The hidden costs of your mortgage

Submitted by vlad.g on Tue, 07/27/2010 - 18:21

The Canadian Association of Mortgage Professionals (CAAMP) recently did a survey and found that about half a million mortgage holders “may have trouble” with payments if their rates increased to 5.25%. It was also reported that about 375,000 mortgage holders are already struggling with payments at the current rates.

What goes down must go up, and as we recover from the 2008-2009 recession we are already noticing an increase in interest rates. Economists are predicting deep discounted 5-year fixed rates could rise to roughly 4.79% by year end 2011. It’s very important to keep an eye on these rates, and your mortgage so that you can change your strategy accordingly and won’t end up in any financial trouble.

When you set up your mortgage, did your lender run the numbers to show you exactly how much cash you’re paying over the life of your mortgage? In most cases, probably not! Let’s analyze an average mortgage in Vancouver and see how these rates are robbing you of your wealth.

The average detached home price in Vancouver is nearing 1 million dollars. Say John Smith puts a 20% down payment and gets a conventional mortgage of $800,000 amortized over 35 years. The 5-year fixed rate he gets is 4.39% and his total monthly payment is $3,712.

Now, did you know on a mortgage like that Mr. Smith’s total payment (principle and interest) over the 35 year mortgage life is $1,558,151? Of that total, is $760,000 cash out of his pocket, which goes to the lending institution as the interest portion. So Mr. Smith ends up paying his house over again in interest payments.

The good news is there are strategies available where you can pay off your mortgage faster and end up paying allot less interest. Would it be a shock to tell you that switching from a 25 year mortgage to a 35 year mortgage could actually pay your home off faster? I usually get this really confused look from people. After all, you don't have to be a finance whiz to know that 35 years is more than 25 years.

You're probably wondering yourself... how is this possible? Essentially what you do is you find out what your payments would be on both a 25 year term and a 35 year term. You then make payments on the 35 year term while saving the difference you would have been paying on the 25 year term into an investment product that can vary depending on your time horizon. This could be a direct investment or a leverage loan depending on the circumstances.

As time goes on, the money saved accumulates which provides two benefits. The first is that if it is growing at a rate higher than the percentage of the mortgage, you're getting ahead which is typically very easy considering how low mortgage rates are currently.

The next benefit is that with a typical mortgage, if you lose your job, you're still on the hook to make those lofty monthly payments. With the example above, the savings that has been accumulated can be accessed and applied to make mortgage payments protecting you in such cases.

While this strategy will not fit everyone, it is only one of an almost countless arsenal of tools I use on a regular basis with clients. Generally, banks cannot not offer these strategies and even if they could, would not likely be too transparent to offer them since it means that the mortgage vice-grips can be removed faster.

Banks have always been in control, it's time for a change.

Please feel free to contact me with any mortgage questions you may have at: