• If you have no spare cash in your budget, you could still use what Cooper calls “found”
money: A one-time bonus at work, an inheritance, gifts of money, or even your tax
• Lump-sum payments can shave thousands of dollars on the interest on your mortgage and
years on your amortization period (the amount of time it will take you to pay off your
loan in full).
• To use an example from Burn Your Mortgage, making lump-sum contributions of just
$2,000 per year on a $300,000 mortgage would save you $17,774 in interest and allow
you to pay off your mortgage six years sooner, assuming a five-year fixed-rate mortgage
at 2.99 per cent interest rate and 25-year amortization.
3. Accelerate your mortgage payments
• The most painless way to ramp up your mortgage payments and shorten your
amortization period is switching from monthly to so-called accelerated bi-weekly
payments, Cooper told Global News. Here’s what that means.
• In the above example of a $300,000 mortgage, your monthly payments would be $1,418.
If you switch to a simple bi-weekly arrangement, your payment is calculated as $1,418 ×
12 months/26 weeks = $654. You’ll be saving a little bit in interest but not much.
• Accelerated bi-weekly payments, on the other hand, are calculated as follows: $1,418 ×
12 months/24 weeks = $709. Your payment is slightly higher, covering the equivalent of
a 13th monthly mortgage instalment every year. Over time, that makes a substantial
difference. In Cooper’s example, it saves $15,393 in interest and shrinks the amortization
period by almost three years.
When Cooper paid off his mortgage, he threw a big party. To celebrate, he burned his
mortgage papers in front of a crowd of cheering friends.Indeed, his book seems, in part, a
tribute to the twentieth-century tradition of setting one’s mortgage documents on fire once
the debt is paid. In the last pages, Cooper laments that such parties are no longer a thing and
vows to make them cool again. As interest rates rise, he might find it easier to get Canadians