Question: I have been coasting along with my mortgage payments, and now I want to kick it into high gear. If I am looking to get a new mortgage or renew the one I have, what kind of research should I do to make sure I can pay off my mortgage faster?

Shop around – and not just for the lowest rate

Of course, you should get the lowest interest rate that you can. But rates aren’t the only thing to consider when comparing options. The point is to get the best deal, which isn’t necessarily the same thing as the lowest price.
In addition to interest rates, pay attention to the three Ps:

Prepayment privileges: As interest rates rise, a bigger chunk of your mortgage payments will go toward interest rather than the principal. That’s why it’s important to get a mortgage that will allow you to make large lump-sum contributions and increase your monthly payments if you decide to pay down your debt faster. Non-bank lenders might both lower rates and offer more generous prepayment privileges than the big banks.

Penalties: What would happen if you were to break your mortgage? That’s a question every mortgage applicant should ask themselves. People wind up having to break their mortgage for any number of reasons: They move, they get divorced, they lose their jobs. And that can cost them thousands of dollars in mortgage penalties, which is why it’s important to look at the fine print. In Canada, if you have a variable-rate mortgage, the penalty is generally three months’ interest. If you have a fixed rate, however, you could get dinged for much more than you think. That’s because you’ll have to pay the greater of either three months’ interest or something called the interest rate differential (IRD), which is based on current mortgage rates and your remaining mortgage balance. If you’re going for a fixed-rate mortgage, it’s important to ask your lender whether the IRD is calculated based on their discount rate or their considerably higher posted rate. The big banks calculate fixed-rate penalties using their posted rates.

Portability: Speaking of mortgage penalties, one way to avoid them if you move is to have a portable mortgage. This means you can transfer your mortgage to your new home and combine it with a new loan, if necessary. Another great feature that could save you thousands of dollars in penalties is having an assumable mortgage. That would allow you to leave your mortgage behind for another qualified buyer instead of breaking it.

Make lump-sum payments whenever you can

Here’s a crucial nugget about lump-sum payments: Unlike your regular monthly installments, all of the money goes toward reducing your principal. Making lump-sum payments whenever you can is advisable. If you have no spare cash in your budget, you could still use your one-time bonus at work, an inheritance, gifts of money, or even your tax return. Lump-sum payments can shave thousands of dollars on the interest on your mortgage and years on your amortization period (the amount of time it will take you to pay off your loan in full).

Accelerate your mortgage payments

The most painless way to ramp up your mortgage payments and shorten your amortization period is switching from monthly to so-called accelerated bi-weekly payments.

Contact me today...

…to find out how you can become mortgage free faster – adoria@mtgarc.ca or 647-201-0167.

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