How Much Difference Will Extra Payments Make Towards My Mortgage?

HomeHappy • July 4, 2019

Have you ever wondered how much difference extra payments actually make in paying down your mortgage? Let's take a look and maybe do a little math.

The first (and largest) factor to look at is the amortization, which is the remainder of your mortgage’s life. A majority of mortgages today start with 25-year amortizations. If you have made only regular payments for 5 years on a 25-year mortgage, your remaining amortization will be 20 years. Pretty simple, right?

Someone making an extra payment on a mortgage with 20 years left will save WAY more interest than someone making the same payment on a mortgage with 5 years left. The more years remaining on a mortgage, the more impact your extra payment will make.

The second factor to keep in mind is the mortgage interest rate. Your interest rate will change many times over the life of your mortgage, divided up by mortgage terms. If you agree to a 5-year term, you will only have that interest rate for 5 years, and then it will be time to renew at a different interest rate. At the time of this writing, mortgage rates are exceptionally low (even after some recent increases in 2018), and based on the last rate decision from the Bank of Canada on April 24/2019, they do not appear to be increasing anytime in 2019.

So what does that mean for you? Well, it depends if you are renewing this year, or 3 years from now. If you are renewing this year, you may want to consider your investment options for a lump sum amount, as opposed to paying down your mortgage. Paying down your mortgage makes the most sense when your amortization is high, and interest rates are also high (or going higher). If you’re renewing in three years time, then you may still want to consider paying down your mortgage, especially if you think mortgage rates will be higher at your renewal. The more you can pay when your mortgage is below 4%, the better payoff it will be if rates increase above 5%.

This is all conjecture and guesswork, especially when deciding between paying down your mortgage or investing more. However, mortgage rates have been abnormally low for a while now, and for whatever reason, the government of Canada selected a benchmark rate above 5% to qualify for a mortgage. Where interest rates go is anyone’s best guess, but it’s nice to be ahead of the game on your mortgage than trying to play catch-up with higher interest rates.

So let’s talk dollar amounts. For all of my examples, I’m going to use a $250,000 mortgage at 3.49% with 20 years remaining - that works out to a payment of $1445.40. If you switch to an accelerated bi-weekly, you’ll pay $722.70 every two weeks (half of the monthly amount), but you’ll save over $12,000 over the next 20 years because you will be making a couple of extra payments per year. Those payments really add up.

With the same mortgage (back on the regular monthly payment), let’s say you have $10,000 floating around your accounts, and you decide to use that money to pay down your mortgage. You’ll have saved around $9,500 in interest thanks to that payment. If you did BOTH the accelerated bi-weekly schedule and the $10,000 payment, it combines to over $20,000 of saved interest.

One more calculation with this mortgage - let’s say that, instead of any of the options described here, you decide to increase the monthly payment from $1445.40 to $1600 even. In just the 5 years time, you would save almost $6000 in interest over the life of the entire mortgage. But if mortgage rates stayed the same for the entire life of the mortgage, and you kept up the additional payment of only $154.60/month, you would pay off the mortgage 3.5 years sooner, AND save almost $15,000 in interest.

In summary, paying down your mortgage can feel good, both in your mind and in your wallet. It makes the most sense to pay down your mortgage when both amortization and interest rates are high. It can sometimes be difficult choosing between investing more and paying down your mortgage, but you can think of your mortgage interest rate as a guaranteed return, which is typically better than your GIC options.

If you'd like to discuss your financial situation and and want to review your mortgage to make sure you have the best mortgage available, contact us anytime!

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By HomeHappy • September 3, 2025
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By HomeHappy • August 27, 2025
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The Source Of Your Downpayment Matters

By HomeHappy • August 27, 2025
If you’re looking to purchase a property, although you might not think it matters too much, the source of your downpayment means a great deal to the lender. Let’s discuss the lender requirements, what your downpayment tells the lender about your financial situation, a how downpayment helps establish the mortgage loan to value. Anti-money laundering Lenders care about your downpayment source because, legally, they have to. To prevent money laundering, lenders have to document the source of the downpayment on every home purchase. Acceptable forms of downpayment are money from your resources, borrowed funds through an insured program called the FlexDown, or money you receive as a gift from an immediate family member. To prove the funds are from your resources and not laundered money from the proceeds of crime, you’ll be required to provide bank statements showing the money has been in your account for at least 90 days or that you’ve accumulated the funds through payroll deposits or other acceptable means. Now, if you’re borrowing all or part of your downpayment, you’ll need to include the costs of carrying the payments on the borrowed downpayment in your debt service ratios. If you’re the recipient of a gift from a direct family member, you’ll need to provide a signed gift letter indicating that the funds are a true gift and have no schedule for repayment. From there, you’ll need to show the money deposit into your account. Financial suitability Lenders care about the source of the downpayment because it is an indicator that you are financially able to purchase the property. Showing the lender that your downpayment is coming from your resources is the best. This demonstrates that you have positive cash flow and that you’re able to save money and manage your finances in a way that indicates you’ll most likely make your mortgage payments on time. If your downpayment is borrowed or from a gift, there’s a chance that they’ll want to scrutinize the rest of your application more closely. The bigger your downpayment, the better, well, as far as the lender is concerned. The way they see it, there is a direct correlation between how much money you have as equity to the likelihood you will or won’t default on their mortgage. Essentially, the more equity you have, the less likely you will walk away from the mortgage, which lessens their risk. Downpayment establishes the loan to value (LTV) Thirdly, your downpayment establishes the loan to value ratio. The loan to value ratio or LTV is the percentage of the property’s value compared to the mortgage amount. In Canada, a lender cannot lend more than 95% of a property’s value. So, if you’re buying a home for $400k, the lender can lend $380k, and you’re responsible for coming up with 5%, $ 20k in this situation. But you might be asking yourself, how does the source of the downpayment impact LTV? Great question, and to answer this, we have to look at how to establish property value. Simply put, something is worth what someone is willing to pay for it and what someone is willing to sell it for. Of course, within reason, having no external factors coming into play. When dealing with real estate, an appraisal of the property will include comparisons of what other people have agreed to pay for similar properties in the past. You’ll often hear of situations where buyers and sellers try to inflate the sale price to help finalize the transaction artificially. Any scenario where the buyer isn’t coming up with all of the money for the downpayment, independent of the seller, impacts the LTV. All details of a real estate transaction purchase and sale have to be disclosed to the lender. If there’s any money transferring behind the scenes, this impacts the LTV, and the lender won’t proceed with financing. Non-disclosure to the lender is mortgage fraud. So there you have it; hopefully, this provides context to why lenders ask for documents to prove the source of your downpayment. If you’d like to talk about mortgage financing, please connect anytime; it would be a pleasure to work with you.