MANAGE YOUR MONEY
Make your mortgage work for you
Interest Rate Type
You will have to choose between “fixed”, “variable” or “protected (or capped) variable”.
A fixed rate will not change for the term of the mortgage. This type carries a slightly higher rate but provides the peace of mind associated with knowing that interest costs will remain the same.
With a variable rate, the interest rate you pay will fluctuate with the rate of the market. Usually, this will not modify the overall amount of your mortgage payment, but rather change the portion of your monthly payment that goes towards interest costs or paying your mortgage (principal repayment). If interest rates go down, you end up repaying your mortgage faster. If they go up, more of the payment will go towards the interest and less towards repaying the mortgage. This option means you may have to be prepared to accept some risk and uncertainty.
A protected (or capped) variable rate is a mortgage with a variable interest rate that has a maximum rate determined in advance. Even if the market rate goes above the determined maximum rate, you will only have to pay up to that maximum.
Amortization refers to the length of time you choose to pay off your mortgage. Mortgages typically come in 25 year amortization periods. However, they can be as short as 15 years. Usually, the longer the amortization, the smaller the monthly payments. However, the longer the amortization, the higher the interest costs. Total interest costs can be reduced by making additional (lump sum) payments when possible.
You have the option of repaying your mortgage every month, twice a month, every two weeks or every week. You can also choose to accelerate your payments. This usually means one extra monthly payment per year.
The term of a mortgage is the length of time for which options are chosen and agreed upon, such as the interest rate. When the term is up, you have the ability to renegotiate your mortgage at the interest rate of that time and choose the same or different options.
“Open” or “Closed” Mortgage
An open mortgage allows you to pay off your mortgage in part or in full at any time without any penalties. You may also choose, at any time, to renegotiate the mortgage. This option provides more flexibility but comes with a higher interest rate. An open mortgage can be a good choice if you plan to sell your home in the near future or to make large additional payments.
A closed mortgage usually carries a lower interest rate but doesn’t offer the flexibility of an open mortgage. However, most lenders allow homeowners to make additional payments of a determined maximum amount without penalty.
Typically, most people will select a closed mortgage.
MANAGE YOUR MONEY
Should you pay off your mortgage early?
Who doesn’t dream about paying off the mortgage and freeing up all that monthly cash? Even if the end goal seems so far away, the idea of paying off the single largest line item on the liabilities side of your net worth statement just sounds so appealing. Perhaps that’s why books have been written devoted to the topic.
Now, with interest rates rising in the U.S., and the threat of higher mortgage rates coming soon to Canada, the perennial question resurfaces: Should you pay off your mortgage early? Or invest the money instead?
Pay off the mortgage, first
Reason No. 1: Save money
Every loan comes in two parts: the principal and the interest.
The principal is the amount you want to borrow. For instance, if you have $100,000 saved but you want to pay a $550,000 home, you will need to borrow $450,000 in order to complete the transaction. That $450,000 in the principal - the money you’ve actually borrowed.
The interest is the fee you pay in order to borrow the money. It’s the cost of using someone else’s money to buy an asset.
In Canada (and America), it’s standard to amortize a mortgage loan. All this means is that the loan repayment is scheduled equally over a set period of time. This enables the lender to calculate the expected earnings of their risk (loaning you the money), as well as establish a timeline for when the loan will be repaid in full.
The easiest way to save money, when it comes to mortgage debt, is to reduce the amount of time it takes to repay the principal debt. For example, if you borrowed $450,000 and the amortization schedule was for 25 years with an interest rate of 3%, you would actually pay just a little under $639,000 back to the lender (assuming no interest rate increases during the 25 years). In other words, you paid the lender close to $190,000 in interest on a $450,000 loan. Reduce the amortization of that loan to just 15 years and you shave $80,000 off the interest payments you make to the lender.
Now, anyone with a simple mortgage calculator will point out that reducing the number of amortization years will prompt an increase in your monthly mortgage payments - for many homeowners, this is not a viable option. But there are other ways to lower the amount of interest you pay. One option is to make accelerated or lump sum payments. This allows you to pay more against the outstanding principal, reduces your interest payments, and shortens the length of time required to pay off the loan. Just remember: the goal is to take less time to pay off the mortgage, as this will lower the principal amount of the loan, the decrease the amount of interest you pay.
Reason No. 2: Financial freedom
Another reason to pay off your mortgage is that owning a principal residence without debt gives you the financial freedom to funnel money that formerly went to your mortgage into your savings or to pursue lifelong dreams, like travelling.
Mortgage interest adds tens of thousands of dollars to the real cost of a home, so a shorter mortgage slashes the amount you pay in total. The money that’s freed up can then be allocated to another priority, such as retirement savings, saving for a child’s education, or pursuing some passion projects.
When not to pay off the mortgage
Paying off your mortgage as quickly as possible should be an important goal for any homeowner - whether you’re halfway through the process, just starting out, or even just contemplating buying a house. But there are circumstances when making the mortgage debt a priority to pay off just doesn’t make sense.
For example, if a person is self-employed or runs a home-based business, it may not be as beneficial to pay off the mortgage early. That’s because a portion of your mortgage interest becomes tax-deductible when you’re self-employed - this deduction helps to bring down your taxable income.
Also, if your property is both your home and an investment property, it may not make sense to focus on paying off the mortgage quickly. Instead, investors should focus on paying off the mortgage on their primary residence, first, before tackling the mortgage on an investment property.
Flip the coin and prioritize investing, first
However, some homeowners would rather put every spare penny into an investment rather than paying down their mortgage debt. Their rationale is that the return on the invested dollar is greater than the guaranteed return you’d get for paying off your mortgage.
Take for instance, a homeowner with $50,000 to invest. They could make a lump sum payment towards their current mortgage. The additional $50,000 would reduce the principal borrowed and this reduces the overall interest paid. For instance, if the mortgage was $450,000 and the homeowner had locked in their mortgage rate at 2.85%, if they made no other accelerated or lump sum payments, this additional $50,000 would reduce the overall amount of interest they’d pay on their mortgage by $44,880 (assuming a 25-year amortization, the lump sum was made in month six of the loan and there were no other interest rate increases). This is like getting a guaranteed return of 2.8% on your invested money. Compare this to high-interest savings accounts that pay between 1.5% and 2% or GICs that pay 1.95% or 2.25% and this return looks good.
But if you’ve been a disciplined saver or if you have a pension you can count on in retirement, it may be possible to take the $50,000 and invest it in riskier products, which will get you a better return.
Another option is the Smith Manoeuver. In simple terms, this is a process of cashing out your investment portfolio to pay off your outstanding mortgage debt. Then taking out a loan against your paid-off home and using that money to invest. The advantage is that outstanding loan is now fully tax deductible (as interest paid on loans used to invest are tax deductions, according to the CRA). But be careful. This is a much more advanced used of leverage and can blow up in your face quickly. For instance, if the market were to drop significantly, you would lose money and still owe the loan used to invest.
Tips for reducing the overall cost of your mortgage
When you get your first mortgage, it’s hard for many people to focus on the end game, especially given that so many people put so much effort into saving up the minimum down payment, or even making use of grants or various cash-back programs that some lenders offer. But it’s important that you keep all of your options on the table so that when you’re ready to focus on your long-term strategy, your mortgage allows you to take action, whatever that may be.
Option No. 1: Start smart and maximize your down payment
While it’s possible to get away with only putting 5% to 10% down on a home purchase, the single biggest cost-cutting measure you can do is to maximize your down payment. Not only will you owe less, reducing the overall interest you pay, but you’ll avoid having to pay mortgage loan insurance premiums - a fee buyers pay for the privilege of putting less than 20% down on a home. (This insurance doesn’t protect you, the buyer, but the bank should you default on your mortgage loan.)
One good way to maximize your down payment is to use the federal Home Buyers’ Plan, which lets you withdraw up to $25,000 in a calendar year ($50,000 for a couple) from your RRSP to put toward a home you will live in (or build).
Option No. 2: Buy what you can afford
Yes. It sounds simple. Buy a home that fits your budget; the reality is when it comes to buying a home most of us struggle. On one side we want our dream home. On the other is the desire to be fiscally smart. Quite often, it’s a trade-off. But if you focus on buying within your budget (not the maximum mortgage amount your bank has agreed to lend you, but the mortgage that works with your financial plan), then you’re less likely to dip below the 20% down payment, and more likely to stick to your plan of paying off the debt sooner.
Option No. 3: Shop for the best rate
Buying a home is stressful. Quite often, then, buyers will stick with banks or financial institutions they know. But when shopping for mortgage rates, it’s actually better to cast your net wide and far.
Consider credit unions and mono-lenders (lenders who use mortgage brokers and only deal with mortgage loans), as quite often these institutions can offer much better rates and terms than big banks.
Option No. 4: Pay attention to when interest is charged
Most standard mortgages in Canada charge interest semi-annually - that means twice a year the lender calculates what interest you owe, based on the outstanding principal debt and the accumulated interest on that outstanding debt. This is known as semi-annual compounding interest (compounding, because it’s interest on interest).
The rate at which compound interest grows depends on the frequency of compounding; the higher the frequency, or the number of compounding periods, then the greater the compound interest. For that reason, a loan with a 10% interest rate, but compounded annually, will actually accrue less interest than a loan with 5% interest that is compounded semi-annually, over the same time period.
Option No. 5: Accelerated payments
When finalizing your mortgage consider going from one monthly payment to accelerated payments. This adds two extra payments per year, which reduces your principal debt just a tad bit faster.
Option No. 6: Lump sum or extra payments
But the real key to paying off your mortgage debt faster is to get a mortgage that allows you to make extra payments. Most mortgages allow borrowers to make annual prepayments of 10% to 20% of principal, without extra fees. These extra payments go directly towards paying down the principal. If possible, however, try and avoid mortgages that only allow you to make extra or lump sum payments on the mortgage anniversary - as this can reduce the likelihood of the extra payment.
Option No. 7: Lower your amortization
Those who want to pay off their mortgages sooner should choose the shortest possible amortization. While typical amortization periods are for 25 years, you can opt for as short as 10 years or as long as 30 years (if you made a down payment of 20% or more on your home).
Forcing yourself to pay off the mortgage in fewer years translates into lower interest costs and substantial savings. The hitch? Your regular monthly or accelerated payments will be much higher.
Option No. 8: Increase your regular payments
To give yourself the best of both worlds, consider going with a longer amortization, but increasing your regular payments using your mortgage loan prepayment privileges. For instance, if your monthly mortgage payment is $1,200 you could increase this to $2,400 per month if your loan terms allowed for double-up payments. In effect, you would be paying off a 20-year mortgage in just 10 years. Better still, you’d have the flexibility to switch back to the lesser regular monthly payment if you were to experience any changes like a sudden job loss or the birth of a child.
In the end, the answer as to whether or not you should pay off your mortgage early really boils down to what’s important to you in both your short-term and your long-term financial plan.
7 expert tips on moving in with your significant other
If that drawer you were gifted at your significant other’s apartment has turned into half a dresser, and your toothbrush is now a permanent fixture in their medicine cabinet, it might be time to consider cohabitation. Moving in with a partner is a major relationship milestone, and both parties are likely to feel nervous in the weeks leading up to the big day.
To ease these tensions, it’s best to purge your belongings and get organized well before the U-Haul truck arrives. “I’ve been in this business for 13 years, and I am no longer surprised at how little in advance people plan for this sort of thing,” says Josh Cohen, the Founder and CEO of Junkluggers, an eco-friendly junk removal company that operates franchised locations across the United States.
If you’re about to make the leap into mutually agreed upon television shows and a never ending pile of laundry, follow these seven pieces of advice for a smooth move.
Take inventory of your belongings.
If you and your partner have been living on your own for some time, you’re likely to have duplicates of furniture and other housewares. “That’s where the battles begin,” warns Cohen. Make a list to determine which items you’re going to keep, considering factors such as size, quality and condition. Ask yourselves important questions like, “Is this couch going to fit through the doorframe?”, “In how many months will this particle board coffee table break in half?” and, “Where did this stain on your mattress come from?”
Decide what to keep, recycle, donate or toss.
Once you’ve selected the furniture, appliances and decor that you’ll have in your new apartment, it’s time to split up the remaining items into four piles. “If it lacks sentimental value, then you should get rid of it,” suggests Cohen. While it may be tempting to throw all of your significant other’s junk into a garbage bag, it’s best to donate and recycle as much as possible. “Tax write-offs are a big benefit of donating to charity, but you’ll also have peace of mind that your stuff isn’t headed for a landfill — it’s getting a new life,” says Cohen. It’s important to know what items can and cannot be recycled. “You can’t recycle finished wood which, unfortunately, is most of the wood out there,” says Cohen. Consult your city’s government website or browse recycling guide if you’re still unsure.
Be willing to compromise.
If you’re signing a lease together, chances are you’re going to be stuck with one another for six months to a year. Why sabotage your relationship before you even move in? If you absolutely must hold onto your treasured stamp collection, don’t give your SO grief about their taxidermy parakeet. And if you still can’t come to an agreement on which furniture items to keep “you can always get rid of both duplicates and opt to buy something new,” says Cohen.
Create a layout.
“Draw out the apartment floorplan and take note of the square footage of each room,” suggests Cohen. Have a game plan going into your move to ensure that the scale of your furniture is appropriate for the new space. If you’re not much of an artist, there are tons of free apps that will help you to decide on a layout before you get started with the heavy lifting.
Label absolutely everything.
“When you’re packing up boxes, label them by room and write down a simple bullet list of all the items that are in the box,” says Cohen. This will save you from major headaches when it’s time to unpack. Numbering your boxes helps, too — that way you can make sure nothing was left behind. Cohen also suggests unpacking as a team, “You’ll both know where things are and can avoid yelling at eachother like, ‘Where did you put this?!’
Acknowledge that moving sucks.
“Before the big day, talk to your partner about the fact that moving is incredibly stressful,” says Cohen. A British study found that the majority of people find moving house to be more emotionally taxing than a breakup, divorce or starting a new job. “Agree to take things with a grain of salt and try to work together — hopefully you’ve hired good movers!” jokes Cohen.
Think of a storage unit as a last resort.
We’ve seen enough episodes of Storage Wars to know that most people don’t take full advantage of their storage units. “If you’re at eachother’s throats and you’re really having trouble decluttering, then at least temporarily, I would consider storage space,” says Cohen. “One downfall I would warn people about is that we get a lot of calls to clear out storage units. Often people fill them up because they’re afraid to let go of things, but then they end up paying thousands of dollars in monthly fees to store belongings they don’t necessarily need.”
BANK VS. BROKER
The broker works for you. The bank doesn’t.
The right mortgage is a critical factor determining long-term savings. The value of a professional mortgage broker comes from having someone who objectively works for you and is not limited to mortgage product offerings from one source; like a bank.
Advice on choosing the right mortgage option considers interest rate, payment privileges, payment penalties, long term savings and much more.
Take a look at the differences between my services & the bank’s services