The Right Stuff

You’re working for your mortgage. Is your mortgage working for you?


      Despite a rate increase in later March, today’s mortgage rates are still at historic lows in Canada. While that can mean great savings for homeowners, it also creates a lot of uncertainty if you’re considering a new home or deciding what to do with your existing mortgage.
     The range of attractive alternative can also be overwhelming. “With all the options available, it has become challenging to decide on the right mortgage terms,” say Paul Carey, manager, Home Equity Financing, RBC.
    But whatever the environment, ensuri9ng that your mortgage is right for you begins with an accurate self-assessment, says Chris Wisniewski, associate vice president, Real Estate and Secured Lending, TD Canada Trust. “Before you start tot talk about specific mortgage terms, consider your down payment and the closing costs associated with buying a home: legal and land transfer fees, moving expense, insurance and adjustments on closing such as prepaid taxes. Do a real estate budget, including any additional costs that might occur as a result of your move – perhaps you need to buy a car, or your transit costs will go up.”
     Once you’ve done those caclculations, Mr. Carey advises stress-testing yoiur budget before you buy. “Just because the bank says you can afford a payment of $2,000 a month doesn’t mean that’s the amount you should pay – the bank’s calculation doesn’t take individual lifestyles into account. It’s best to try living with your new budget for a month or two to see how comfortable you are.”
The same stress-testing strategy can be helpful when deciding between a variable or fixed-rate mortgage. Typically, borrowers have paid less over time by taking advantage of variable rates, he says, but variability requires the ability to manage potentially higher payments, both financially and emotionally.
     To cope with future uncertainty, you must look beyond rates, says Anjel Van Damme, director, Home Equity Specialized Programs, RBC. “You may end up having to move, or need extra funds to renovate, make an important purchase or consolidate credit card debt. There may be a promotion or a bonus – or a situation in which you’re not able to afford your monthly payment.”
     Options such as allowing the purchaser of your home to assume your mortgage or the ability to “port” your mortgage to a new home and “add-on” (that is, borrow back part or all of the amount repaid on the principal value of the mortgage, without the usual costs of a new mortgage) can help ensure our mortgage meets your needs even if your situation changes, says Ms. Van Damme.

     Flexible payment features can reduce the cost of interest over the life of a mortgage or reduce the stress in the short term. “With our mortgages, if your cash flow improves – for example, your child no longer needs daycare – you can increase payments up to 10 per cent per year or done or more “double up” payments,” she says. “You can change your payment frequency; changing from monthly to “accelerated bi-weekly” is like adding an extra monthly payment every year. And if something unexpected comes up, you can choose to skip a payment once a year.

     You’ll achieve the best results by giving yourself enough time to plan and make decisions, syas Ms. Wisniewski, noting that the pre-approval process is an opportunity to discuss your options and needs with a mortgage expert. “Once you put in an offer (on a home), things can happen so quickly. You want to make sure you’re not forced to make choices you wouldn’t have had you more time to consider”.

Once you’re in your new home, viewing your mortgage as an element of our financial plan and revisiting it regularly can help you achieve your financial goals faster, says Colette Delaney, senior vice-president, Mortgages and Lending, CIBC Retail Markets.

     Even with the recent rate increases, “we are at a unique point in the market,” she says. Posted five-year rates were 7.19 per cent two years ago; today, CIBC has a five-year rate special of 4.49 per cent (which also includes two per cent “cash back” that can be used to offset prepayment charges). “Many homeowners have a mortgage that is not yet up for renewal, but given today’s rates, they’re wondering if it’s time to transfer the mortgage to lock in for five years at a lower rate.”
    A conversation with a mortgage advisor will determine the course of action that’s best for you. “If you make a switch, you may be able to reduce your interest costs and accelerate the rate at which you pay down your mortgage, meaning you can become mortgage-free faster,” says Ms. Delaney.
     Getting the right advice is the most important step in the process, she says. “Spending a little time with an advisor can provide clients with years of confidence that they have a mortgage product that is right for them”.

Source: Globe and Mail-April 19, 2010