1. Do your homework
If you already have a mortgage, dig out your documents and find out more about the product you currently have. It’s not enough to just know what your monthly payments are. Find out what rate you are on, when it’s up for renewal, the penalty fee to break your mortgage, and the restrictions for changing your mortgage rate (i.e. the conversion privileges for moving from a variable rate into a fixed rate).
If you are a first time home buyer, make sure you have a complete picture of your total income, debts and expenses so the lender can easily determine how much you can afford. A good rule of thumb is that your mortgage payments should not exceed more then 40% of your net income.
2. Don’t take on more debt than you can afford
It seems that Canadians (and the rest of the world) are taking on too much debt. This is partly a result of record low interest rates which have encouraged consumers to borrow more money. But interest rates have been low for a long time now and as the economy picks up pace, it is inevitable that rates will increase.
Many experts are saying rates will increase in the third quarter of 2013, so be sure to plan for rate increases when calculating how much debt you can afford.
3. Compare mortgage rates
Don’t take out a mortgage with your current bank just because it’s easy. Don’t sign the renewal letter from your existing mortgage lender without trying to negotiate a better rate.
Make sure you compare mortgage rates before you choose a lender or broker. This will give you more power to negotiate a better rate and you may even find a different broker or lender offering a much lower rate. Remember, even a few basis points can make a big difference when it comes paying off a mortgage.
4. Don’t be fooled by marketing tactics
Banks that offer really low mortgage rates if you switch your everyday banking to them may not be giving you the full picture. Often these providers will need to make up the money they lose on the mortgage interest by charging higher administration fees for normal chequing and savings accounts.
5. Speak to a mortgage specialist
For personalized advice, you should speak with a mortgage expert. A good mortgage planner will be able to answer all of your questions and provide you with advice that suits your needs.
Finding the best mortgage rate is a good starting point when shopping for a mortgage, but mortgage rates are not the only thing that matters. A mortgage professional takes you through other important details such as the prepayment options, portability, penalties, etc.
6. Assess your risk tolerance
One of the biggest mortgage decisions that you will need to make is the popular fixed versus variable rate debate. In order to make this decision you will need to ask yourself how much risk are you willing to take on? A variable rate mortgage can fluctuate so your payments may increase without much notice. A mortgage professional can help you access your risk tolerance so you can feel confident making this decision.
7. Check the fine print
As with all contracts, it’s very important that you know what you’re signing. Make sure you look at all of the details, including prepayment options, late payment fees, refinancing penalties, etc. For example, if you take out a variable rate mortgage and it’s convertible into a fixed rate, make sure you know how the lender will calculate the fixed rate.
8. Increase the frequency of your payments
Any additional payments you can make on your mortgage will most likely end up saving you lots of money in interest over the life of the loan. As the mortgage balance decreases, less of your payment will go towards paying off the interest and more will come off of the principal, allowing you to pay off the debt much more quickly. A small change from a monthly to a bi-weekly rapid payment schedule will help you to pay off your mortgage years earlier.
9. Shorten Your amortization period
When you need to renew your mortgage at the end of each term, consider shaving off a year or two from the amortization period, particularly if you can renew at a lower rate so that you’re payments will not be effected. For example, if you took out a 5 year fixed mortgage with an amortization over 25 years, after 5 years you will need to renew for another term, but instead of renewing at 20 years amortization, see if you can manage the payments of a 19 or 18 year amortization period. This will help you to pay less interest in the long run.
10. Protect your mortgage.
Before you purchase mortgage insurance through your bank or lender, make sure you do your homework. A mortgage insurance product (not to be confused with mortgage default insurance) protects the lender, not you. In most cases a life insurance policy is a much better solution to protect your mortgage. Find out more about the differences between mortgage insurance and life insurance and compare life insurance quotes to get the best rate.
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