Increasing Your Mortgage Payments in Line with Inflation
Turn your Mortgage Cents into Interest Dollars
In 2010, less than 25 per cent of Canadians took the action to make an extra payment toward their mortgage balance, however, it is important to keep in mind that every year inflation rises an average of two per cent, and so too should your income. So why not adjust your mortgage payments to get the most out those key dollars?
Let’s say that the average mortgage balance in the country is around $250,000, at about 4 per cent with a 30 year amortization, making the average mortgage payment $1,188 per month. This means the average mortgagor currently pays roughly $14,256 per year. Upping this by two per cent equates less than $300 that first year. Would you notice roughly $23 extra per month?
In increasing your payments by two per cent annually, you can actually eliminate nearly 25 per cent of the funds you would have paid in interest. In the above example, almost $178,000 would have gone to interest over the life of your mortgage had you never increased your payments. By making the two per cent increase in payments every year, you shave off over $42,000 from that sum, plus cut eight years off the total length of your 30 year amortization.
Think you can handle even more? Try popping mortgage payments increased by different percentage points into an online mortgage calculator and check out the amortization table for yourself. If your annual household income is about $70,000, and rises two per cent per year, that’s an extra $1,400 your first year and so on for you to budget into rising costs accordingly.
You may also want to implement this strategy in conjunction with a switch to bi-weekly accelerated mortgage payments. Using the example above, switching to bi-weekly would mean making 26 payments of roughly $594, for a total contribution of $15,444, to your mortgage per year. That’s already nearly $1,200 more per annum than a monthly payment would allot, and would slice over four years off your 30 year amortization. Couple that with a two per cent increase to your mortgage payments per annum and you will have your mortgage paid down in less than 20 years. For more information, and help number crunching, contact your mortgage broker or lender. Alternatively where possible, and where you are comfortable doing so, manage your proactive mortgage changes online.
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