# What is better to do save up or pay monthly towards mortgage?



## don kroetch (Aug 25, 2010)

I save roughly between 400 to 500 a month extra toward our mortgage. I have it in a tax free savings account.

We have a 3.79 3 year fixed. I pay 1575 a month.

I dont trust my bank for the answers. So I would like to know is it better to put that money every month towards the principle? Or better to wait out the term and put the lump sump toward it then? I just want the principle as low as possible because Im worried about it getting higher than 5% fixed when Im done the term.


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## MoneyGal (Apr 24, 2009)

You can model this problem for yourself using a mortgage calculator. There are Canadian mortgage calculators at www.dinkytown.net - they will let you enter your existing balance, term, amortization, interest rate, payment schedule and lump sum payments. 

As a general rule, earlier prepayments are more favourable than waiting...for obvious reasons - you are reducing the outstanding balance (upon which interest is calculated) earlier.


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## Maltese (Apr 22, 2009)

don kroetch said:


> I save roughly between 400 to 500 a month extra toward our mortgage. I have it in a tax free savings account.
> 
> We have a 3.79 3 year fixed. I pay 1575 a month.
> 
> I dont trust my bank for the answers. So I would like to know is it better to put that money every month towards the principle? Or better to wait out the term and put the lump sump toward it then? I just want the principle as low as possible because Im worried about it getting higher than 5% fixed when Im done the term.


In addition to Money Gal's response, you should check the prepayment conditions of your mortgage. Some lenders allow additional payments at any time while others stipulate when additional payments can be made.


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## don kroetch (Aug 25, 2010)

I can pay whatever it seems. The calculator thing doesnt work. I have a mac. It just shows a blank screen. Not happy about that. It really looked useful to.


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## the-royal-mail (Dec 11, 2009)

If you are paying 3.79% interest, you should only consider keeping/investing any extra money you have IF the rate you will get is more than this amount. See last question.

I don't know of any TFSA that pays more than 2%. I say put the money down on the mortgage.

Do you have a rainy day savings fund (other than the $ being discussed here) in case adversity strikes?


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## Berubeland (Sep 6, 2009)

Increasing your monthly payment will result in the greatest saving because as you pay down the principal your next interest calculation will be on the lesser amount owed and then less of your money will go to interest and more will go to principal for every subsequent payment. 

Now interest for mortgages is not calculated monthly. It may be semi annually or quarterly. I'm not sure what it is. They may well recalculate it when you make a prepayment. 

The best person to calculate this is whomever holds your mortgage. They can also tell you what you are allowed to do with your payments.


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## MoneyGal (Apr 24, 2009)

By law, mortgage interest in Canada is calculated semi-annually (i.e., twice per year). 

If you like math, here is a decent web page which shows how to compound mortgage interest for both semi-annual and monthly (and more frequent) payments. 

Bottom line, though; as I said earlier, earlier prepayments will always win (if the mortgage rate is held constant) because they reduce the balance on which interest is calculated. If you wait, you will pay more interest than you would otherwise pay.


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## the-royal-mail (Dec 11, 2009)

Maybe I should start a new thread, but is this how car loans work also? I bought a new car recently (financed by a bank) and then within about 30 days put down two separate significant chunks down. I note the monthly payment amount has not changed; they told me the chunks I put down merely reduce the duration of the loan.


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## don kroetch (Aug 25, 2010)

I am going to put it as a lump sum toward my mortgage at the end of each month. BUT im thinking Im going to write a check and have it put ONLY toward the principal. Guess its time to make an appointment with Scotia. Damn it. How i hate that bank.


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## MoneyGal (Apr 24, 2009)

All prepayments automatically go to the principal; there's nowhere else for them to go!


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## dilbert789 (Apr 20, 2010)

the-royal-mail said:


> Maybe I should start a new thread, but is this how car loans work also? I bought a new car recently (financed by a bank) and then within about 30 days put down two separate significant chunks down. I note the monthly payment amount has not changed; they told me the chunks I put down merely reduce the duration of the loan.


Car loans generally have the interest calculated monthly, so no in terms of monthly vs every 6mths. The amount you have left to pay wouldn't reduce your payment amount, but would reduce the total interest paid. I tried to write an example but I think it was more confusing so I deleted it...

We recently opened up a Line of Credit and paid off a car loan with it. The interest rate is almost half which was the reason for doing it. The only way I know of to have your payment reduced but the term stay the same is to either go to a line of credit where you can decide for yourself how much you want to pay(minimum of interest). That way you could pay less on months where you needed to.


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## don kroetch (Aug 25, 2010)

I could never get a line of credit for 340 000. If that is what you are indeed talking about.


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## GeniusBoy27 (Jun 11, 2010)

No, I think he meant a LOC for your car loan, which would be better.


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## dilbert789 (Apr 20, 2010)

GeniusBoy27 said:


> No, I think he meant a LOC for your car loan, which would be better.


That is correct, I meant for a car loan. In regards to extra payments on your mortgage, get all of your other (if you have any) debt that you are paying a higher interest rate on paid off before you look to put any extra down on your mortgage. 

In my case I have a LOC (~20k) and a mortgage (~200k), but the interest rate on the mortgage is actually higher than the LOC so any extra payments we would have put towards the LOC to pay it off we've dropped on our mortgage. The amounts don't matter, just the interest rate.


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## Elbyron (Apr 3, 2009)

don kroetch said:


> I can pay whatever it seems. The calculator thing doesnt work. I have a mac. It just shows a blank screen. Not happy about that. It really looked useful to.


If it's blank, you probably don't have the latest version of Java installed. Use the Software Update from your apple menu to check that you have the most up-to-date version of Java.




the-royal-mail said:


> I don't know of any TFSA that pays more than 2%.


A TFSA doesn't have to be a high-interest savings account. It could be a GIC, which could make 3 - 4%, or even a self directed TFSA which can hold mutual funds, stocks, bonds, or pretty much any investment. You have to think of the TFSA account as a variation of an RRSP account: it's just a special investment vehicle that has tax advantages.



MoneyGal said:


> By law, mortgage interest in Canada is calculated semi-annually (i.e., twice per year).
> 
> If you like math, here is a decent web page which shows how to compound mortgage interest for both semi-annual and monthly (and more frequent) payments.


Please correct me if I'm wrong, but I thought most financial institutions calculate mortgage interest on a daily basis, though the rate they show you has to be based on semi-annual compounding. The link you provided shows how the semi-annual compounding basis can be converted to an equivalent monthly compounding basis. But last time I moved my mortgage to another bank, the transfer occurred in mid-month and they had to make adjustments to compensate for about a week's worth of interest. The adjustment amount was calculated using a daily compounding rate (obtained using math similar to finding the monthly rate). Therefore, when you make a lump-sum payment in mid month - provided the lender allows this - the mortgage principal is immediately reduced and will lower the ratio of interest/principal on your next monthly payment. It DOES make a difference if you pre-pay at the beginning of a pay-period vs the end of the payment period... you're always better off paying as soon as possible. I think I once calculated that for every day that I delayed in making a $10,000 pre-payment, it would cost me a dollar in interest.

So, getting to the OP's original question of monthly pre-payments vs one lump sum, I would vote for a third option: pay as frequently as you can, provided the lender allows you to. If you're setting aside a portion of your paycheque to go toward the mortgage, then make the pre-payments right after each paycheque is deposited (which I suppose is monthly for some people).


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## MoneyGal (Apr 24, 2009)

Elbyron: to be more complete, my post should have said, by law, mortgage interest in Canada must be *quoted* as calculated on a semi-annual basis. Obviously, as you have pointed out, it can and is calculated differently than semi-annually. The requirement is for semi-annual quoting, not semi-annual compounding.


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## brad (May 22, 2009)

don kroetch said:


> The calculator thing doesnt work. I have a mac. It just shows a blank screen. Not happy about that. It really looked useful to.


I have a Mac too and the calculator appears just fine for me. I'm using the latest version of Apple's Safari browser, but it also works in Firefox (Mozilla). Maybe you don't have javascript enabled in your browser -- the page runs on Java and you need to enable javascript if you're going to see the calculator.


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## Elbyron (Apr 3, 2009)

brad said:


> I have a Mac too and the calculator appears just fine for me. I'm using the latest version of Apple's Safari browser, but it also works in Firefox (Mozilla). Maybe you don't have javascript enabled in your browser -- the page runs on Java and you need to enable javascript if you're going to see the calculator.


Actually, upon a closer look, the javascript on the page is actually what is causing Don's problem:
var IEMAC = ((agt.indexOf("msie") != -1) && agt.indexOf("mac")!=-1);
...
if ( IEMAC ) {
return "<P>";
}

What this means is that the author decided you should see an empty paragraph element if your browser is Internet Explorer and you're using a Mac. It's rather stupid, but there's not much you can do about it other than switching to Safari or Firefox.


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## brad (May 22, 2009)

Elbyron said:


> What this means is that the author decided you should see an empty paragraph element if your browser is Internet Explorer and you're using a Mac. It's rather stupid, but there's not much you can do about it other than switching to Safari or Firefox.


The last version of IE for Mac was released in 2003, and you haven't been able to download it from Microsoft's site since 2006. So switching to Safari or Firefox is a good idea all around, especially since using such an ancient unsupported browser leaves you open to all kinds of security risks.


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## Shayne (Apr 3, 2009)

don kroetch said:


> I save roughly between 400 to 500 a month extra toward our mortgage. I have it in a tax free savings account.
> 
> We have a 3.79 3 year fixed. I pay 1575 a month.
> 
> I dont trust my bank for the answers. So I would like to know is it better to put that money every month towards the principle? Or better to wait out the term and put the lump sump toward it then? I just want the principle as low as possible because Im worried about it getting higher than 5% fixed when Im done the term.


The sooner you put the money against your mortgage the better. I have made some assumptions and done some calculations.

I assume that your mortgage amortization is 35 years and the original amount it $367,545 and the payment is of course $1,575.

If you don't prepay at all your balance at the end of 5 years would be $339,654.

If you prepay $5,400 yearly your balance at the end of 5 years would be $310,507.

If you prepay $450 monthly your balance at the end of 5 years would be $310,000.

So you save $507 in interest over 5 years. 

If I project that over the life of the mortgage you are saving $3,255. This number will increase as rates increase.

So your answer is, pay now. When you renew ensure your new mortgage lets you make prepayments whenever you want. 

Good luck!


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## Scottlandlord (May 27, 2010)

Shayne, you have made a very good post. Yet, I would rather use my capital to make numbers a heck of a lot higher than what I pay my lender with my mortgage.

I see debt as a tool and nothing to be afraid of.


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## Shayne (Apr 3, 2009)

Scottlandlord said:


> Shayne, you have made a very good post. Yet, I would rather use my capital to make numbers a heck of a lot higher than what I pay my lender with my mortgage.
> 
> I see debt as a tool and nothing to be afraid of.


I was simply showing the differences. Different people have different risk tolerance and goals. You see I am on the other end of the spectrum and when I can say I don't owe anyone anything it will be a very happy day.


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## Scottlandlord (May 27, 2010)

Shayne said:


> I was simply showing the differences. Different people have different risk tolerance and goals. You see I am on the other end of the spectrum and when I can say I don't owe anyone anything it will be a very happy day.


Fair enough. I enjoy your posts, even though I'm on the other side of the debt spectrum. 

I like to view debt as my team of dogs pulling me across the northern tundra. And I can always sell because I make sure I purchase in the right areas.


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## heyjude (May 16, 2009)

I have no mortgage on my primary residence, but I have several rental properties. Some have mortgages at Scotiabank, one is at ING, and one is a HELOC. The loan I like best is the ING Unmortgage, because it is really easy to change the terms and to make prepayments on the principal. As well, if you sign up for the Interest Rate Monitor, they will email you when interest rates change to your advantage. Then you can call them and get a blended rate with a new term. As a result, I have been able to shave over 1% off the interest rate and now have a 5 year mortgage at a low rate till 2015. Of course, when the bond market changes and long term interest rates go up, I will keep that low rate. 

Meanwhile, over at the HELOC, I've got the flexibility to pay interest only or dump in spare cash against the principal anytime, or even to extend my credit if necessary. But the interest rate is tied to Prime and has increased by 0.75% this year. It's still competitive, but I want to keep lowering the principal in case prime continues to rise. 

Since all my debt is investment debt, the interest is tax deductible, so my goal is to pay down the debt with the highest interest rate first, followed by the HELOC, which is the wildcard. However, the ING Unmortgage makes it so easy....and money is fungible, so the sooner I pay off that property, the sooner the rent can go towards paying off the others.

Disclaimer: I have no financial interest in ING.


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## Scottlandlord (May 27, 2010)

Thank you for this. Very interesting.

Do you mind telling me what your ING rate is?


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## Shayne (Apr 3, 2009)

heyjude said:


> I have no mortgage on my primary residence, but I have several rental properties. Some have mortgages at Scotiabank, one is at ING, and one is a HELOC. The loan I like best is the ING Unmortgage, because it is really easy to change the terms and to make prepayments on the principal. As well, if you sign up for the Interest Rate Monitor, they will email you when interest rates change to your advantage. Then you can call them and get a blended rate with a new term. As a result, I have been able to shave over 1% off the interest rate and now have a 5 year mortgage at a low rate till 2015. Of course, when the bond market changes and long term interest rates go up, I will keep that low rate.
> 
> Meanwhile, over at the HELOC, I've got the flexibility to pay interest only or dump in spare cash against the principal anytime, or even to extend my credit if necessary. But the interest rate is tied to Prime and has increased by 0.75% this year. It's still competitive, but I want to keep lowering the principal in case prime continues to rise.
> 
> ...


Are you sure that a blended rate is in your best interests? I would suggest that you find someone who can do the math properly as you would likely do better moving to a new bank and paying the penalty compared to taking the blended rate.


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