According to the Bank of Canada, 48% of Canadian mortgages are up for renewal in 2019.
If your mortgage is one of them, or if you’re about to make the leap into the world of homeownership for the very first time, there are certain factors to consider to ensure you end up with a mortgage that works in your best interest.
Here are 3 tips that will save you money and time:
TIP #1 Ask about pre-payment privileges.
The more interest rates rise, the bigger portion of your monthly mortgage payments will go towards the interest versus the principal. This is where pre-payment privileges can help you conquer the interest curve, faster.
What exactly are prepayment privileges?
They offer you flexibility to prepare a percentage of the mortgage principal before the end of the amortization period – without penalty. In some cases, lenders may offer you their “best rate” at the cost of not allowing you to make pre-payments on your mortgage during the set term. So be sure to ask your lender what kind of pre-payment privileges your mortgages allows to provide you with the option of making extra payments.
The savings potential of taking advantage of pre-payment privileges
Let’s say you have a $300,000 mortgage, currently at a 5-year fixed rate of 3.29% and amortized over 25 years.
By making annual pre-payments of just $2,000, you would save $21,787 in interest and pay your mortgage off 3.5 years faster (assuming the interest rate remains constant over the amortization period).
TIP # 2: Find out what the penalties are for breaking your mortgage.
From a transfer to another school that requires you to make a move to a new city, to changes in your marital or financial status – there are circumstances that could arise that would require you to sell your home before the end of the term, which would result in having to “break” your mortgage.
Are you aware of the penalties you would incur if you had to break your mortgage?
In Canada, if you have a variable-rate mortgage with one of the big banks, you would typically have to pay 3 months of interest in order to break your mortgage. If you have a fixed rate mortgage, you’ll have to pay the greater of either 3 months of interest or something called the interest rate differential (IRD)-which is based on current mortgage rates and your remaining mortgage balance. So be sure to ask your lender whether the IRD is calculated based on their “discounted” rate or their (higher) posted rate.
Here are two ways to avoid mortgage penalties:
- A portable mortgage provides you with the option to transfer your mortgage to your new home and even combine it with a new loan if necessary.
- An assumable mortgage allows you to pass your mortgage to another qualified buyer instead of having to break it.
TIP #3: Weigh the benefits of making a down payment of less than 20%
If you think making a mortgage down payment of 20% or more automatically guarantees you the “best” rate-think again.
While it may come as a surprise, lenders actually offer the best interest rates to high-ratio mortgage borrowers (those who need mortgage insurance because they have less than 20% down).
And there’s a very good reason for that.
Default insurance makes a high-ratio mortgage borrower low-risk against loss. This makes it cheaper for lenders to fund the mortgage loan, allowing them to pass some of that savings back to the borrower (in the form of lower rates).
- Do your rate research. A bank’s posted rates are typically not their lowest, so before you renew or sign that first-time mortgage application, shop around and compare rates. Your options could be your best bargaining chip when it comes to negotiating your mortgage rate.
- Consider choosing a broker vs. a bank. A Bank of Canada study found that using a mortgage broker could result in getting a lower mortgage rate than with the big banks, due to the fact that brokers have access to multiple lenders- therefore having access to even more competitive quotes.
- Keep your credit in good standing. The best rates go to borrowers with the best credit scores, so be sure to always pay your bills on time and never let your debt exceed more than 35% of your limit.
Looking for a mortgage that works in your best interest?
Contact Noble Mortgages Today at (416)-241-2227!