When shopping for a mortgage, many people tend to focus exclusively on obtaining the lowest rate. This is due, in large part, to advertising messages indicating that this is the best action to take. Unquestionably, rate is an extremely important component of any mortgage, but there are many other, equally important aspects to consider.
Features such as the down payment, size of the mortgage, amortization period and mortgage term, and whether you’re most comfortable with fixed or variable, open or closed, all play a significant role in determining which overall product best aligns with your individual needs and unique situation. Equally important to the big picture are the mortgage terms and conditions including refinancing restrictions, prepayment privileges and portability options.
Indeed, lower rates will help reduce your overall borrowing costs, but the best product is not necessarily synonymous with low payments. You may actually end up with a mortgage that’s a bit more expensive but, if it meets all your needs, it will save you in the long run. The key to making it work financially, now and into the future, is getting the right mortgage, with the right features.
Tips to help save on your mortgage aside from rate:
- Increase your down payment. Saving for a down payment is no easy feat but, the more you put towards the cost of the home, the less you need to borrow. And with a smaller balance, you’ll reduce the amount of interest you’ll pay over the life of the mortgage.
During the mortgage application process, your lender will conduct an assessment of your financial situation to determine the amount they’re comfortable loaning and assess the associated risk level. They do this by calculating your loan-to-value ratio (LTV) – the amount you need to borrow versus the value of the home. With less money down, your loan amount will be larger and, in the eyes of your lender, risker, which they’ll offset with a higher rate. If you can lower your LTV with a larger down payment, your risk level will decrease, your payments will be lower and the likelihood of qualifying for a better rate will improve. The combination of a smaller loan balance and a lower rate will reduce the total amount of interest you’ll pay over the life of the mortgage.
If you’re able to put down more than 20% of the value of the home, you’ll avoid paying mortgage default insurance, which is a mandatory requirement for those having to borrow 80% or more in order to buy their home. These premiums protect your lender in case of payment default and, over time, they can add up.
- Accelerate your payment frequency. The frequency of your payments has a significant impact on how fast you reduce the loan and the amount of interest you pay. When you increase, or accelerate, the payment frequency, the loan principal decreases faster and you, therefore, pay less interest over time.
A popular choice is accelerated bi-weekly payments, which represents an effective option for paying down your mortgage faster. Payments are a bit higher than with other options, amounting to roughly one extra payment per year, but the acceleration could end up saving you thousands or even tens of thousands in interest over your life as a mortgage holder.
- Make additional payments. Putting extra money towards your mortgage by increasing your payments or making lump-sum payments is another way to pay down the balance faster.
Take advantage of extra cash such as a tax refund, salary raise or work bonus and make an additional payment on top of your regular monthly amount. Lump-sum payments, also referred to as prepayments, are generally available up to a certain amount per year (be sure to check what your specific lender allows). This helps reduce the loan balance and, by extension, the interest owed.
You can also choose a higher payment amount when you arrange your mortgage if you’re financially comfortable doing so, or round up your mortgage payment. Another option is to increase your payments during the term of your mortgage should you come into extra money, receive a salary increase or find that you have extra funds at the end of each month. And when refinancing, consider continuing with the same payment amount even if you obtain a lower rate. Increasing the amount of your payments, even by a small amount, can take years off your mortgage.
The federal government offers incentives and rebate programs such as the RRSP Home Buyers’ Plan, First-Time Home Buyers Incentive, First-Time Homebuyers’ Tax Credit, GST/HST New Housing Rebate and the Canada Greener Homes grants. Speak with your mortgage agent to learn more about applicable programs.
Have questions about how to save money on your mortgage? Answers are a call or email away!