Taking advantage of your options

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This article was published 31/03/2010 (5869 days ago), so information in it may no longer be current.

MOST Canadians don’t take advantage of their mortgage pre-payment features, which provide opportunities to pay down their debt faster and save on interest, say lending executives.

"The opportunities are in the details," says Paul Carey, manager of home financing for the Royal Bank of Canada.

Reading and understanding the fine print can have a huge impact on a homeowner’s choosing to make regular extra payments, a lump-sum payment or to increase the amount of the regular principal payment. Only about 10 per cent of homeowners utilize these pre-payment options, says Carey.

"Not all mortgages are created equal," says John Turner, director of mortgages at the Bank of Montreal (BMO). "While prices are very important for customers, they get so focused on the rate and not thinking about… what if your situation changes."

All mortgages today, whether open or closed, provide a means for mortgage holders to make additional payments. Open mortgages provide unlimited early payments without penalty, while closed mortgage rules vary and have more restrictions and limits.

"Life is one of those things where curves can be thrown at you and you need to have a mortgage that allows you to deal with those curves," says Turner.

Some agreements provide for "family care" or the ability to skip a certain number of payments if, for example, a couple has a baby. "You can arrange a mortgage and then a few months later you find out your wife is pregnant and suddenly you have a cash-flow situation," he says. Buyers also have to consider whether to make monthly, bi-weekly or accelerated bi-weekly payments. The difference between monthly and bi-weekly is negligible, but when accelerated — one extra payment each year — you can cut your mortgage amortization drastically.

On a typical 25-year mortgage, homeowners could cut it down to 17 years using some accelerated bi-weekly structures, says Turner.

Lenders will typically provide homebuyers 15 to 20 per cent in pre-payment options in an average closed mortgage, but it’s wise to check that those payments are cumulative, meaning annually, instead of one-time payments.

"Just as you would build a financial plan in building wealth, you need to build a mortgage plan as part of that overall financial plan," says Turner.

Structure it to allow you to reduce the debt in the most effective and efficient way to save money and become mortgage-free sooner.

Many lenders will also give you the option of starting with a variable mortgage and switching to a fixed term, says Bob Alexander, a mortgage specialist with Canada Direct Mortgage in Calgary. Realistically, most homeowners can’t afford to take full advantage of pre-payment options, but structuring it in a manageable way still provides savings.

Certain lenders will even give back the pre-payments if you run into unexpected financial challenges. BMO, for example, offers mortgage cash accounts that allow a refund of pre-payments, "no questions asked."

Inheritances can also be utilized to maximize pre-payment options. Just be aware of the restrictions. Some lenders require payments to be made at specific times during the life of the mortgage.

Good financial advisers can easily tailor a mortgage plan to meet your comfort level for risk and for the long-term repayment of the loan, including consideration of a person’s tolerance for variable rates.

"If a person is not going to be able to sleep at night because they’re worried that prime rate is going to go up by a quarter of a per cent, well then a variable rate mortgage isn’t right for them," says Carey.

 

— Canwest News Service