Residential Real EstateBeyond Interest Rates: What To Look For In A Mortgage
If you choose a lender and a mortgage based entirely on the interest rate, you
may have bought "the sizzle" and ignored the quality of "the steak." Since
mortgage interest is usually not tax deductible, the rate does matter but
Canadians often fail to look beyond interest to see other ways to save.
Interest on the interest:
Canadian federal law limits compounding to annual or semiannual calculations
with the blended repayment plans offered by most residential lenders. The
frequency of compounding, or calculating interest on the interest, determines
how quickly the mortgage debt grows. Other repayment methods, such as flat or
fixed plans, may involve more frequent compounding, quarterly, monthly, so read
the fine print carefully.
Pay more frequently and pay less:
Most mortgages are repaid monthly, but weekly or biweekly repayment is often
possible. However, accelerating payment frequency does not automatically pay
your mortgage off more quickly. Carefully calculate what you"ll pay off in a
year to be sure there is a
savings. Shortening the amortization period by a few years is another way to
achieve the same end.
Pay now or pay more later:
If you need to finance more than 75% of the appraised value of the property in
question (this is called high ratio financing), mortgage insurance is required
by Canadian law. This insurance protects the lender should you fail to repay
the mortgage. As the borrower, you pay the one-time premium of up to 3.75% of
the mortgage amount or principal. The premium rate is linked to the size of the
mortgage. With a 5% deposit and
$100,000 mortgage, the premium would be $3750, but with a 10% deposit the
premium would be $2500. The premium may be paid separately or added to the
mortgage. If you have the cash to pay the premium, consider putting this money,
and anything else you can raise, towards the deposit and reducing the premium at
the same time.
Arrange two to save:
To avoid paying mortgage insurance when you need a lot of financing, arrange or
take over a conventional first mortgage, that is, a mortgage for less than 75%
of the appraised value, and arrange a second mortgage for the balance. How does
the cost of the conventional mortgage plus a second mortgage compare with the
cost of one large mortgage plus the mortgage insurance premium? Examine
interest rates, terms, prepayment
privileges, legal costs, and payment convenience to be sure two mortgages,
instead of one, saves you money.
Built-in opportunities:
Set yourself up to win financially. Open mortgages with prepayment privileges
allow you to pay off your mortgage debt more quickly and save on interest. This
is especially important if you sell before renewal since it may cost thousands
in penalties to pay off your mortgage early.
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