Let's see whether the many people who bought a house in 2007 show the appropriate killer instinct when renewing their mortgages this year.
Surveys indicate that about one-third of mortgage holders are actively trying to terminate their mortgages early by making extra payments. But we need to do more now, before the economy rallies and rising interest rates start making it more expensive to finance the cost of a home.
This is where the people who bought five years ago come in. Those who opted for a five-year fixed-rate mortgage will have to renew at some point this year, which means they face a choice. They can either let today's vastly lower mortgage rates reduce their monthly payments, or leave their payments where they are and use the differential to accelerate the pay down.
Long-time mortgage broker Vince Gaetano of MonsterMortgage.ca has been urging his renewal clients to go with the second option. "The story we try to present to the client is: 'How soon do you not want to have a payment any more?' "
To make his case, Mr. Gaetano lined up some facts and figures on the mortgage market for 2007 and now. Five years ago, the global financial crisis had yet to flare up and Canada's housing market was reporting what were then record sales.
A majority of buyers were going with five-year fixed mortgages, for a couple of reasons. First, discounted variable-rate mortgages were going for close to the same rate as a discounted five-year mortgage with a fixed rate. Second, it was widely thought that interest rates were headed higher.
As a result, Mr. Gaetano said, about 70 per cent of buyers were going with five-year fixed rate mortgages.
He recalls that, in June of 2007, a well-discounted five-year mortgage went for 5.79 per cent. Today, the very best rate for a five-year mortgage is 3.29 per cent.
Let's say you started with a $300,000 mortgage in 2007. Mr. Gaetano said that if you chose a 30-year amortization, your monthly payments would have been $1,745 and your balance on renewal would be $278,184. If you moved into a new five-year fixed rate mortgage at 3.29 per cent, your monthly payments would be $1,358, which would save you a very significant $387 a month.
Mr. Gaetano's numbers show that if you pocketed that money and went with lower payments, your mortgage balance on renewal five years from now would be $239,087. If you kept your payments level, thereby paying down an extra $387 a month against your principal, the balance on renewal would be $213,914. The lower your mortgage amount on renewal, the quicker the loan will be paid off and the less interest you'll pay.
High personal debt loads in Canada have caused concern at the Bank of Canada, the Department of Finance and, outside the country, the International Monetary Fund and the Organization for Economic Co-operation and Development. It would be a clear sign that Canadians are getting the message on debt if they used all available opportunities to pay their mortgages down quicker.
The actual experience in this area is encouraging. The 2012 RBC Home Ownership Poll indicates that 14 per cent of Canadians made double-up mortgage payments (your regular payment plus an additional amount equalling as much as one extra payment), 13 per cent made one-time lump-sum payments and 7 per cent applied a bonus, gift or inheritance against their mortgage balance. A mortgage market survey released by the Canadian Association of Accredited Mortgage Professionals last November suggested that 36 per cent of mortgage holders are making voluntary additional payments.
"You are seeing a significant minority who value [mortgage prepayment] features and are taking advantage of it," said Jim Murphy, CAAMP president.
The CAAMP survey also found that in cases where people were renewing their mortgages at a lower rate, 24 per cent voluntarily increased their payments. We could do better than that, especially among the people renewing mortgages they arranged in 2007.
These people presumably have seen their pay rise somewhat, and they've learned how to juggle the cost of running a house along with other expenses. Most importantly, they're fortunate to have got into the market before the price runups of the past few years.
No one's in a better position to show the killer instinct about mortgages than the class of 2005. Don't let us down at mortgage renewal time, guys.
How often do mortgage holders make extra payments so their mortgages will be paid off ahead of schedule? Here are some answers from a survey done for the Canadian Association of Accredited Mortgage Professionals. The stats suggest more people in recent years have been trying to pay off their mortgages early.
Made lump-sum payment
Increased payment frequency
One or more additional efforts
Source: CAAMP Annual State of the Residential Mortgage Market survey, November, 2011