Canada's housing market is maintaining a robust pace, largely because mortgage interest rates have been low for several years. But even the lowest interest rate costs add up over the full term of a mortgage. By taking a close look at their mortgage terms, homeowners may be able to save thousands of dollars by taking advantage of mortgage options available from their lenders.

Pre-payment privileges are the first thing homeowners should consider as a way to chip away at their principal payments, says the Canadian Bankers Association. It allows you to pay a percentage of the original principal owning, in addition to your regular mortgage payments. Traditionally, this has been 10 per cent of the principal on the anniversary date of the mortgage, but competition in the mortgage market is prompting lenders to offer more flexible options. At Scotiabank, for example, you can prepay 15 per cent of the original amount of the mortgage anytime during the first year of the term of your mortgage, without a penalty or administration fee.

Increasing the amount of your mortgage payment is another way to get mortgage-free faster. For example, the Bank of Montreal's 20+20 Prepayment plan combines accelerated payments with prepayment privileges. Once every calendar year, you can increase payments by up to 20 per cent over the current payment, and you can prepay up to 20 per cent of the original mortgage payment each calendar year. Both options are available without a fee or penalty.

Increasing payment frequency is another way to save money. The Royal Bank uses the example of an $80,000 at 8 per cent. Amortized over 25 years, the total interest cost of the loan is $103,165. But if you take that monthly payment of $610.58 and divide it by four, then pay that amount ($152.65) every week, your loan would be paid off in 19.9 years and the total interest cost would be $77,874.

Setting a shorter amortization rate when you renew your mortgage is also a great idea. A $100,000 mortgage at 8 per cent over 25 years would cost $128,963. But by paying $65.15 more in monthly mortgage payments and reducing the amortization period to 20 years, the interest would be about $98,806.40, a savings of more than $30,000.

Mortgage rates are already pretty low, but if you're lucky enough to be renewing at a lower rate than you've been used to, stick with the same payments. If your income goes up or your financial situation improves, don't forget to put more money into your mortgage.

The reason homeowners take out mortgages in the first place is because they need financial help to buy a house, and coming up with extra cash to put toward the mortgage is a challenge. Compared to credit card rates, mortgages are quite inexpensive, so it's important that you don't ignore other bills and investment plans to pay off the mortgage at all costs. One way to do both, for Canadians who can maximize registered retirement savings plan contributions and may get an income tax refund, is to then use that refund to apply to the mortgage.

The best advice for anyone who is looking to take out a new mortgage or renew an existing one, is to shop around. Eager bankers, mortgage brokers and other financial services people will reward you handsomely for switching your business to them, and offer prepayment options and a world of flexibility. Don't take your mortgage payments for granted, and it could save a lot of money in the long run.

The Canadian Bankers Association offers "Mortgage Wise," a guide for home buyers, on its website. Another good resource for mortgage information is Canada Mortgage and Housing Corp.

For more articles by Jim Adair, please press here.

Published: July 19, 2001

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Jim Adair is editor of REM: Canada's Real Estate Magazine, a business publication for real estate agents and brokers. He has been writing about Canadian real estate, home building and renovation issues for more than 30 years. You can contact Jim at .