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How to Reduce Your Interest Cost

With a lot of discipline and determination, you can stay on top of your debts.

  1. Repay your credit card debts
  2. Repay your mortgage

1- Repay your credit card debts

What do to

  • Pay your credit card balance in full by the due date each month.

If you can’t pay your credit card balance on time

  • Make a payment as soon as you can before the next statement comes out. You’ll save on interest charges, since they usually start from the date of purchase and until the balance is paid off in full.
  • Get a low-interest rate credit card if you can’t pay off your balance each month.
  • Get a line of credit and use it to pay off your balance in full each month. A line of credit usually carries an interest rate lower than a low-rate card. You can save more in interest charges per year this way*

If you never pay your credit card balance in full by the due date each month

  • Stop using your credit card.
    Call your financial institution and ask them to transfer your credit card balance to a lower interest line of credit or personal loan.
  • Find a way to cut back in your budget to be able to put larger amounts toward paying off your debt.
  • Find a way to earn more money. You just might have to find a 2nd job to be able to repay your debts. The satisfaction you’ll get from seeing the amount you owe go down from day to day will make it all worthwhile.
  • See Draw up a monthly budget

Select the order in which you want to repay your debts

You can repay your debts in either of 2 ways:

  • by starting with the ones with the highest interest rates first
  • by starting with the ones with the smallest amounts first

In either case, you’ll have to make a list of your debts and save as much as you possibly can to eliminate them as fast as you can. It’s up to you to determine in which order to repay them.

Let’s be honest: the first way is, logically, the one that pays off the most, since it allows you to rid yourself of the debts that cost you the most (the ones with the highest interest rates).

But perhaps you’re someone who gets a bigger sense of accomplishment by taking smaller, faster steps. If you are, the 2nd way may be better for you. Here’s why: by focusing on paying off your smallest debt first and seeing it paid off quickly, you’ll be more motivated to take on the 2nd and then the 3rd.

The mind works in mysterious ways. As long as your way of doing it works for you, that’s all that matters.

As soon as you’ve finished paying off a loan

  • Continue to save and put the money that was going toward it toward the next debt on your list.

Did you know?

  • When you take out a cash advance on a credit card, interest is charged as of the date of the advance until the time the amount is paid off in full.
  • If you don’t pay your credit card bill by the due date indicated on your statement, you’ll be charged interest on the entire amount you owe until you pay it in full.

2- Repay your mortgage

Make the largest downpayment you can

This will reduce the amount of your mortgage and the length of time it takes you to repay it. To help you increase your downpayment, you can use the HBP. To avoid paying interest needlessly, consider buying a smaller home and paying it off in a period of 17 years.

Reduce the repayment term

You can save several thousands of dollars simply by reducing your mortgage repayment period, for example, by repaying your mortgage in 17 years instead of 25 or 30 years. You’ll see just how much less interest you’ll pay. To find out more, see the interest cost comparison.

Find out more – See The cost of credit.

Increase the amount of your payments

If you can, repay up to 15% of the original mortgage amount each year (or each term if the term is less than 1 year.)

Double your payments whenever possible.

Make a substantial prepayment when you renew your loan

This will greatly reduce the amount you pay in the long run.

Make more payments

Increase the frequency of payments to weekly or every two weeks and repay a bit more of your mortgage each time. In the long run, you’ll save a substantial amount and reduce the length of time it takes you to repay your mortgage.

With weekly payments, for example, you make the equivalent of 13 monthly payments a year, i.e., 4 weekly payments more, or 2 payments every 2 weeks more than a borrower on the regular payment plan.

A mortgage of $100,000 at an interest rate of 7.5% amortized over 25 years would be paid off in 25 years with monthly payments, while the same mortgage would take 20 years to pay off with payments every 2 weeks.

The next step

User our What will my mortgage payments be simulator.

Interest cost comparison

Let’s take the example of a couple, age 35, who buys a $250,000 home with a downpayment of $45,000, and gets a mortgage of $205,000 from their financial institution.

The tables below shows the real cost of their home if they repay their mortgage over 25 years vs. over 15 years.

Cost of house

Downpayment
(versement initial)

Mortgage amount

Interest rate

$250,000

$45,000

$205,000

6.75%

$205,000 mortgage repaid over 25 years

Payment frequency

Payment amount

Interest charges over 25 years

Total cost of home
including interest

Monthly

$1,404.35

$216,306

$250,000

+

$216,306

=

$466,306

Every 2 weeks

$702.18

$171,113

$250,000

+

$171,113

=

$421,113

Weekly

$351.09

$170,603

$250,000

+

$170,603

=

$420,603

$205,000 mortgage repaid over 15 years

Payment frequency

Payment amount

Interest charges over 15 years

Total cost of home
including interest

Monthly

$1,803.51

$119,631

$250,000

+

$119,631

=

$369,631

Every 2 weeks

$901.75

$101 883

$250,000

+

$101,883

=

$351,883

Weekly

$450.88

$101,571

$250,000

+

$101,571

=

$351,571

Mortgage loan insurance

If the amount of your downpayment is less than 20% of the home’s value, you need to take out additional insurance, called mortgage loan insurance, from either the Canada Mortgage and Housing Corporation (CMHC) or Genworth Financial Canada.

The insurance helps protect lending financial institutions against the risk of mortgage default, which rises with the amount of the loan.

Find out more

To find out more about mortgage loan insurance, see the Canada Mortgage and Housing Corporation (CMHC) Web site.

 

* Source: Financial Consumer Agency of Canada.

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