For most Canadians, buying a house is the largest financial commitment they’ll ever make.
On the surface, it seems pretty simple – you call up a Realtor, look at a few houses, and make a decision. Once a mortgage lender agrees to lend you the money, you’re all set to move in. No fuss, no muss. There’s just one problem. That mortgage you just took out? You have to pay that back. With interest. For all the mortgage newbies out there, here are five easy ways to make that as painless as possible.
Use Bi-Weekly Payments
This tip is easy to implement, and has a huge impact over time.
When signing up for a standard mortgage, the default is always monthly payments. Instead of paying monthly, take half of the amount and pay it every two weeks.
Say your mortgage payment would be $1500 per month. Instead, you pay $750 every second Friday. After a year, instead of paying off $18,000, you’d actually be a little further ahead, paying back $19,500. That doesn’t seem like much, but it’s a pretty easy way to knock about three years off a standard 25 year mortgage.
Buy Less House
Remember, not only do you need to pay off the extra mortgage amount if you go over your house buying budget, you also need to pay interest on the extra principal as well.
Say you had two identical mortgages, both at 4% interest. One was for $300,000, the other was for $325,000. Over the life of the first loan, you’d pay $173,418 in interest. On the second mortgage, you’d end up paying $187,869 in interest.
Not only would a little bigger house cost $25,000 more, but you’d also be stuck paying more than $14,000 extra in interest over the life of the mortgage.
Avoid CMHC Fees
Yes, it’s tough to save up enough of a down payment to get to the 20% threshold -- especially in today’s real estate market -- but doing so can save thousands not only in CMHC mortgage insurance fees, but also on the interest paid on those fees.
Let’s assume a borrower is buying a $300,000 house, putting down 5%, and signing up for a mortgage rate of 4%. Once you include the CMHC premium of 3.15%, the borrower’s $285,000 mortgage balloons to a balance of $293,977. By the time the mortgage is paid for, that CMHC premium will cost more than $14,000.
Too many Canadians are happy to pay whatever interest rate is offered by their bank.
LowestRates.ca has more than 30 different lenders competing for your mortgage business, including many that specialize in keeping costs down. That doesn’t sound like the business model of most banks I know.
Even small percentages can make a big difference. If we both took out $300,000 mortgages tomorrow, but I got an interest rate of 4% and you picked up a 3.5% loan, I’d end up paying $173,418 in interest over a 25-year loan. You’d only end up paying $149,343.
Select the Right Mortgage Term
Most Canadians are happy to sign on for a five-year fixed mortgage. Two out of every three Canadian homeowners have one.
There are many reasons to opt for a five-year fixed mortgage term. But for many borrowers, it’s the wrong choice.
What happens after a few years pass and you’re looking to sell? Depending on the lender and the various penalties they charge, you could be looking at a bill of four or five figures just to get the right to sell your house.
If you’re not 100% sure that you’ll be living in the property after five years, take out a shorter term. Many lenders are even offering discounted rates for you to do so!