Is your current mortgage the best you can get today?

THINK OUTSIDE THE BOX:  Things change.  Rules change.  Mortgages change!  Life is full of change and having a mortgage amortized over 25 years is very common today.  With interest rates at all-time historic lows, that long amortization can easily be whittled down to save you thousands of dollars.  By doing an annual mortgage check-up, you can ensure you always have the best product suited to your personal goals and needs.

Annual Mortgage Check-up

Every year you should contact your Mortgage Broker to review what the market is offering in terms of rates to discuss whether or not it’s worth renegotiating your mortgage or increasing your payments.  Increasing your monthly* payments can help threefold – 1) you will pay down your mortgage and substantially decrease your amortization,  2) save thousands of dollars in interest, and 3) avoid “payment shock” which can happen if interest rates increase and you have to renew into a higher rate at maturity.

Perhaps you are considering an investment or a renovation on your home in the near future.  It certainly is good to review your personal plans and see how a mortgage can be used to finance these goals in an effective and tax-advantageous way.  Early Spring is a great time to complete an annual check-up because it’s timed with your New Year’s resolutions and tax discussions with your Accountant.  Even something as simple as putting a nominal Tax Refund of $500 onto your mortgage can save you thousands of dollars over the next 25 years.

Save through prepayment privileges

The vast majority of mortgage options these days offer some “Prepayment Privilege”.  Lump Sum Privileges of at least 10% are generally the minimum offered but you can also obtain mortgages with up to a 25% Prepayment Privilege!  The latter option essentially means you can pay off the mortgage in 4 years and 1 day – with NO penalty charges!  Only a small handful of mortgage holders actually use the “Lump Sum Privilege” but a majority use the “Accelerated” mortgage payment privilege.  Some Lenders allow you to increase your payment by 10% while others allow up to 100%.  The latter means you are essentially doubling your monthly mortgage payment with ALL the additional funds being put directly onto Principal.  This is HUGE for paying down your mortgage quick!

*One misnomer that the Banks often espouse is that “Weekly Payments” will pay down your mortgage faster than paying monthly.  NOT TRUE!  It is the simple act of paying MORE that pays down your mortgage faster – NOT paying “more often”.  I would recommend anyone’s “Frequency of Payment” be timed with how their income is being generated.  If you are paid bi-weekly, then your mortgage payment should be taken bi-weekly.  The key is to pay MORE every other week than the minimum payment offered.  If you own a rental property and rental income is collected once per month, then you should pay on the mortgage monthly.  Again, paying more with each monthly payment is the key to paying down the mortgage faster.  Note: your Accountant may not recommend paying aggressively on a tax-deductible mortgage.

Fixed rate or variable rate?  That is the question

Generally speaking, a variable rate mortgage is a less expensive way to finance a property when compared to a fixed rate.  Studies show that 9 times out of 10 a variable rate mortgage will have you pay less interest over a 25 year amortization when compared to a fixed rate.  However, at today’s historic low rates it is possible that this is that 1 in 10 times it would be less expensive to lock-in for 5 years.  And if I’m wrong, I probably won’t be wrong by much.  The other factor for many folks choosing a 5 year fixed rate today is because the Government of Canada has forced all Applicants to qualify at a Bank Qualifying Rate (BQR) for any mortgage product OTHER THAN a 5 year fixed rate.  This means that many first time home buyers who are seeking the maximum mortgage amount they qualify for will be forced to obtain a 5 year fixed rate.  Thankfully the rates are in the customer’s favour today.

Why is the Government forcing the majority of its citizens into 5 year fixed rates?  Is this some kind of conspiracy?  I doubt it.  The Government is simply ensuring that Canadians are qualifying for their home purchases at a more “normal” market interest rate.  This new Government rule will hopefully help ensure that Canadians can still afford their home when their mortgage comes up for renewal in 5 year’s time.  Please call our office if you have any questions, want to discuss longer term fixed rates or set up an Annual Mortgage Check-Up.  If you have friends or family that are contemplating purchasing a new home, please consider sharing this introductory video on my home page with them so we can ensure the mortgage they obtain is the best they can get today…

Garth Lyon – February 21, 2013

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