Mortgages: Tips for Any Buyer
The down payment is the money you put forward toward the price of a home – and is often the most challenging part of buying a home. The larger the down payment, the less your home with cost you in the long term. At the same time, it is important to be realistic about exactly how much you can afford as a down payment. Over stretching your finances to make a larger down payment can lead to you being cash strapped in the future, and hence having to borrow money on a credit card or a line of credit, at a higher interest. Think long-term when making this decision.
Making your Purchase More Affordable
Typically, lenders require mortgage loan insurance for anyone who wants to purchase a home with less than 20% of the purchase price. The Canadian Bank Act prohibits most federally regulated lending institutions from providing mortgages for amounts that exceed 80% of the value of the home, without mortgage loan insurance. Through your lender, CMHC Mortgage Loan Insurance enables you to finance up to 95% of the purchase price of a home. The premium charged by the CMHC for such loans decreases as the down payment increases. Even still, depending on the circumstances, there can be ways to maneuver around these insurance premiums.
The Mortgage Payment Schedule
When most people think of their mortgage payments, they think in terms of monthly installments. However weekly or bi-weekly mortgage payments have been growing in popularity with home owners across Canada, and many institutions now offer these payment options. However, making weekly or bi-weekly (where you make a half-payment every two weeks) payments will save you money. With bi-weekly payments, for instance, you will make two more half payments per year towards your mortgage. This might not seem like much, but it does add up. The end result is you pay off your mortgage sooner and you save money.
A second reason why making weekly or bi-weekly payments can be advantageous has to do with employment income. If you receive your income on a weekly or bi-weekly schedule, then your budget can be simplified if you similarly schedule your mortgage payments.
Mortgage Payment Plans
Privilege payment options are an essential component of a mortgage; they can lead to big savings and thus they are a very important aspect to any mortgage. These payment options allow the mortgage holder to make lump sum payments, usually on an annual basis. Exactly how these payments can be made and when vary widely across financial institutions, so it is important to understand your mortgage specifics. A privilege payment of 10%, for example, means you can pay off 10% of your mortgage per year, in addition to your regular mortgage payments. In general, the more flexibility in this payment option, the better. Even just paying off an extra $1000 a year will shave off a lot of interest over the lifetime of the loan.
Fixed versus Variable Interest Rates: What’s Better
A 2001 study by a York University professor determined that in about 90% of the time, it was better to have chosen a variable interest rate in your mortgage, down to 77.1% of the time, if you had good negotiating skills and credit. At the end of the day, your own risk tolerance plays a big part in making the decision of whether to go variable or fixed, as does your own cash flow availability.
Taking a variable mortgage rate can lead to savings because with a fixed rate, the banks charge a premium to accept the risk that money may not be so cheap in the future. At the same time however, you are accepting the interest rate without any guarantee. It is important to ensure you speak with a mortgage advisor and expect to make the right decision for you.