There has been a significant decrease in the number of Canadians using low interest rates to pay down their mortgages and BC residents are the worst culprits, according to the results of a CIBC survey released July 21.
Although the poll found that more than half of Canadians with mortgages (55 per cent) are taking one or more actions to pay their mortgages down before the term is up, this is notably lower than the results of a similar poll in 2013, which found that more than two-thirds (68 per cent) were accelerate their repayments.
The number drops further when broken down to BC residents, of which only 47 per cent are taking any actions to pay down mortgage debt early the lowest proportion in the country.
Nationally, among those taking some early-repayment action:
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- 32 per cent accelerated their payment frequency (down from 42 per cent in 2013)
- 28 per cent increased their payment amount (compared with 30 per cent last year)
- 18 per cent made a prepayment or lump sum payment (15 per cent in 2013)
Respondents to the 2014 survey said, on average, that they will be 58 years old before they become mortgage-free.
In BC, respondents said they expected to be 66 years old on average by the time they paid off their mortgage the highest in the country.
Recent research from CIBC shows that Canadians are spending more this year on other items such as home renovations (up 30 per cent from a year ago), and summer vacations (up 20 per cent from last year).
"A mortgage is the largest debt most Canadians will take on in their lifetime, and being mortgage-free is an important goal for many," said Barry Gollom, CIBC's vice-president, secured lending and product policy.
"With current low interest rates, this may be an opportune time to make progress against your mortgage. Even a few small changes can make a big difference in the length of time it takes to pay off your mortgage and the amount you pay in interest charges."
Paying off your mortgage sooner can result in significant savings, which can have a large impact when applied to your other financial goals.
CIBC cites some specific examples to show how savings can add up, using a mortgage of $250,000 (the Canadian average), with a 4.99% interest rate and a 25-year amortization period, and regular monthly payments of $1,453:
- Increase payment amount: Taking the regular monthly payment amount and topping it up by $147 per month would save you four years and $34,362 in interest on your mortgage.
- Accelerate payment frequency: Most Canadians are paid every two weeks, so aligning your mortgage payments with your pay deposit and making accelerated bi-weekly payments of $726 would result in saving four years off the life of your mortgage, and a reduction of $30,970 in interest charges. Combining this with increased payments as above (an extra $74 bi-weekly) would together save you seven years and $57,182.
- Make pre-payments/lump sum payments: Not a lot of families have a few thousand "extra" dollars lying around, but even using your annual tax refund towards your mortgage can make a difference. The average Canadian tax refund is $1,600, and applying that amount to your mortgage each year would reduce the amortization by four years and save you $33,103 in interest.
- Using all three of these strategies in combination would shave nine years off the life of your mortgage, and result in total savings of $73,785.
