Navigating Financial Flyers and Mortgage Strategies
Your mailbox often overflows with a mix of mail, from department store flyers to bank bulletins. If you’re a shopaholic, you might eagerly sift through sales for perfume or throw pillows, discarding the rest. However, if you’re keen on financial education, you’ll likely keep the bank flyers and toss the sales ads. These bulletins, tucked into financial statements or credit card bills, offer valuable insights. One major bank we work with occasionally shares economic trends, highlights high-performing mutual funds, or answers common questions like:
- Should I borrow from my retirement funds as a first-time homebuyer?
- Should I prioritize retirement savings, debt repayment, or delay buying a home?
- How much do I need to maintain my current lifestyle?
- Is an extra mortgage payment better than investing in a guaranteed investment certificate?
Weekly, newspapers dedicate a business section page to analyzing an individual’s financial situation (using fictitious names) with commentary from three to four experts. Each expert offers a unique perspective, making these analyses thought-provoking. Regularly reading these sections and bank flyers provides a clearer understanding of common financial strategies, such as making extra mortgage payments to improve your financial health.
Benefits of Extra Mortgage Payments
Mortgages can feel overwhelming, especially since early payments—typically in the first five to seven years—primarily cover interest rather than principal. For example, if you pay $200 weekly, about 75% ($150) may go toward interest, leaving only 25% ($50) to reduce the principal. This slow progress explains why many hesitate to transition from renting to homeownership, as a mortgage can feel like a lifelong burden.
For couples starting a mortgage in their late 20s, paying it off by retirement is common unless they make extra payments. Some determined individuals shorten a 25-year mortgage to 15 or even 10 years by consistently making extra monthly payments and annual lump-sum contributions. Here are key reasons to consider extra mortgage payments:
Build Equity Faster
Equity is the cornerstone of homeownership. Unlike renters, whose equity is limited to savings or possessions, homeowners build equity in their property from day one. Extra mortgage payments accelerate this process, increasing your home’s value as a tangible asset. By the midpoint of your mortgage, your equity becomes more substantial, offering financial flexibility.
Reduce the Amortization Period
Scheduled payments primarily cover interest, but extra payments go directly toward the principal, reducing both your balance and amortization period. For example, a friend purchased a $159,000 home and opted for weekly payments, which inherently save interest compared to monthly ones. She made two extra payments monthly and a $10,000 annual payment for two years. Despite stopping extra payments after losing her job, she reduced her 25-year mortgage’s remaining term from 21 to 16 years by the four-year renewal, demonstrating the impact of disciplined payments.
Become a Low-Risk Borrower
Building equity through extra payments makes you an attractive borrower to lenders. As a homeowner, banks are more likely to offer low-rate loans, knowing they can seize your property if you default. For instance, if you’re nearing retirement and want to downsize to a condo, a banker might offer a $20,000 home equity line of credit (HELOC) to renovate your basement, potentially at 75% of your home’s value in some regions like Canada. Renters rarely enjoy such opportunities.
These benefits open doors to possibilities like renovations, travel, funding education or weddings, or even partial retirement in a dream destination—all without the burden of heavy winter coats. By making extra mortgage payments, you gain financial freedom and a stronger foundation for your future.
