Regular reviews of your mortgage ensure your loan is still right for your financial situation
by Malcolm Morrison, THE CANADIAN PRESS
TORONTO – Buying a home is probably the most expensive purchase you will ever make and if you’re like the vast majority of Canadians, you used a lot of borrowed money to experience the joys of home ownership.
Because you have to pay interest on a loan over years and decades, that means you will end up paying a lot more money for your house or condo than what you paid the seller.
You have to take advantage of every break to reduce your mortgage balance and the amount of time it will take to pay off your home. And that means it’s a good idea to take a good hard look at that loan at least once a year.
“There’s a lot of things that people don’t actually think about,” said Jim Rawson, regional manager for mortgage broker Invis in Toronto. For starters, he thinks it is a good idea to keep a mortgage table handy just to remind you how much you’re actually paying for that house.
“And you should take a look at it every year and take a look at where you are on it and how much you paid down,” he said.
One of the most obvious things you can do – and will shave years off your mortgage term – is make sure you are not paying in monthly installments.”You can switch to weekly or bi-weekly and generally most institutions will allow you to do that.” Doing so amounts to an extra monthly payment every year. Also, most mortgages are built with an annual pre-payment feature.
“And if you can make a portion of that, any portion of it, you’re obviously going to be saving some interest,” said Rawson.
Many institutions will allow you to pre-pay at least 15 per cent of your principal balance every year. (MERIX allows 20%)
You may not be able to come up with a huge amount of money every year. But even nibbling away at the balance can carve years off the payment term.
“Ten dollars (a week) is not going to make a huge difference (to you) – but $10 a payment can make a difference,” said Rawson.
“And you know a lot of people are getting raises every year, or every couple of years and if they were to apply even a portion of their raise to their mortgage, they would be saving a lot of money over the course of their mortgage.”
You may also be thinking of embarking on a major renovation for your kitchen or bathroom or slapping on a new roof.
Many would go the home equity loan route but instead, you could just add the cost to your mortgage for a lower interest rate.
“Absolutely, if you have enough equity built in to your home right now and you’re looking at a major renovation, certainly refinancing and adding, increasing your mortgage amount can certainly be a very cost-effective way of borrowing for that renovation,” said Charles Lambert, Managing Director, Mortgages, at Bank of Nova Scotia.
“You look at it in terms of relative size of the renovation that you want to do – I’m not sure you want to (do this) if you’re repainting your house or something like that.”
Instead, he said, a line of credit could be the appropriate way to do a smaller project. And here again, you can use your home as security for a line of credit.
“You can borrow up to 80 per cent of the value of your home,” said Lambert.
Secured lines of credit generally charge a point or two above the prime rate.
You could also think about consolidating debt like a credit card balance to a lower rate by tacking it onto your mortgage. But don’t use it as an excuse to rack up more debt.
“One of the key things that I always advise clients about is if they’re going to pay off credit cards by refinancing your mortgage, you better be cutting up those credit cards,” said Rawson.
“It doesn’t mean you can spend some more money because that’s not going to help at all.”
Finally, mortgage interest rates are at extremely low levels now – but they won’t stay that way and economists expect the Bank of Canada to start hiking rates later this year.
So for peace of mind, homeowners on a variable rate might want to opt for something fixed right about now.
“If you’re looking for long-term stability, then you’re probably taking a look at trying to do something fixed for five years or so,” said Rawson.
But, historically, rates fluctuate and at some time in the future, you may find that it makes sense to break your mortgage so you can take advantage of a lower rate, despite a high penalty.
For example, Scotiabank would charge you the greater of three months’ interest on the mortgage balance or the interest rate differential.
“Sit down with a mortgage pro, they can work out for you whether it makes sense or not,” added Rawson, adding if you can save yourself two percentage points over the next five years, you’re way ahead.