Mortgage Savings

Pay a little now, save a lot later. It works better than you might think - if you know what you're doing.

How often have you seen the line "carries cheaper than rent" in real estate ads?

It's true, in these days of low interest, mortgage payments can be cheaper that rent payments, especially in Orillia. But there's a big difference between the two - while rent goes on forever, a mortgage can be paid off. You need to focus on that fact in order to develop a good mortgage strategy, one that will give you huge savings over the long run, no matter what happens to interest rates. It is especially important if you are shopping for your first mortgage, but there are clauses in many existing mortgages that, if used properly, will give you returns in the range of 3 - 400%, or even more, during the life of the mortgage.

The main idea is to put more money towards the principal and waste less on interest so you can pay off the mortgage sooner. There are several ways to do this:

One way is an "open mortgage" which allows you to make unlimited lump sum payments. This is good if you think you are coming into a lot of money soon, but you also pay a higher interest rate so it may not be worth it to you. Better to use clauses that can be included for free.

Many lenders allow you to "double-up" your payments once a year. What difference could one payment make? If you have say, a $100,000 mortgage at 7.5% amortized over 25 years, your monthly payment would be $731.55. If, at the end of the first year, you doubled-up, you'd reduce your principal by that amount, something which, right then, would take you almost five payments to do. So by making one payment you've just saved yourself approximately 4½ payments of $731.55 each or about $3,290.

You can also make bi-weekly payments instead of monthly payments. It's important to pay every two weeks exactly half of what you would normally pay every month, that way you are making the equivalent of one extra payment a year with more money going towards the principal. On that same $100,000 mortgage, paying monthly you would still owe $91,604.82 after five years, but paying bi-weekly you would only owe $87,100.87. At that rate, you would pay off that 25 year mortgage in about 20 years. That's five years of payments you don't have to make, saving you over $43,000.

Remember, don't use these clauses to lower your payments, pay as much as you can afford and always apply as much money as possible towards the principal. There are several other clauses you can negotiate into your mortgage that will help you towards your goal of "home free". They are:

Portability

This allows you to transfer the mortgage to a new property if you decide to move. That way you save the payout penalties (which in Ontario are sinful) and you can keep the momentum going on the savings you got from using the other clauses. This is especially important with today's low interest rates.

CMHC Fee Portability

If you have a high-ratio mortgage that is insured by CMHC, you have to pay a substantial fee. If you move and get another CMHC mortgage - you want to avoid paying that fee again. You do it by asking your lender for fee portability. It's important that you ask - even insist - on it, because many lenders are not aware of this option and very few offer it to clients. The fee is often added to your mortgage, portability can save you thousands of dollars.

Quicker amortization

The amortization is the number of years it will take you to pay off the loan. Higher numbers mean lower payments but more of them. 25 years is common but, if you can afford it, ask for a 20 or even 15 year rate. That means you stop making mortgage payments 5 or 10 years sooner and pay much less in interest over the course of the loan.

If you are looking for your first home, here's a sure-fire strategy to save you lots of money. You should always go to a lender to be pre-qualified for a loan before you even look, so do that. The lender will tell you what price you can afford to pay for a home, based on a 25 year amortization. Then, if you can, go buy a home that's cheaper. When you negotiate the loan, instead of lower payments, ask for the same payments with a lower amortization period.

While you may be tempted to invest your money in the stock market, you need equity first, and paying down your mortgage is a good way to get it. If you are currently renting, try saying this to your landlord "I'm going to give you a bit extra now so in a while, I don't have to pay any rent." Ya right. Smart landlords use your money to pay down their own mortgage.

For more detailed information on your specific situation, just contact me. I am not a mortgage broker, but I have received training in mortgage financing and can help you achieve your goal of being home free!