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Back to Mortgage section Learning Centre - Mortgages
Mortgage tips for the homeowner

How to get the most out of your mortgage - Choosing your mortgage options

When searching for the perfect mortgage, smart shoppers know the importance of securing a low mortgage rate. They also realize however that the mortgage rate is not the only factor that determines perfection. In many cases, it is the various mortgage options that can result in savings of thousands of dollars in interest over the life of a mortgage.

But how do you know what mortgage options are right for you? This will largely depend on your marital, financial and family circumstances and will more than likely change frequently over the course of your mortgage. At the right we have depicted several situations that may require one or more mortgage options that are currently available on the market today. Keep in mind however, that for some of these options, you are required to negotiate them when you set up or renew your mortgage and as such, may not be available to you during your mortgage term.

 
l I received an inheritance
l I just received a raise in salary
l I get paid every two weeks
l Every so often, I have extra money left at the end of the month that I would like to apply to my mortgage
l Mortgage rates have decreased...just in time for my renewal
l I am afraid that mortgage rates will rise when it is time to renew my mortgage
l We want to start looking for a house but think that mortgage rates will go up before we buy
l What happens to my mortgage if something should happen to me?
l Sometimes I find that I run out money before the end of the month
l I am thinking about moving to a new house
l Interest rates are dropping but I am locked in at a high rate until the end of my mortgage term
 
 

Situation #1: I received an inheritance

Mortgage option: Mortgage prepayment
An inheritance can make a substantial difference in our lives but this is especially true for those who hold mortgages. If possible, it is a good idea to use at least part of the inheritance to pay off a portion of your mortgage. This can result in savings of thousands of dollars in interest and can subtract several years off the the duration. Many mortgage providers will allow you to pay off a certain percentage of your mortgage principal each year without incurring a penalty. They may also permit you to pay off an unlimited amount at the time of your mortgage renewal.

Situation #2: I just received a raise in salary

Mortgage option: Increase the amount of your mortgage payment
With this mortgage option, getting a raise can mean more than just having the ability to make more money. If you are able, increasing the amount of your mortgage payment can be the most beneficial use for your extra income as it can also cut years off of your mortgage. Most mortgage providers will allow you to increase your mortgage payment by a certain percentage (normally 10 per cent) during each 12 month period. In some cases, the amount of your mortgage payment increase is applied directly to your principal which will end up saving you a considerable amount in interest costs. The best thing about this option is that, because of the increase in income, you will not experience a change in your standard of living and your mortgage will be paid off much sooner than anticipated.

Situation #3: I get paid every two weeks

Mortgage option: Increase the frequency of your mortgage payments
When you set up or renew your mortgage, it pays to arrange it so that your mortgage payments match with your pay schedule. For example, if you get paid every two weeks, you should be making your mortgage payments on a bi-weekly basis as well if possible. This will result in you paying if your mortgage at an accelerated rate and will make the best use of your hard earned money. The drawback to this option is that it must be arranged at the start of a mortgage or at the time of renewal however, some institutions will allow you to change your payment schedule during the course of your mortgage term for a fee.

Situation #4: Every so often, I have extra money left at the end of the month that I would like to apply to my mortgage

Mortgage option: Increase your mortgage payment for that month
Now and then we find ourselves in the enviable position of having income left over at the end of the month after everything has been paid for. What better use could there be for this money than to use it towards paying down your mortgage? Although it may not seem to make a big difference at the time, making this practice into a habit can result in big savings over the term of a mortgage. Some mortgage providers will, on any regular payment date, let you prepay a certain amount of money (usually from a minimum amount up to the amount of your regular mortgage payment) towards your mortgage. This extra payment amount is normally applied directly to the mortgage principal which will result in a savings in interest costs.

Situation #5: Mortgage rates have decreased...just in time for my renewal

Mortgage option: Keep you mortgage payment amount at the same level

When it is time to renew a mortgage, many people find the temptation of having extra income in the hands too much to resist. Instead of continuing their current mortgage payment schedule, they opt for the lower mortgage payment that the renewal offers. Would they still have made the same decision if they realized that by maintaining their current level of mortgage payments when they renew, they could have paid off their mortgage years earlier than expected?

By renewing your mortgage without changing the amount of your current payments, you receive the benefit of the lower interest rate that comes with the renewal. This means that less of your payment will to towards interest costs and more will be applied to your principal balance. Your payments remain the same, thus not affecting your budget and you end up saving a substantial amount while subtracting years from your mortgage.


Situation #6: I am afraid that mortgage rates will rise when it is time to renew my mortgage

Mortgage option: Inquire to see if you can renew early
The period of time just before your mortgage comes up for renewal can be very stressful. This can be made more unpleasant if you feel that mortgage rates are on the increase. Instead of spending the next 12 months worrying about rising interest rates, some mortgage lenders provide you with the option of renewing early and locking into a longer term when you feel the rate is right. It gives you the security of knowing that you may have saved a substantial amount while getting the rate you wanted.

Situation #7: We want to start looking for a house but think that mortgage rates will go up before we buy

Mortgage option: Look into a pre-approved mortgage

Buying a house can be a pretty overwhelming experience by itself so who needs the added pressure of worrying about rising interest rates? If this situation sounds familiar, you may want to approach your chosen mortgage lender about applying for a pre-approved mortgage before you begin shopping for a home. If approved, most mortgage lenders will guarantee an interest rate for a fixed term mortgage term of your choice for a certain length of time prior to your closing date (normally 60 days or 90 days for new construction). As an added bonus, if mortgage rates drop, you will receive the lowest rate in effect for your chosen term.

However, this mortgage option does come with a warning. It is wise to decide on a realistic price range for your new home before applying for a pre-approved mortgage. This will help to avoid overspending and making the mistake of purchasing a house that comes with mortgage payments that you can not afford.


Situation #8: Sometimes I find that I run out money before the end of the month

Mortgage option: Skip a mortgage payment
At one time or another, we have all come up on the short end of the financial rope after as particularly expensive month. Unexpected expenses can sneak up on you quickly and be difficult to handle, especially if you are on a budget so it makes sense to have a back-up plan in place. Many mortgage lenders offer the option to skip what is equivalent to one mortgage payment over a certain period of time (normally one payment per year). You, as the mortgagee, are still required to make the payment but you can repay the skipped payment at any time during the mortgage term.

Situation #9: What happens to my mortgage if something should happen to me?

Mortgage option: Purchase mortgage insurance
As we all know by now, it is impossible to predict what will happen in the future whether it be the next ten minutes or the next ten years. Since your home is one of the biggest investments you will make and your mortgage is probably the biggest debt you have, doesn't it make sense to protect it from default? Most mortgage lenders have an arrangement to provide some for death or disability coverage to mortgage holders. When covered by this insurance, the mortgage on your house would be paid off in the event of your sudden death or disability.

Situation #10: I am thinking about moving to a new house

Mortgage option: Mortgage portability
After going through the trouble of negotiating an acceptable mortgage rate, it would seem silly to have to give it up just because you are moving, especially if mortgage rates have risen since your last renewal. Because of this, many mortgage lenders will include the option of Portability in their mortgages. Portability allows you to transfer the existing interest rate, terms and conditions of your present mortgage to a mortgage on your new home, subject to approval. The benefit of this option is that it is also available to those who move in the middle a mortgage term.

Situation #11: Interest rates are dropping but I am locked in at a high rate until the end of my mortgage term

Mortgage option: Blend and extend
You can never tell when mortgage rates will drop, which can be painful if you are locked into a higher rate for a fixed term. So, as a solution to this unfortunate situation, many mortgage providers offer an option that is known as Blend and Extend. With this option, you blend your interest rate with the current rate, producing a lower rate that you can lock into regardless of the length of time remaining in your mortgage term. You benefit from lower mortgage payments and are protected if mortgage rates begin to rise again.



Notice: Fiscal Agents Financial Services Group are not engaged in rendering tax, accounting or legal professional services or advice. The comments on this page are not intended, nor should they be relied upon, to replace specific professional advice. Before acting on material contained herein, readers should seek advice that is appropriate to their personal circumstances from a professional advisor.





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