Have you had your mortgage checkup?

How to ensure your mortgage is working hard enough for you.

No mortgage may indeed be the best mortgage of all, but that’s not realistic for most homeowners. The cycle of life that often includes paying off student loans, raising a family and saving for retirement stretches out those house payments, and a 25-30 year time frame is the norm for many people today.

Challenges aside, with interest rates still at historic lows, even though they are on their way up, a quarter-century amortization can be whittled down, and thousands of dollars saved, by doing a basic mortgage checkup.

 

Yearly checkup
“At least once a year, get into the habit of taking a look at what the market is offering in terms of rates and discussing whether it’s worth your while to renegotiate your mortgage or increase your payments,” says Martin Beaudry, vice-president of lending at ING Direct in Toronto. Any extra money you can apply — especially early on in mortgage payments — usually translates into significant savings over a 25-year period, he adds.

As well, if you find there are repairs or renovations to be made to your home, it’s not a bad time to check if your lending institution will allow you to draw some funds without penalty. If so, you may have some leeway to spruce up your home and add value to your property at the same time.

Spring is an ideal time for a mortgage checkup because it’s the time you file your taxes, says Beaudry. If you are expecting a refund, applying that refund to your mortgage, rather than making a personal purchase, can save you significant money. For example, a $400 refund translates into at least $2,000 to $3,000 in interest savings, says Beaudry.

 

Save through prepayments
While most people “migrate to rates,” says Laura Parsons, area manager for specialized sales at BMO Financial Group, in Calgary, Alta., there may be drawbacks in going with the cheapest mortgage rate you can find.

She says most people don’t even review their mortgage documentation before signing them. Yet from bank to bank, every product is different, and the prepayment options can differ considerably. Going for the cheapest interest rate may mean forfeiting those cost-cutting privileges. So, be sure to ask if and when you’re allowed to make prepayments on your mortgage.

“When you think about increasing your payments, even $100 makes a huge difference over time,” explains Parsons. “It’s a window of opportunity with prime rates so low for people to prepay.” As she says to clients, if you have three coffees a day, buy one fewer coffee and put that money toward your mortgage instead.

To add fuel to the burning of your mortgage, opt for bimonthly or, even better, weekly payments, and you can shave four to six years off your repayment schedule.

According to Gary Siegle, regional manager at Invis Inc. mortgage consultants, in Calgary, Alta., paying an extra $3,000 once a year toward the principal on a $250,000 mortgage can result in interest savings of more than $40,000 on a mortgage with a 25-year amortization and a fixed rate of 4.19 per cent.

But “make sure you look at the contract to make sure you’re not getting a penalty,” says Siegle. “There are very few fully wide open mortgages.”

Shopping around for a mortgage with the option of making lump-sum prepayments on your anniversary every year and payment flexibility also offers a safety net should you experience reduced income or unexpected expenses.

 

Fixed rate or variable?
The big question on most homeowners’ lips these days is whether to fix their mortgage payments or ride with the economic times of fluctuating interest rates that currently are inching upward.

The decision boils down to a matter of comfort. “The variable rate is really low,” says Beaudry. “So, if you can live with a little bit of fluctuation, then this is another way that you can save money. But know [that you need to] have the financial strength to shoulder a substantial increase in payments.”

So, be prudent when going through your annual mortgage checkup. “You can get yourself into the glue if you’re not managing and thinking in context of your total budget,” says Siegle.

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