Inflationary hedging is one of our most effective strategies to help you repay your mortgage faster while at the same time protecting you against payment shock upon your mortgage renewal due to increased mortgage rates. We implement this strategy by gradually increasing your mortgage payments over four years of your five year term so when your mortgage is up for renewal your payments are the same as the projected renewal rate.
Lets look at a fixed rate example:
Our client has a $300 000 five year 3.0% fixed rate mortgage and we project a 5.0% renewal rate in five years. At the beginning of year two of the mortgage we will increase our client’s payments to reflect a rate of 3.5%, beginning of year three, 4.0%, year four 4.5% and at the beginning of year five we will be paying at a rate of 5.0%. It is important to note that our client is still being charged at 3.0% by the lender and we are using the pre-payment privileges on the mortgage to increase the payments.
Our client’s monthly payments will gradually increase by only $87 every year, from a starting payment of $1261 to an ending payment in year five of $1601. This small increase will however result in a significant benefit for our client. In addition to protecting their budgeting against a large payment increase at renewal, they will also repay an additional $10 477 toward their mortgage principal and will have reduced their remaining mortgage amortization by approximately two years.
This is a strategy that we will often employ even more aggressively with our variable mortgage clients. We will often approve a variable mortgage but work with our clients to set their payments at the current best five year fixed rate.
Lets look at a variable rate example:
If we have a variable rate mortgage at 2.5% and the current five year fixed rate is at 3.5% we will often set your payments at the 3.5% mortgage rate. This strategy has two major benefits to you, the first being we are guarding you against payment increases in the event of the prime rate rising. The second being that while there is a large difference in rate between the 2.5% variable you are being charged at and the 3.5% rate you are paying at, the extra payments you are making are repaying your mortgage faster and effectively reducing your remaining mortgage in some cases by years.
This is a strategy that we have worked with our clients on for many years and with great success, when you are choosing a mortgage professional to work with make sure to ask them questions about how they can develop strategies with you to help protect you against rate increases and also help you repay your mortgage faster. Please feel free to contact us via our online contact form, phone, or by applying online.