28 Aug

Ultimate Guide to Saving on Your Mortgage: Smart Strategies for Canadian Homeowners

General

Posted by: Allison Kehler Tolley

Introduction

Securing a mortgage is a significant financial commitment, but saving on your mortgage doesn’t have to be a complex process. By understanding key strategies, you can reduce costs, pay off your mortgage faster, and build equity more efficiently. This guide will walk you through actionable tips and expert advice on ways to save on your mortgage and achieve your financial goals sooner.

1. Choose the Right Mortgage Term

Understanding Mortgage Terms

Selecting the appropriate mortgage term is critical to saving money over the life of your loan. In Canada, typical mortgage terms range from 1 to 10 years, with 5 years being the most common. A shorter term often means a lower interest rate, but it also comes with higher payments. Conversely, a longer term may provide lower monthly payments but usually at a higher interest rate.

Short vs. Long-Term Mortgages

  • Short-Term Mortgages: Offer lower interest rates, reducing the total interest paid over time. However, they require higher monthly payments, which may strain your budget.
  • Long-Term Mortgages: Provide lower monthly payments but usually at a higher interest rate, resulting in more interest paid over the life of the loan.

Strategic Tip: If you can afford higher monthly payments, opt for a shorter term to minimize your interest payments. Always consider your long-term financial plans when selecting a mortgage term.

2. Explore Fixed vs. Variable Rate Mortgages

Fixed-Rate Mortgages

Fixed-rate mortgages offer the security of consistent interest rates and payments throughout the term. This predictability is valuable in a fluctuating market, allowing you to budget more effectively. However, fixed rates are typically higher than initial variable rates.

Variable-Rate Mortgages

Variable-rate mortgages fluctuate with the prime rate, potentially offering lower interest rates in the short term. However, they come with the risk of rate increases, which can lead to higher payments over time.

Strategic Tip: Consider a variable-rate mortgage if you anticipate stable or decreasing interest rates, and you can handle potential payment increases. Alternatively, a fixed-rate mortgage may be better if you prefer stability and predictability.

3. Increase Your Down Payment

Benefits of a Larger Down Payment

A larger down payment reduces the amount you need to borrow, leading to lower monthly payments and less interest paid over the life of the mortgage. Additionally, putting down 20% or more can help you avoid costly mortgage default insurance.

Avoiding Mortgage Default Insurance

In Canada, mortgage default insurance is mandatory if your down payment is less than 20%. This insurance protects the lender but adds to your overall cost. By increasing your down payment to 20% or more, you can avoid this additional expense.

Strategic Tip: Aim to save at least 20% of your home’s purchase price for your down payment to avoid extra costs and reduce your mortgage balance.

4. Take Advantage of Prepayment Options

What Are Prepayment Options?

Many Canadian mortgages offer prepayment options, allowing you to pay more than your scheduled payment or make lump sum payments. These payments go directly toward your principal, reducing your loan balance faster and lowering the amount of interest you pay over time.

How to Maximize Prepayments

  • Double-Up Payments: Some lenders allow you to double your regular payments without penalty.
  • Annual Lump Sum Payments: You may be able to pay up to 15-20% of your original mortgage amount as a lump sum annually.

Strategic Tip: Use any extra funds, such as tax refunds or bonuses, to make lump sum payments. This will reduce your principal balance and help you save on interest.

5. Refinance Your Mortgage for Better Terms

When to Refinance

Refinancing your mortgage involves paying off your existing loan and replacing it with a new one, typically at a lower interest rate. It’s a smart move when interest rates drop or your financial situation improves, allowing you to secure better terms.

Benefits of Refinancing

  • Lower Interest Rates: Reduce your monthly payments and overall interest costs.
  • Switch from Variable to Fixed Rate: Lock in a low rate for the remaining term of your mortgage.
  • Consolidate Debt: Combine higher-interest debt into your mortgage to lower your overall interest payments.

Strategic Tip: Regularly review your mortgage terms and consider refinancing when rates drop or if your financial situation changes significantly.

6. Shop Around for the Best Mortgage Rates

Importance of Comparing Rates

Mortgage rates can vary significantly between lenders. By shopping around, you can find the best rate that suits your financial needs. Don’t just settle for the rate your bank offers—explore options with the help Allison Kehler-Tolley, your Lethbridge mortgage broker.

Utilize a Mortgage Broker

Mortgage brokers can access a wide range of lenders and rates, often securing better deals than you can find on your own. They can also provide expert advice tailored to your financial situation.

Strategic Tip: Always compare at least three different mortgage offers before making a decision. This ensures you’re getting the best rate and terms possible.

7. Utilize the First-Time Home Buyer Incentive

What Is the First-Time Home Buyer Incentive?

The First-Time Home Buyer Incentive is a government program that provides eligible first-time buyers with 5% or 10% of their home’s purchase price to put toward their down payment. This shared equity mortgage helps lower monthly payments, making homeownership more affordable.

How to Qualify

To qualify, you must be a first-time home buyer with a household income of $120,000 or less. The mortgage must be four times your qualifying income or less.

Strategic Tip: If you’re a first-time buyer, explore this incentive to reduce your down payment costs and lower your mortgage balance, making your payments more manageable.

8. Make Bi-Weekly Payments Instead of Monthly

Why Bi-Weekly Payments Matter

Switching from monthly to bi-weekly payments means you’ll make 26 payments a year instead of 12. This effectively adds one extra monthly payment annually, helping you pay off your mortgage faster and save on interest.

Calculation Example:

Assume a $400,000 mortgage at a 3% interest rate over 25 years:

  • Monthly Payment: $1,897.36
  • Bi-Weekly Payment: $948.68
  • Interest Savings: Approximately $16,000 over the life of the mortgage

Strategic Tip: Set up bi-weekly payments to reduce the term of your mortgage and save on interest.

9. Consider Mortgage Portability

What Is Mortgage Portability?

Mortgage portability allows you to transfer your existing mortgage to a new property without incurring penalties. This is particularly useful if you move before your mortgage term ends, as it helps you avoid breaking your mortgage and paying hefty fees.

Benefits of Portability

  • Avoid Penalties: Save thousands by not having to break your mortgage.
  • Maintain Interest Rates: Keep your favorable interest rate even when purchasing a new home.

Strategic Tip: If you anticipate moving during your mortgage term, opt for a portable mortgage to save on penalties and retain your current interest rate.

10. Utilize a Mortgage Payment Calculator

Why Use a Mortgage Payment Calculator?

A mortgage payment calculator helps you estimate your payments based on different scenarios, such as varying interest rates, payment frequencies, and amortization periods. By adjusting these factors, you can see how changes affect your overall mortgage cost and make informed decisions.

Conclusion

Saving on your mortgage is achievable through informed decisions and strategic actions. Whether it’s selecting the right term, exploring rate options, or taking advantage of prepayment privileges, every step you take can lead to significant savings. By implementing the strategies outlined in this guide, you can reduce your mortgage costs, pay off your home sooner, and secure your financial future.