Now for something completely different! This week, we’re opening our blog doors to a guest – Jordan Lavin from RateHub.ca, Canada’s leading financial product comparison website. He’s here to talk about the impact smart thermostats can have on the affordability of your Mortgage.
Smart home thermostats are some of the most fascinating and practical uses of artificial intelligence. The best smart thermostats allow you to control your home from anywhere, learn from your behaviour, and integrate with AI assistants like Apple HomeKit, Amazon Alexa, and Google Home.
Even more importantly, however, smart home thermostats can help you reduce your carbon footprint by reducing energy use. This also translates to cost savings that can really add up.
According to Natural Resources Canada, switching from a manual thermostat to a smart thermostat can save at least 8% of the energy you use to heat and cool your home. Other estimates are higher, ranging from 13% to as high as approximately 30%. We’ll use 13% in our calculations. If it costs an average of $150 per month to heat or cool your home with a manual thermostat and a natural gas furnace, that’s at least $19.50 per month in savings or $234 per year you could be saving.
If you have a heating source like electric baseboard heaters, the savings could be even more significant. In fact, it could cost more than $1,100 per month in electricity to match the output of a 50,000 BTU furnace on the coldest days of the year, based on current Toronto Hydro rates. Even if you spread out the cost of winter heating over the entire year, it could cost an average of $500 per month to heat an 8-room home with baseboards. A smart home thermostat could reduce that cost by $65 per month.
Whichever heating source you use, a 13% savings is like getting an entire month and a half of free heating or cooling every year just by upgrading your thermostat.
Can a smart thermostat help me get a mortgage?
When you apply for a mortgage, your lender determines how much you can borrow using an equation called your debt service ratio. Typically, you can use up to 39% of your monthly income to pay for housing costs, as long as your total debt including housing doesn’t exceed 44% of your monthly income.
Your housing costs in this equation are made up of four factors: Principal, interest, taxes, and heat. That means your combined (principal and interest) monthly mortgage payment, plus your monthly property taxes, plus your monthly heating cost can add up to a maximum of 39% of your monthly income. If you’re planning to buy a condo, 50% of your monthly maintenance fees are added to the equation as well.
So naturally, reducing your heating cost should help you afford to spend more on your mortgage, right?
Unfortunately, the savings from a smart thermostat alone just aren’t enough to justify a significantly higher mortgage.
Let’s look at an example of a family earning $75,000 per year before tax purchasing a home with monthly property taxes of $300, and monthly heating costs of $500.
According to Ratehub’s mortgage affordability calculator, this family can afford a mortgage of $302,078 with today’s best mortgage rate of 2.99%, a 20% down payment and a 30-year amortization.
After subtracting the 13% savings from a smart thermostat, our family’s maximum mortgage amount goes up to $314,069. That’s only a difference of $11,991, which realistically isn’t enough to help them afford anything they couldn’t already.
What’s more, it’s unusual that your lender would look at the exact specific heating cost of a particular home. They’re more likely to accept rough math assuming a cost of roughly $1 per hundred square feet per month with a natural gas furnace, or $3.50 with electric baseboards. E.g. it’s generally accepted that a 1,800 sqft home would cost about $500 per month to heat. Your mileage may vary depending on your lender, as well as details about the home like its location and primary heating fuel.
So how can a smart thermostat help with my mortgage?
Even though a smart thermostat can’t help you get a mortgage, the good news is you may be able to use the savings to pay off your mortgage faster.
This is accomplished through a mortgage prepayment. A prepayment is when you make extra payments toward your mortgage, over and above what you’re required to pay every month. Most lenders will allow you to make annual prepayments of up to 10% or more of the original value of your mortgage, or increase your monthly payment by up to 10% or more, or a combination of both.
Let’s look at how you can pay off your mortgage faster by applying your energy savings to mortgage prepayments. For this example, we’ll assume a mortgage amount of $500,000 with Canada’s best mortgage rate of 2.99%, amortized over 25 years.
If you were to increase your monthly payment by $65, you would save $8,993 in interest over the course of your mortgage, and pay off your mortgage almost 11 months early.
How else can I save with a smart thermostat?
Another idea to try is to bank your energy savings in a high interest savings account. These are savings accounts that pay much higher rates of interest than regular savings accounts provided by the big banks.
The money you save by upgrading to a smart home thermostat could add up to a significant bank balance over time. With today’s best savings rate of 2.3%, a $65 monthly deposit could grow to be worth $26,321.70 after 25 years.
If you want to take your environmentalism one step further, you could even put the money you save on energy toward green investments. You could use the money to help pay for other upgrades to your home, like a more efficient furnace, better insulation, or new windows. You could also make financial investments in products like bonds to fund green energy projects.
The bottom line
Upgrading to a smart home thermostat won’t make you rich overnight, but for a relatively simple change the benefits add up.
Saving 13% (or more) off your home energy bill and using the difference to pay down your mortgage (or build up your savings) can be an investment worth thousands of dollars over the long run. And these estimates only account for the heating cost of your home. If you also have a central air conditioner, a smart home thermostat can help reduce your cooling costs in the summer, making it an even more worthwhile investment.
Finally, energy costs are expected to continue rising over the years to come. Fossil fuels are a limited resource which will only become more expensive with time. And even though demand for electricity is falling, the high cost of maintaining infrastructure has driven prices up.
Upgrading to a smart home thermostat is a decision that can help you save thousands of dollars in heating and cooling costs over the years you live in your home. Putting that savings toward your mortgage can help save you thousands in interest payments, and pay off your mortgage months sooner.