February 27, 2012
Best money-saving mortgage tips
Has the recent correction in the incredibly low fixed-rate mortgages that some major banks were offering got you thinking that you missed your chance? Mortgages in Canada are still at record lows so if you are thinking about jumping into home ownership, or have a current mortgage term coming to an end that will soon be up for renewal, the following mortgage tips can offer helpful info in your decision-making process, and some money-saving advice when it comes to getting or renewing a mortgage.
A variable-rate mortgage has the highest probability of outperforming a fixed-rate mortgage. That’s what a 2001 university study concluded when comparing variable-rate with fixed-rate mortgages over 15 years. As well, often lenders do not penalize the borrower for leaving early when it comes to an open or variable-rate mortgage, giving you the opportunity to lock in to a fixed-rate mortgage later on should interest rates go up.
Lock in to a three-year term if you’re getting a fixed-rate mortgage. It’s makes lenders more money to get you locked in to a five-year term but did you know that the average mortgage is held for a three-year term? Circumstances do arise unexpectedly that cause people to feel they need to break their mortgages so it may be a good idea to give yourself more leeway with a shorter term.
The”Break and Run” strategy – With the recent historically low drop in fixed-rate interest rates offered by some major banks, those who had locked in a couple of years ago are gnashing teeth; or pumping fists if they plan to use the “break and run” strategy. This is the name given to a borrowing trick of getting out of an existing mortgage whenever signing up for a new one results the end savings being greater than the penalty. But buyer beware, many borrowers have found that the mortgage penalty is much higher than they had expected. Typically the penalty for breaking a mortgage is 3 months interest or the IRD (Interest Rate Differential) – whichever is greater – and the lower the current rates are, the higher the calculation. Many banks have different calculations they use to obtain the IRD (it is not currently standardized) so if the rate you got was discounted from the standard at the time you locked in, or you took a cash back offer, the penalty may be very high.
Make a prepayment. Before you end your current mortgage, you may be able to make a prepayment on a percentage of the balance. Most standard contracts allow annual penalty-free prepayments and paying this lump sum will lower the overall penalty fee. Be sure to ask about this option as it may not be offered to you up front. If you are negotiating a new mortgage, pay attention to this clause in the contract as it can help you pay off the balance sooner as it allows you to put more money towards the principle sum.
Consider hiring a mortgage broker. Mortgage brokers work for you, the client rather than someone who is an agent of the lender, selling you a product. The mortgage broker can find ways to minimize the IRD penalty or negotiate on your behalf to get the right mortgage for you.