It’s no secret that having a good credit history is important when buying a home in Canada. But what if you don’t have one? Don’t worry – there are still ways for you to buy your dream home! In this…
The global economy is like a roller coaster. It goes up, up, up, before suddenly dropping all the way down, then starts climbing back up, slowly but surely.
There are a million and one factors behind this phenomenon. Political upheaval in a mideastern country can cause oil prices to rise, thus affecting everything from the price of the gas you put in your car to the price of apples you buy at the grocery store. That’s just one example of many.
Mortgage rates are also part of this roller coaster ride. In Canada, mortgage rates are set by lenders according to the benchmark rate set by the Bank of Canada.
At the moment, we are sitting at the start of an upward cycle. The roller coaster’s cars have started their climb up the rails. The Bank of Canada has hiked up its benchmark rate four times over the past 12 months, bringing it up from the 0.5% it sat at in early July 2017, all the way to 1.5% where it sits at the moment. Lenders have responded to these increases by raising mortgage rates accordingly.
These decisions will have a direct impact on you, the borrower. An increase of 0.25% might not seem like much on paper, but over the long run, it could end up costing you thousands of dollars.
However, there are certain things you can do to minimize the negative effects of these increases on your wallet.
Let’s have a look at some good strategies you can adopt to save money. (See: Mortgage Affordability Calculator)
Take advantage of all prepayment opportunities
If I told you I had an investment opportunity guaranteed to get you a return of 3.5%, what would you say? Would you call me crazy and walk away?
But this is exactly what happens when you repay your mortgage loan faster. If the interest rate on your mortgage is 3.5%, every dollar you repay is a dollar on which you don’t have to pay interest. So, in reality, you’re gaining 3.5% on every dollar. Again, this might not seem like much, but on a $500,000 mortgage loan, the savings are significant.
So, use all the prepayment privileges included in your mortgage loan to save money. If you purchased an open mortgage, you can repay as much as you want every year. On the other hand, if you opted for a closed mortgage, you do have prepayment privileges built-in. You might be entitled to a prepayment of up to 20% of the original mortgage loan per year without being penalized. That means that on a $500,000 loan, you can repay up to $100,000 per year, free of charge. At a 3.5% interest rate, this represents an approximate saving of $3,500. Not too shabby.
Is it time to refinance to secure a lower rate?
Residential mortgage loans are great business for lenders. Once you’re a client, they will likely do all they can to get you to renew with them.
If your renewal date is coming up in a few months, it might be a good idea to open negotiations with your current lender right away. They may offer you a lower rate to keep your business.
Not sure if the time is right? Check with a Nesto.ca mortgage expert to find out if you should renew early.
Create a buffer against potential rate hikes by increasing your mortgage payments
If you opted for a variable rate, your mortgage payments remain fixed; they won’t change, regardless of what happens to the prime rate. The difference lies in how your payments are applied.
If interest rates drop, a greater portion of your mortgage payment will go to principal. If the interest rates rise, less of your mortgage payment goes to principal. This has a direct impact on your amortization period: paying more interest means it will take longer to repay your mortgage.
Many experts recommend creating a buffer against potential rate hikes by increasing your mortgage payments. Most lenders will allow you to do this once a year.
As the prime rate typically increases in increments of 0.25%, consider increasing your payments by the same amount. For example, if your monthly payment is $1,000, you should consider bumping it up to $1,025. Adding another 0.25% to that, if you can afford it, is an even better idea; you’ll create a buffer for the next 2 prime rate increases.
It’s a win-win-win proposition. While the rate remains stable, you’ll be paying more principal. If they go up once (or twice), you’re covered. If they drop, you’ll be paying more principal, thus shortening your amortization period. Either way, you can’t lose. (See : Mortgage Payment Calculator)
Check with your Nesto.ca mortgage expert to find out how to increase your monthly payments or to discuss tips on the best strategies to adopt on raising rates.
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