Ways to save money on your Mortgage
HOLLY KENNEDY SPECIAL TO THE OKANAGAN WEEKEND
Two recent rate increases by the Bank of Canada, coupled with hints that more are likely on the way, have sent interest rates on an upward trajectory. While this is welcome news for savers, it is also a new paradigm for many newer homeowners who may be approaching their first mortgage renewal date and will be facing higher borrowing costs.
Here are some cost-saving ideas to help you reduce the total amount of mortgage interest you might otherwise pay. 1. Don’t just default to the 5 year term
Give considerable thought to how your personal circumstances are likely to unfold. Take a few moments to peer into your family’s crystal ball: do you see any potential employment changes, is downsizing, upsizing or relocation in your future?
Even better: Ask yourself “Am I certain that I will be in this home for the next year? What about two or three years down the road, or longer?
A good rule of thumb is that the point your crystal ball becomes unclear should dictate the maximum term length you should consider. Otherwise, you may be setting yourself up for mortgage prepayment charges should you need to sell. 2. Take advantage of prepayment privileges If you are anticipating a bonus, have excess savings, or if you happen to receive an unexpected windfall, consider putting those funds toward your mortgage principal.
Most lenders will allow you to pay up to 20% of your original mortgage amount as a principal payment without incurring any prepayment fees.
Even better: It doesn’t just have to be a lump sum. Many lenders will allow you to increase the amount of your regular payments up to 20%, or double your payments (all money that exceeds the normal amount goes towards paying the principal), or any combination of the three, so long as it does not exceed 20% of the original mortgage payment annually.
This can be one of the fastest ways to attack the principal, lowering your interest cost over time. 3. Increase the frequency of your payments Instead of making mortgage payments once a month, you can make payments on a biweekly or weekly schedule.
By increasing your payment frequency, you whittle away the principal quicker and therefore reduce overall interest costs.
Even better: Consider accelerated payments. Typically, these are done on a bi-weekly schedule.
This tip involves paying the equivalent of half of a regular monthly payment every two weeks.
This results in the equivalent of an extra month of payment every year (26 half-payments equals 13 monthly payments), which goes towards paying down the principal amount.
While this may not seem like much, over the course of your mortgage it adds up and can significantly reduce your amortization, making you mortgage-free faster. 4. Fixed or variable, open or closed?
There are different kinds of mortgages, each with distinctive features. Depending on your stage of life, the structure of your mortgage can have benefits and drawbacks.
A fixed rate mortgage offers a simple, peaceof-mind solution.
If you’re looking for flexibility, an open mortgage may fit better with your lifestyle since it allows you to pay additional amounts toward the principal, or even pay it off entirely, without penalty.
A longer term fixed rate will insulate you for a longer period against interest rate increases and provide you with budget stability.
A readvanceable mortgage allows you to access the equity in your home (typically upon approval by your lender) for additional borrowing without the expense of having to reregister the mortgage.
Incorporating a home equity line of credit with your mortgage can provide you with a cost-effective way of financing renovations, large purchases, education costs, etc. by providing you with access to preferred rates and terms.
It may be that the ideal solution is a combination of different mortgage types.
When it comes to mortgages, the best choice is what’s right for you. The best advice is to work with an experienced, qualified advisor who will look at your mortgage needs within the context of your entire financial plan, and not just in isolation.
There’s not one specific strategy to use. To learn which combination of strategies best fits your life, contact us at Canadian Western Bank. We’re here to help.
Holly Kennedy is a personal sales and marketing specialist with Canadian Western Bank.