Flexible lender can reduce mortgage hassles

A common barrier to homeownership is the fear of decades of hefty monthly mortgage payments before you own your home free and clear.

In today’s market, though, you will be surprised at how flexible some lenders are in letting you speed up payments and ultimately reduce interest costs by thousands of dollars.

You will also find a lively competitive spirit among even major lenders that means you can often negotiate for a lower mortgage rate than that posted at the front counter. In fact, Canadian lenders concede that reductions of from one-quarter to one-half a percentage point off the posted mortgage rates are fairly common. The best deals are made if you can bring some other business to the bank, such as transferring your RRSP or a charge card account from another institution.

Once you have nailed down the mortgage rate, it is time to check out some of the mortgage options that can reduce the overall cost of your mortgage.

Here are some of the best methods:

-- Reduce your amortization period. Most first mortgages in Canada are for 25 years amortization. Yet, if you can raise your payment a bit and cut the amortization period, you will save big. For instance, you would save $58,300 on a $100,000 mortgage at 8 per cent interest if you shorten the payments from 25 to 15 years. Your monthly payments would increase by only $185 per month. Raise the payments by just $110 and you can shorten the traditional amortization by five years and save more than $30,000.

-- Split-up or speed-up monthly payments: Examine your cash flow patterns to see if you can benefit from making more frequent mortgage payments.

If you’re paid every two weeks, consider a bi-weekly payment schedule instead of a monthly mortgage payment. The strategy is simple: if you split the original monthly payment in half and pay each half every two weeks, you’ll actually end up making 26 payments a year, the equivalent of 13 monthly payments instead of 12. The 13th payment can go directly to reducing the principal and reduce your overall interest costs.

The savings can be especially significant if you go with an accelerated weekly payment. On a $100,000 mortgage at 8 per cent interest, such payments can cut a 25-year amortization by nearly five years and save you approximately $31,700 in interest costs.

There is a caveat with accelerated payments, however. Different lenders can calculate and apply the extra payments in different ways. Some methods result in very little difference in the total savings to you. Read the fine print and, if you’re not sure, have the lender explain exactly how the extra payments will be applied to the principal.

-- Increase payments to keep pace with income: Ask your lender for a mortgage that allows you to increase annual mortgage payments by a certain percentage every year. Doing this will allow you to use increases in income or a successful investment to trim years off mortgage payments and hundreds if not thousands of dollars in interest costs.

-- Double-up payments: Some lenders allow you to make extra payments against a mortgage balance, occasionally or on any payment date. This is a great option if you sometimes have extra cash but don’t want to regularly commit to higher mortgage payments.

-- Go with an open mortgage. An open mortgage allows you to increase the payment at any time. You can even pay off the mortgage in full without any penalty or extra charges.

-- Apply any windfalls: Perhaps it’s an inheritance, a tax refund or a lottery winning. Most lenders will allow for an annual lump-sum mortgage prepayment, if you have negotiated it up front.

Finally, remember the buyer is firmly in the driver’s seat today. If you can’t get the mortgage terms you want, be prepared to steer your business somewhere else.

By: Frank O'Brien
June 24, 2001

Copyright 2001 Inman News Features
Distributed by Inman News Features