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6 Ways To Save Thousands On Your Next Mortgage

Nelson Smith — Thu, 29 Mar 2012 09:00:09 +0000

Unfortunately, unless your last name happens to be Buffett or Gates, you’re going to have to take out a mortgage to buy your dream home. Or, even just a decent, regular old house. I know, it stinks.

You’d rather be out of debt, enjoying the sunshine on your deck, not the bank’s deck. Mortgage debt is like a noose around your neck, and you want rid of it as soon as possible. Hey, I don’t blame you, not one bit. Paying off that mortgage is going to take all sorts of sacrifice, commitment, and general personal finance know how. Once you’ve got that bad boy paid off though, it’ll be worth all the extra work.

But why make things hard on yourself? These 6 tips will make paying off that mortgage easier.

Shorter Amortization

The first one is a no-brainer. The longer you’re in debt, the more interest you’ll end up paying.

For example, if you have a $200,000 mortgage at 4%, you’ll end up paying $115,612 in interest if you finance your house over 25 years. If you cut that down to 20 years, you’ll cut that down to $90,038. You can save $25,000 just by cutting 5 years off your amortization.

Yes, your monthly payment will go up, but only about $150 per month. You’ll eat away at your principle much faster with a 20 year loan than with a standard 25 year. (Not to mention the super-long 35 and 40 year amortizations that were available in Canada for a while) If you’re feeling really ambitious, you can save thousands more by lowering your amortization to 15 years.

Can’t afford a 15 year amortization? That brings us to point 2:

Buy Less House

Even with today’s super low interest rates, you still end up buying your house about one and a half times. You pay back all the principle, while the bank takes about half the value of the house in interest. As interest rates rise, so will the percentage the bank takes as interest.

If you can find a way to buy $20,000 less of house, you’ll save at least $10,000 over the life of your mortgage, plus the original $20,000 to begin with.

These days, most people have way too much space anyway. They buy with potential future needs in mind, rather than focusing on what they need today. If you take a long, realistic look at how much space you really need, you could probably end up downsizing your expectations.

Bi-Weekly Accelerated

This is an old trick, but one worth mentioning nonetheless. Bi-weekly accelerated mortgage payments take your normal monthly payments, divide them by 2, and then you make that payment every 14 days, rather than every 15 or 16 like you would with semi-monthly payments.

Make sure you go with bi-weekly accelerated payments. If you go straight bi-weekly, your payment will be adjusted so you’re paying the exact same amount per year as you would be if you paid monthly.

Just by making the switch to bi-weekly accelerated payments, you can knock 4 years off your mortgage.

Shop Around

Obviously, it’s important to shop around when you get your mortgage. The internet has made searching for mortgage rates pretty easy, and mortgage brokers will always be around to find you the lender with the lowest rate. Consumers are, for the most part, getting pretty good at weighing their options before they commit to a mortgage.

Where consumers are still pretty bad is at renewal time. Most Canadian mortgages have terms of 5 years, although terms are available anywhere from 1 to 10 years. After their term is up, the borrower has to sign up for a new term. And, more often than not, they just renew with their current mortgage holder. Sure, it’s a bit of a pain, but shouldn’t you be willing to do a few hours work to save a few thousand bucks over 5 years?

Get The Right Product

Did you know that the majority of people who choose a 5 year fixed mortgage never actually make it to the end of their term? They either move, or refinance, or whatever.

If you’re not 100% certain you’re going to be living in your home for the next 5 years, you’ll want to look at a shorter term. If you break a mortgage before the term is up, you’re looking at a penalty of 3 months interest. Depending on how much you owe, that penalty could be worth thousands of dollars.

Make Prepayments

Most mortgages will let the borrower pay up to 20% of the value of the mortgage off every year, without incurring a penalty. On the fictional $200,000 mortgage from earlier, that’s $40,000 per year you could pay down.

Even if you just paid a couple thousand dollars per year, those add up, and will end up knocking a couple years off your mortgage. Plus, every time you use your prepayment privileges, all that extra cash goes directly onto principle. You end up with a slightly smaller mortgage every time you do that.

Conclusion

Too many people are just content to pay their mortgage for 25 years, and pay thousands of dollars in unnecessary interest. If you follow these tips, you’ll knock years off your mortgage, and be well on your way to financial independence. Besides, it’s a lot easier to save for retirement without having a mortgage.

6 Ways To Save Thousands On Your Next Mortgage originally appeared on Canadian Finance Blog on March 29, 2012.

My Best of 2011

Jim Yih — Tue, 13 Dec 2011 10:00:48 +0000

It’s been quite the year for me and am very thankful to Tom Drake for all of his support in my online endeavours. He makes running a blog easy because I can just focus on writing without having to worry about all the technical stuff of running a blog. Together, Tom and I launched Retire Happy Blog at the beginning of 2011 and in less than a year, the site has grown beyond my expectations. My biggest accomplishment was being voted Canada’s Best Personal Finance Blog by the Globe and Mail.

As we near the end of the year, I thought it would be fitting to share some of my best and most popular articles of 2011. I can’t believe I wrote about 200 articles this year so I thought it would be best to organize my top picks by category.

Three most popular posts of 2011

How much will you get from Canada Pension Plan in Retirement? By far, my most popular article in 2011 was this article on Canada Pension Plan. There are 68 comments and this article gives you a really clear perspective on how much you can expect from CPP in retirement.
New Proposed Changes for CPP On May 25, 2009, Federal, provincial and territorial Ministers of Finance recommended changes to the Canada Pension Plan (CPP). These proposed changes are set to be implemented for January 1, 2012. This article goes through the four biggest changes that will affect Canadians.
Everything you need to know about RRIFs Most Canadians choose a Registered Retirement Income Fund (RRIF) as their primary retirement income option. This article shares with you some of the most important decisions you need to make with your RRIFs

Best three articles on investing

My three top picks for investment articles revolve around the choppy markets in 2011.

Is a poor return a good reason to change your financial advisor?

Jim Yih — Tue, 01 Nov 2011 09:00:24 +0000

Lately in my workshops and presentations, I have heard an increased amount of dissatisfaction from investors about their financial advisors. The last 10 years have been tough on investors because the markets have been choppy and when you take both the up and downs into consideration many investors are still left feeling disappointed about their results.

I’ve heard a lot of complaints of lousy performance and unfortunately, for their financial advisors, they become the easy scapegoat.

Is your advisor to blame for bad performance?

In many cases, people hire financial advisors to help them manage their portfolios and make good investment decisions because they feel like a professional should and can do better than they would on their own.

Ironically, however, investment returns is one of the things that financial advisors cannot control or predict because the markets by nature are unpredictable. This is one of the great disconnects of the financial industry. Investor expectations cannot be met if they expect their advisors can select investments that do not lose money or beat the markets consistently. Some investors think advisors are better equipped to understand the markets, predict the markets or even to have insider information. This is a fallacy in thinking!

So the irony is that firing and hiring an advisor on performance and investment return may be the worst reason to do so. Moving to a new advisor that promises better returns is destined for failure because most advisors are in the same boat.

Welcome to the world of relative benchmarking

When you experience bad performance, is it because your advisor picked bad investments? Or is it really because the environment is not conducive to strong performance? For example, when the stock market goes through a broad correction, it happens because most of the individual stock prices have dropped. You could be the best stock picker around but in a bear market, you are probably going to still lose money. If you think about it, most advisors are highly subject to the market performance which they can’t control or predict.

As a result, most of the financial industry thinks in relative terms. How well you do is dependent on how well everyone else does or how with environment allows you to do.

Relative performance is simply looking at the performance of your investments or your portfolio and comparing it to the performance of other benchmarks. Two of the most common relative benchmarks are the index comparisons and peer group (average) comparisons.

So how well have you done compared to others?

I met Steve two weeks ago at one of my workshops and he is frustrated because he wants to retire but over the past 10 years, he feels like his portfolio has gone nowhere. The first question I asked Steve was “What is your personal rate of return?” Steve did not know.

How can you know if you are doing well or poorly if you have no idea what your personal rate of return is? Ask your advisor to give you your personal rate of return. That does not mean a list of the investments you own with the performance of those investments over the past 1, 2, 3 , 5 or 10 year returns. Those are called investment returns (or something I call newspaper returns) which can be very different than the investor returns.

Once you know how you are doing, then you can compare those returns to an appropriate benchmark. This is where it gets tricky. I’ve always said I can make any investment looks good with real statistics, it just depends on what statistics I show you. Let’s use a real example to help you understand what you need to know to figure this all out.

Let’s say Steve has a balanced portfolio with about 60% equities and 40% stocks and over the past 10 years, he has only made a 2.5% compound return. By Steve’s standards, that is really disappointing. Is Steve’s disappointment justified?

Well, if you compare that return to the average Canadian Balanced Fund with a 60/40 mix, the average 10 year return to the end of September 2011 was about 4%. If you compare Steve’s return to the 10 year return to the Morningstar Canadian Balanced 60/40 index, the index made a 7.7% compound average annual return.

In this example, I think Steve has a valid case to be disappointed but he has to also make sure that he knows the numbers. I’ve seen people fire and hire advisors on the basis of emotion and judgement only find that the grass may not be greener on the other side.

Before you are going to fire you advisor, make sure you get some data and make sure it’s not just about performance. Make sure you are looking at other things like service, creating financial plans, communication, advice beyond just the portfolio. It’s OK to get a second opinion too but it’s hard for advisors other than the current advisor to determine your personal rate of return. Make sure you know why you are firing an advisor so when you interview new ones, you know what questions you should be asking.

Is a poor return a good reason to change your financial advisor? originally appeared on Canadian Finance Blog on November 1, 2011.

Will Rising Interest Rates Affect My Variable Rate Mortgage?

Robb Engen — Tue, 11 Oct 2011 09:00:58 +0000

What happens to your mortgage payments when interest rates rise? Many people mistakenly believe that their payments will fluctuate when interest rates change. They end up paying a premium for the fixed rate so they can sleep better at night knowing their mortgage payment will remain constant.

Even though there is overwhelming evidence that selecting a variable interest rate mortgage will save money over the 5-year fixed interest rate, many home owners still fear what might happen to their mortgage if interest rates rise.

I recently explained this to a friend of mine after telling him about my variable rate mortgage of prime minus 0.80%. He mentioned that he went through a mortgage broker to secure a 5-year fixed rate of 3.89% last year, and he thought that was a good deal because he wouldn’t have to worry about rising interest rates affecting his mortgage payments.

Will My Payment Change If Interest Rates Rise?

According to TD Canada Trust, with a variable rate mortgage the interest rate is set on the first day of each month, and your payments remain the same. The closed variable rate mortgage also gives you the ability to lock in your interest rate by converting to a fixed rate mortgage at any time, as long as the new term is at least the lesser of 3 years or the current remaining term.

Let’s look at an example:

If I took out a $250,000 mortgage with a variable interest rate of 2.20% paid monthly over a 25 year amortization schedule, my total monthly mortgage payment would be $1,083. Because my total payment is fixed, and due to the odd number of days in each month, the amount I’m paying on principal and interest fluctuate even without a change in the interest rate.

5-year term, no change in interest rates

Principal payment – $661/month on average
Interest payment – $422/month on average
Total payment – $1,083/month

What happens when the interest rate rises throughout my 5-year term? How will rising interest rates affect my variable rate mortgage?

We’ve already established that my monthly payment is fixed, therefore an increase in interest rates will affect the amount that I pay towards principal and interest. Clearly if interest rates climb throughout the 5-year term, more of my monthly payment will go towards interest and less towards principal.

If the amount of interest that has accrued in any month ends up exceeding the amount of my regular principal and interest payments, the excess, being deferred interest, will be added back onto the total principal amount on the first day of the next month. In my case, this could potentially occur if the interest rate on my mortgage rises above 4.50%.

Can You Save Money and Sleep at Night?

Let’s assume that my friend and I have the exact same mortgage amount, terms and amortization schedule. After 5 years of paying 3.89% interest, my friend has paid a total of $78,011 in principal and interest, and the remaining balance on his mortgage now comes to $217,209.

If my 2.20% variable interest rate mortgage remains constant throughout the 5-year term, I will have paid a total of $64,975 in principal and interest, and the remaining balance on my mortgage now comes to $210,300. That’s a savings of over $7,000 in interest alone, which is enough to consider refinancing your mortgage.

Of course the whole point of choosing the fixed rate is for the sleep at night factor in case interest rates rise significantly during the 5-year term. But can you save money while still protecting yourself against the risk of rising interest rates?

My solution is to choose the variable rate, but adjust your payment to at least the 5-year fixed rate. That way you’re taking advantage of the lower interest rate and making extra principal payments, your payment stays the same, and you’ve built in your own insurance in case interest rates rise. Now that sounds like peace of mind to me.

Will Rising Interest Rates Affect My Variable Rate Mortgage? originally appeared on Canadian Finance Blog on October 11, 2011.

Exploring Discipline

Alan Schram — Wed, 17 Aug 2011 09:00:35 +0000

Being rich takes discipline. I mean, there are a couple of ways that people can get rich without being disciplined. They can, on the off chance, randomly purchase a single lottery ticket and suddenly become a millionaire. Or, you could become a youtube celebrity overnight, or even stumble across a backpack full of gold. It could happen, it just most likely won’t. Instead, most wealthy people are disciplined. They are disciplined with their money, for sure, but they are also disciplined in other areas of their life. You rarely find extremely rich alcoholics or shopaholics. Most rich people understand moderation, and restraint in all areas of their lives.

Physical Discipline

If you want to be rich, you have to be physically disciplined. You need to be able to walk through a shop and avoid going through the most tempting of areas. You need to be able to get yourself out of bed in the morning, get into the shower, and go to work. You need to be able to give your body exercise when it needs it, and restrain yourself from eating or drinking too much. It is not as if all your money will disappear if you suddenly decide to order in pizza one night. Far from it. However, if you are unable to resist yourself from picking up the phone and asking for delivery, then it won’t be long before your bank account is drained. You must be disciplined.

Emotional Discipline

If you want to be rich, you have to be emotionally disciplined as well. You need to be able to walk into a mall even while upset, or angry, or tired, and walk out without making impulse purchases. You need to be able to separate your life decisions from your emotions, even when it is difficult. You need to be able to give yourself time to process those emotions before you make a rash choice that ends up costing you time, or energy, or money, just because you went with “what felt right” at the time. If you can’t control your emotions, you won’t be able to control your spending. It’s not that you’re not allowed to cry at movies anymore; far from it. However, if you are unable to resist the tugs on your heart strings long enough to avoid purchasing yet another fancy workout machine from the Shopping Channel, then your money won’t last long. You must be disciplined.

Mental Discipline

If you want to be rich, you have to be mentally disciplined. You need to be able to walk down the street without comparing yourself to everyone that you meet. You have to be able to stop yourself from imagining a better financial life that is unobtainable. You need to force yourself to have realistic expectations from the future. If you want something, financially, there is most likely a way to get it. Most answers, however, are full of long and slow paths that are no fun for anyone. You must be disciplined enough to realize that there are no quick and easy solutions for most of life’s problems, and you have to be disciplined enough to stick to the path that will get you where you want to go. It is not as though you are no longer allowed to dream about vacation homes or expensive scotch; far from it. However, if you spend more time dreaming than achieving, your goals and dreams will falter, you will lose motivation, and you won’t achieve success. You must be disciplined.

If you’re like me, you want to be disciplined. But it is hard. There are so many temptations and dreams and desires, and it is hard to be physically and emotionally and mentally disciplined all at once. It is hard, but it is worth doing. If you want to be disciplined, don’t try to conquer everything at once, it is just too much. Instead, pick one small thing to be disciplined at, like not eating fast food, or saving $50 a week, or focusing on one small goal for the week, and do that for a month. Then pick something else and do that for the next month, while trying to maintain the first one as well.

Do you want to be rich? Are you disciplined? How have you achieved your discipline?

Exploring a Financial Fast

Exploring Discipline originally appeared on Canadian Finance Blog on August 17, 2011.