Increasing my mortgage payments - Give Me Back My Five Bucks

Increasing my mortgage payments

One of my August goals was to increase my accelerated bi-weekly mortgage payments to the 20% prepayment maximum. Well, I never got around to it, but earlier this week I was reminded of it by @RateSupermarket who tweeted about 3 easy ways to save $65,541 on your mortgage.

So I finally stopped being lazy, and called to speak to someone at Vancity.

My minimum mortgage payments are $1,098/month ($13,176/year).

When I signed my mortgage paperwork back in May, I agreed to a 10% increase to $600/accelerated bi-weekly ($15,600/year).

Now, my mortgage payments will be approximately $660/accelerated bi-weekly ($17,160/year).

You can see from the chart below what a difference the 20% prepayment can make to my mortgage amortization (30 year amortization, current 5-year fixed term at 3.74%). Granted, after this current 5-year term is up, when I go to refinance, who knows what kind of interest rate I’ll end up getting.

The dark blue represents accelerated bi-weekly payments without any additional prepayment option. You can tell that already cuts my mortgage down by 4 years. And then when you add in the accelerated bi-weekly payments with the 20% prepayment (orange), you can see that it knocks my mortgage down even further, to 19 years.

This new payment amount of $660/bi-weekly ($17,160/year) represents approximately 21% of my gross annual income, and it’s an amount that I’m comfortable with for the time being. I also hope to keep saving money into my House Fund, so that by the time next spring rolls around, I will have enough saved up not only for my property taxes, but to also put down a lump sum towards the mortgage principle when my anniversary date comes.

If anything should happen, and I can no longer afford $660/bi-weekly, I can always drop my payments down to the original amount. As long as I’m satisfying my obligation of $1,098/month, and not going above 20%, then the bank is fine with whatever I choose to do.

**NOTE: For those who are new to my blog, please know that along with my FT job, I also am a freelance write & blogger. I choose to work about 65 hours/week (see my freelancing schedule) in order to be able to afford to save, pay down my mortgage, and travel often. I worked hard to get out of debt, and I’m working just as hard now to reach all of my personal finance goals. If you check out my freelancing schedule, or stick around to read more of my blog, you can see that even though I’m busy, I make sure to have a good balance in my life. :)

About Krystal Yee

I'm a writer, personal finance blogger, and marketing professional based in Vancouver. I'm a former Toronto Star (Moneyville) columnist, author of The Beginner's Guide to Saving and Investing, and co-founder of the Canadian Personal Finance Conference. When I'm not working, you can usually find me running, playing field hockey, or plotting my next adventure.

50 comments

  1. Great stuff Krystal. I’m going to write a post about this as well in the future.

    Good inspiration to others who have mortgage debt, like us :)

  2. Good illustration of the power of increased payments!

    I’m at the right-hand end of the mortgage payment chart (looking at getting it all paid off by the time of the next mortage renewal in 2013), even with ratcheting up the principal on the last mortgage renewal, the house will be paid off five years early.

    Even a year-and-a-half away from the event, I’m feeling good.

  3. I have always been a supporter of a 15 year mortgage, however, with interest rates being at record lows, sometimes I wonder if the extra money would be better used leveraged. I am not sure how the tax system works in Canada, but in the U.S. homeowners are usually able to deduct the interest off of their taxes, thus making the cost to borrow under 3%. What if you took the extra you are paying and put that into a mutual fund or similar investment vehicle. I am wondering if you would come out ahead over the course of 30 years. Just a thought!

    Martilyo!

    • Hi Martilyo! Thanks for your comment. :) The way I see it is, all debt = bad debt. Even mortgage debt. And while my interest rate is relatively low, putting the money towards my mortgage is a guaranteed 3.74% return. Whereas if I took that money and invested it somewhere else, am I really going to get that money back?

      My goal is to retire early, and having a mortgage 30 years from now is not going to help me. I’m not living a financially independent life if I have to rely on a bank for a mortgage. So the sooner I can become debt-free, the sooner I can think about retiring.

      • Hi Krystal,
        Paying your mortgage early does not yield a 3.75% return, the only way to get a return is from appreciation of the property. Ignoring property appreciation, your mortgage term yields a negative return. This makes the comparison against investing the money incorrect.

      • I”m sorry Krystal, but how are you making 3.74% on your mortgage? I”m thinking you failed basic finance and should stick with blogging.

        • what?! I missed the part where she said she was making 3.74% on her mortgage. Look at “I just want to insult people even though what I say, in no way, relates any true fact” guy.

    • Actually very few homeowners in the USA qualify for the mortgage interest deduction. Only the top 25% of income earners have enough to make it worth itemizing on their taxes. 75% of taxpayers take the standard deduction.

  4. I could geek out over charts like this ALL DAY. So awesome, Krystal!

  5. This is great Krystal – I love that you’re planning your future and getting rid of your mortgage debt as soon as possible :)

  6. Wow Krystal, that’s truly amazing! I always knew that sending more than your minimum payment would cut the length of your loan down. But until I saw your chart and how much it would save you it really blew me away!

    If you can afford to do it what a great idea!

  7. Great post! I’m hoping to increase my mortgage payments soon (and maybe do a lump sum prepayment) but I’m a flight attendant with Air Canada so I’ve been sitting on my savings/keeping my budget tight in case things didn’t go well with our negotiations. I’m also going to be renting out my basement (it was finished by the previous owners with a bedroom, bathroom and living area so all I have to share are my kitchen and laundry facilities). I would have loved keeping the place all to myself but really, it doesn’t make much sense for me. I’m away half of each month anyways so for a small loss of privacy, I’ll get extra income to help with some updates/paying the mortgage down sooner.

    I remain in awe of everything you manage to accomplish but I try to be inspired by it, instead of discouraged that I haven’t been able to get as much done!!

    • That’s awesome you’re going to be renting out your basement. It makes total sense to get rental income from that space, especially if you don’t use it and you won’t even be there half the time. Good for you for recognizing that!

      I used to get really discouraged a few years ago before I started my blog. I felt like all of my friends were so much farther ahead of me… but a very wise person reminded me that I’ll eventually get there too, I’m just taking my own unique path there and creating my own unique story along the way. It sounds so cheesy, and totally something lame that Oprah would say, but it’s what I always think about now when I get depressed about not achieving a goal, or if I start the bad habit of comparing myself to others. So don’t be discouraged. It sounds like you’re doing really well! :)

      • I have to agree with Martilyo. It is narrow minded to think that all debt is bad debt. I can understand your desire to have no debt based on your previous situation, but a blanket statement that all debt is bad is not always true as many financial experts can tell you. You need to do what is best for you but I hope people reading this don’t take it as gospel that debt is always bad because it can actually make your moneybwork for you.

        • I appreciate where you’re coming from, but in my mind, debt is debt – whether it’s credit card debt, student loan debt, an RSP loan, or in my case – a mortgage. It’s all bad debt. And yes, sometimes we need to take on debt, but when you owe money to somebody else, you are not financially free.

          You will find plenty of financial experts who agree with me, also those that will agree with you. My blog is about financial independence. And you can’t gain independence by relying on somebody else.

  8. You may as well just change payment frequency to weekly accelerated.

  9. I’m curious.. does the 20% limit mean that you can’t pay off the entire mortgage if, say, you won the lottery tomorrow?

    • Yeah, I can do 20% prepayments, and then once a year I can make a lump sum payment up to 20% of the balance of the loan. I can pay it off if I won the lottery, but I think I’d have to pay some sort of penalty. That being said, if I won the lottery, I probably wouldn’t care about a penalty fee. Hahaha

  10. Great to hear you’ve upped your mortgage payments. I’ve just done the same, though now it takes up just under 55% of my net income! It’s a little extreme, but, like you, I know I can always reduce it if I need.

    It’s too bad they limit you to 20% of your current payments. At my building society, on their fixed rates they allow you to pay back 10% of the outstanding mortgage on top of the minimum payment – which is pretty great considering the other banks allow a maximum of 5%!

  11. My wife and I have more than doubled our minimum payments almost every month since our mortgage began and also done some sizable annual lump sum payments.

    Our first mortgage will be paid off next month in less than 5 years from when we started. We originally started with a 25 year mortgage so think how much interest we saved.

    Of course, we want a much bigger house now for our growing family so we’ll see if we can do it again. At least we have a big down payment for the next house!

  12. We did this as well.. Hubby and I use over 50% of our income to pay down our mortgage and will have our 310 000 house paid off in 6 years! To think that we will be 31 and have no mortgage is exciting! So much freedom… we can’t wait and are strangely obsessed over watching the “amount owing” go down!

  13. That is a truly significant amount of savings! I am still torn about increasing the payment vs investing if you can get a rate of more than your interest. But there is really something to be said for being able to say that you really truly own it and that you paid it off ASAP. Congrats!

  14. Orrrr (and I’m going to be the only one saying this…) you could consider going further into debt in order to leverage your money and have someone ELSE pay for your retirement. You can borrow up to 80% (give or take) of the equity you have in your home and buy property that pays your bills. I just did this. The money I borrowed will all be payed back by my new tenants (including management fees taxes etc etc) and will make $1000 a month cash flow. In addition, I will have my curent home and 2 duplexes paid for by renters. It equals about $650k all together. And I’ll will probably use the cash-flow to put another $500 or so per month towards my mortgage. At about 15% cash on cash return, it beats the hell out of my rrsps!!

  15. This is great, but my bank doesn’t allow me to do biweekly payments. They’d impose a late payment/shortfall penalty if I tried to pay half my monthly payment every two weeks. It sucks, but then my loan rate is 3.0%, so I’m not about to switch banks. You have a really good graph though, and I certainly will be paying extra every month on my mortgage too.

  16. re: the bi-weekly payments… some banks (my credit union does this) will put your partial payment into escrow until the full amount comes in (meaning your second payment of the month). Because it is not counted as a payment, there is zero benefit if that is the case.

    So the best I can do is just overpay each month and have that count as extra principal–speaking of, be sure that your bank knows how to handle that extra payment, some of them will put the money into escrow unless you give them specific instructions.

  17. While the graph is very motivating, note that there is an “opposite” picture of what would happen if you saved/invested that extra money compared to what you are saving/investing now. My retirement account provider used to show that type of thing, showing the difference between investing just a little more or less.

    I don’t disagree with your plan – it is hard to argue with it, plus, it is your money, your finances, your choices. Just remember there is another side to the equation!

    Also, what’s going on with your retirement savings might be another good blog topic if you are running low. Not that it ever seems like you are running low – you are so full of ideas & posts!

    • I did think about what would happen if I saved/invested that money right now. Though it’s hard to justify investing in anything when putting money against my mortgage is a guaranteed 3.74% return. That being said, I am currently saving between $700-800/month towards my retirement right now. Obviously it could be higher if I wasn’t prepaying so much on my mortgage.

  18. Good job, Krystal.
    Consumerist linked to you, btw :)

    Nothing is sweeter than to pay off loans & debts like student loan, car payments and a mortgage. There are great net savings and a lot of satisfaction in paying it off early.

    While it is true that the IRS deduction of having a home loan and the possibility of investment returns CAN end up being more net money on the investment side, emphasis on CAN, but everybody overestimates the IRS mortgage benefit; but let’s not forget you pay gains on those investments that do not have a guaranteed return.

    We crunched the numbers with an accountant (big / avg, / no mortgage). It was a no brainer to work towards paying off a 6% mortgage vs breaking even / losing money with financial investments. Instant 6% return.

    Our biggest bills after paying off the mortgage are our high deductible private health insurance (private policy with a $5k deductible per person comes in >$1100/month (yes that one hurts big time) and property taxes, then heating oil and gas for the car & car maintenance. It would be sweet if we could get back to paying $2 (or less) for a gallon of gas & oil. I’m sure that would help people greatly and stimulate our retail & service economy. .

    Anyhow. My personal take is, it is best to work towards paying off everything and aim for a cash equivalent lifestyle. Pay all bills the month they come in. Not everybody can do it easily or quickly – and some people took on too much debt with two mortgages, two car loans and a bunch of credit card debt – but it is a lot of peace of mind to pay things on time, have a small emergency fund and a little nest egg.

  19. Here’s a great tool to play with the effects of additional payments / bulk payments on a Canadian mortgage. It isn’t set up for accelerated bi-weekly but you can get a pretty close approximation by following the instructions included.

    http://www.vertex42.com/Calculators/Canadian-mortgage.html

    Great post – I saw you on the consumerist website and surfed on over!

  20. I wanted to give you another mortgage option that I used. For people that have a good chunk of equity (large downpayment) or going to their second property having paid a nice chunk of their first property off.

    I had a large downpayment. So instead of following the herd, i opened up a large line of credit “secured” against the equity in my property. So my complete mortgage balance apx. $100K was on a line of credit. (set up was $300.00)

    The beauty of this type of system is you can pay your mortgage back on your own schedule. For someone like Krystal who has a variable side income, if she makes an extra few hundred dollars at any time, her side income could go into paying down the LOC and there are no penalties.

    I set it up to make 2 auto payments a month. Where I work I receive quarterly bonuses. The bonuses went into the LOC, took down the principle very quickly. If i saved some extra cash I dumped that into the LOC. I watched my mortgage evaporate very fast. You could see it disappear on each monthy statement.

    The big plus here is what you save in interest paying your mortgage down much faster. Your interest is recalculated every month on the lower balance. You can see you interest cost go down every month as your payments reduce your principle more and more every month that goes by.

    Again this approach is not for everyone. You need discipline to not use the LOC for other things and keep adding to it. Keep this one seperate from your other credit.

    Worked for me. I was able to go mortgage free in about 7 years using that method.

  21. Can we have an analysis of paying 13/12ths your mortgage every month and not paying to have the mortgage company process your payments bi-weekly? They are charging you a service fee, yes?

  22. Great graph, I know it’s hard for some people to pay off mortgages earlier than the bank planned for you, especially when others talk about adding risk by putting the extra payments in the market or leveraging equity.

    For me, my home is the one thing I want to own free and clear as soon as I can. If I lose my car or my furniture or my cable TV, so be it, but if I own my house and don’t have to deal with mortgage companies, I’ll be very happy.

  23. Consider making a webform where people can add the particulars about their mortgage so that they can see the difference for themselves for something they’re actually managing at the moment.

    If and when you do something like that, I’d like an email so I can come back to the page. I really think that its one thing to show people what you’re doing, and it is fantastic to see what it is doing for you, but something that can help people realize the same effective dream is a wonderful thing as well.

  24. Interesting Graph, Im in South Africa and our interest rates are closer to 10%, but I wanted to add here that the higher the interest rate on your mortgage the more you will save by paying it down. I know for us a doubling of our monthly payment results in decreasing a 20 Year mortgage to 5 years.

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