If you’re wondering how to save money on your mortgage, you can consider a few different ideas, from making a larger down payment to rounding your monthly payment amount up a few dollars. Each option has its pros and cons, but each one will make a difference.
It’s easy to get overwhelmed by the numbers when you buy a house, especially considering it’s likely the largest single purchase you’ll ever make. But even if you find yourself a bit uncomfortable a few months or years later and want to bring the amount owing down, there are a few tips you can try.
Here are a few of the best ideas we’ve come across for saving money on your mortgage.
1. Save on your mortgage by comparing rates online
In order to save money on your mortgage, you first need to get a mortgage and get a good mortgage rate. In order to do this, do some internet browsing to see what kind of rates are currently available.
You’ll need to do some research on the differences between fixed vs. variable rates, choose which one feels right for you, and compare like to like. Comparing fixed rates from one lender with variable rates from another isn’t going to be much help to you.
To make this process even easier, you can work with an online mortgage broker. They’ll show you the best rates from the best lenders, point out perks you weren’t aware of, and generally guide you through the process.
One of our favourite online mortgage brokers is nesto. With their $500 Lowest Rate Guarantee and 1% cash back program, there’s a lot to like.
You can learn more here:
- 2 year: 4.7%
- 3 year: 4.24%
- 4 year: 4.45%
- 5 year: 3.99%
- 7 year: 5.94%
- 10 year: 6.14%
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2. Consider making a larger down payment to save on your mortgage
Here’s something to think about when you first start house hunting: consider making a larger down payment in order to save money on your mortgage. The larger the down payment, the smaller the mortgage amount that you’ll have to borrow.
Your down payment is how much of your own money you want to spend to purchase your house.
For example, with a $25,000 down payment with a 5-year term of 5% interest and 25-year amortization, you’d pay $316,484.24 in interest. But with a $40,000 down payment, the total amount of interest paid would be $287,021.05. The higher down payment saves you $29,463.19 in interest payments. A difference of that size is hard to ignore.
Forking over more cash upfront can be difficult, but it really does make a difference in your future.
3. Change the amortization period
Since the amortization period is the length of time it takes to fully pay off your mortgage, a shorter period would mean paying it off sooner. Yes, this does mean that your monthly payments will be larger, but it also means that you’ll pay less interest.
On the other hand, if you need more immediate savings and want to lessen your monthly mortgage payments, you could extend the amortization period instead.
Let’s look at an example. The table below uses the following information:
- House price: $456,375
- Term length: 5 years
- Interest rate: 5%
- Down payment amount: $91,275 (20%)
- Number of annual payments: 12
| Amortization period | Monthly payments | Interest paid over amortization period |
|---|---|---|
| 5 years | $8,601.64 | $37,544.31 |
| 10 years | $4,829.13 | $73,898.26 |
| 15 years | $3,596.80 | $109,528.55 |
| 20 years | $2,998.95 | $143,764.47 |
| 25 years | $2,654.30 | $175,982.37 |
As you can see, the interest paid during the length of an amortization period gets very high. If you were to cut down from just 20 to 15 years, you could save $34,235.92 in interest.
But you’ll also notice that a lower amortization period means a significant increase to your monthly payment amount, making this approach unrealistic for some homeowners. You’ll need to do some detailed calculations and figure out how much you can really afford to pay each month before approaching your lender to ask about a decrease in amortization.
4. Change the payment frequency
Another way to save money on your mortgage is to increase the frequency of your payments – if you’re on a monthly payment schedule, try switching to biweekly. You’ll be surprised at how much this can actually save – and it once again comes down to paying less interest in the long run.
Instead of making 12 payments each year, one per month, moving to biweekly payments means making 26 payments per year. But because some months are longer or shorter than others, you’re essentially making an extra month’s worth of payments in one year.
| Monthly payment | Biweekly payment | |
|---|---|---|
| Payment amount | $1,200 | $600 |
| Number of payments per year | 12 | 26 |
| Annual total | $14,400 | $15,600 |
The table above shows that by making biweekly payments instead of monthly, this homeowner is putting an extra $1,200 per year on their mortgage, which is the same as if they’d paid an extra monthly payment.
5. Save by rounding up your monthly payment
It doesn’t take a mathematician to figure out that by rounding up your payment by just a few dollars each month, you can save money on your mortgage. Even adding just $15 per month can save you a significant amount in the long run.
Let’s say you have a mortgage for $400,000 and your usual monthly payment is $982. Raising this by $18 probably isn’t going to strain your budget plan too much, so you decide to make $1,000 payments instead. This allows you to shave an extra $368 off of your mortgage each year – which means you’re paying off a total of $29,857 of your loan faster than planned.
6. Save on your mortgage by making a lump sum payment
You can save money on your mortgage by making even one lump sum payment, as long as the terms of your loan allow for it. These are also referred to as prepayments. Whether you make a small or large prepayment, it will make a difference.
Before making a lump sum payment, though, it’s important to check and see that you won’t be penalized for doing so. Some lenders don’t allow prepayments at all, while others allow a specific number of them per year, and others even specify the percentage of the remaining principal that you can prepay each year without penalty.
The national government’s page regarding “Mortgage fees: Prepayment penalties” will provide you with more detailed information.
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The examples listed above are only a few ways that you can save money on your mortgage, but they are still effective options.
Have you used one of these examples, or maybe a different method to save on your mortgage? Were you successful?
We love hearing from our readers, so feel free to leave us a note in the comments section below.
FAQ
Are there ways to save money on your mortgage?
Yes, there are several ways to save money on your mortgage. You could change the amortization period of your loan, take the amount you pay each month and round it up a few dollars, or even make a one-time lump sum payment. These are just a few of the many options available to you.
What is a mortgage prepayment?
A mortgage prepayment is a term used to describe a one-time lump sum payment a homeowner makes on their mortgage. Some lenders have rules regarding how much or how often you can make these prepayments, but they are often worth making since they save you quite a bit on interest charges.
How can I get a good mortgage rate?
One way to get a good mortgage rate is to work with a mortgage broker. They have access to multiple lenders and can help find a company and a rate that works for you, making the process much simpler for you.
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Comments
Hi Rhonda. I think you're talking about the Amex Gold Rewards card featured at the bottom of my posts. When I click the link I see this line of text next to the Annual Fee title:
"Your first year’s on us! That’s a value of $150*"
Thanks for the kind words Amit. I like your suggestion of using the higher fixed payment vs the lower variable payment. You'll be out of your mortgage sooner and save even more on interest.