3 mortgage tips that will save you time and money

Approximately 17% of all Canadian mortgages renew every year.

If your renewal is coming up (or if you’re about to buy a home for the very first time), there are certain factors to consider that will help to ensure you end up with a mortgage that works in your best interest.

With that sentiment in mind, here are 3 mortgage tips that will save you time and money.

Tip #1: Ask about pre-payment privileges.

The more interest rates rise, the bigger portion of your monthly mortgage payments will go toward the interest versus the principal. Pre-payment privileges can help you pay down your mortgage faster.

What exactly are pre-payment privileges?

They offer you the flexibility to prepay 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’, but limit the amount of pre-payments on your mortgage during the set term. So be sure to ask your lender what kind of pre-payment privileges your mortgage 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 move, to changes in your marital or financial status—some things could 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.

Note that lenders will require that certain conditions are met in order to port your mortgage or have your mortgage assumed and that not all lenders will allow you to do this. If you are looking to avoid a mortgage penalty, seek out expert advice to review your options.

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).

Bonus Tips:

• Do your rate research. A bank’s posted rates are typically not their lowest, so before you renew or sign that mortgage application, shop around and compare rates. Your options could be your best bargaining tool when 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 using the big banks. Why? 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? Call on Educators Financial Group.

No matter where you are on the pay grid or how far (or close) you are to retirement—we can provide you with the right kind of mortgage to fit with your needs, goals, and budget.