Canadian interest rates have risen for the past few years. Further interest rate hikes may be on the horizon. Here are some tips that could save you lots of money on your mortgage as interest rates rise.
Shop around for a deal, and not just in terms of interest rates.
A low-interest rate will save you money, of course. However, rates aren’t the only thing to consider. For example, a shorter loan term results in less interest paid out over the life of the loan over a longer one. Anything you can do to shorten the length of the amortization will, therefore, save you money. The best way to do this is to pay attention to the three Ps: prepayment privileges, penalties, and portability.
Prepayment privileges are the most obvious. If you have to pay a penalty for paying down on the principal, you’ll be less prone to do so and have less money going toward the loan balance. That’s the point. Banks may let you make so many principal lump sum payments, or they may limit it to a certain amount per year. Conversely, non-bank lenders tend to be generous with customers. Consult with a Fort McMurray mortgage broker to find a lender who won’t charge payments for paying down the loan.
The next “P” stands for the penalties you owe if you break the mortgage. You could be forced to pay a penalty when you’re forced to sell the home due to divorce, bankruptcy or job loss. The same penalties may be owed if you refinance the loan, essentially breaking the old mortgage while securing a new one. If penalties are owed, there can still be a difference in how they are calculated. A common levy is three months of interest on the loan. That’s the standard if you refinance a variable rate mortgage to lock in today’s interest rates. Yet lenders can still vary in how they calculate it. Big Banks tend to calculate the penalty using posted rates, while non-bank lenders generally use their discount rate. The discount rate is lower than the posted rate.
Portability is another factor to consider, and in the right circumstances, it can save you quite a bit of money. If you have to move, you might be able to take your mortgage with you without having to pay a penalty. Or you may be able to transfer the loan to a new homeowner when you have to move.
Make lump-sum payments
Lump-sum payments are better than adding money to your regular mortgage payment since the entire amount goes toward the mortgage principal. And the lender cannot possibly use the money to pay your next few mortgage payments instead. Get in the habit of sending separate principal payments to accelerate the loan.
What if you don’t have spare money in your budget to save up for lump-sum payments? Promise yourself that you’ll send all “found” money toward the loan. Don’t blow inheritances, cash gifts or bonuses. Send it all toward your debt so that you can pay it off as quickly as possible. The same should be true of your tax return. All of this will shave years off the life of your loan and thousands of dollars in interest.
Accelerate your mortgage payments
Accelerating mortgage payments means you’re paying off the loan faster than required. One relatively painless option is switching from monthly to biweekly mortgage payments. It results in making the equivalent to a 13th mortgage payment every year. This shaves three years off the average mortgage. It will also save more than 15,000 in interest over the life of the loan. You’ll save a little interest if you sent in half a payment halfway through the month every month, but it isn’t nearly as much as sending in biweekly payments.