Fixed vs. Variable?
One of the classic real estate dilemmas: taking a variable rate mortgage can usually result in big savings, plus lower monthly costs, when compared to fixed-rate loans. So the immediate effect of choosing the variable rate is the strong potential for these interest rate savings. The down side is, that when rates finally do go up, although most Canadian banks will keep your actual payment amount the same for the remainder of the loan term, the amount of principal being paid off can be reduced to almost zero – you end up only paying interest. It’s always a good idea to talk to your mortgage professional when you are making this decision.
Bi-weekly and weekly payments
Most mortgages have the option to allow payments to be made on a weekly or bi-weekly basis. This option may be desirable for two reasons. The first is it can save you money as you can expect to pay off your mortgage about 4 years sooner. This can save you dramatically over the life of your mortgage. The other reason why these options are so popular is that if your employer pays you on a weekly or bi-weekly basis, you can simplify your budgeting by making the payment line up with the way you paid.
Making Extra payments
Paying extra amounts on your mortgage can make a big interest saving over time. When selecting a lender, the extra “privilege” payment options are something to look for. A 20% privilege payment will allow you to pay off up to $20,000 per year on a $100,000 mortgage. It is important that the privilege payment also be flexible to allow you to pay smaller payments on the mortgage and as often as you wish. An extra $1000 periodically paid on a mortgage can help you become mortgage free much faster, as each “privilege” payment goes direct to the loan principal amount (i.e. not to pay interest).
Reducing the CMHC fees on your purchase
When you require a mortgage for more than 80% of the purchase price of a residential, personal-use property, that mortgage must be insured by Canada Mortgage and Housing (CMHC) or GE Mortgage insurance. The premium charged by these companies decreases as the down payment increases. When you finance your property at 95%, a premium of 2.75% is added to the mortgage loan. By increasing the down payment to over 10% of the purchase price the premium can be reduced to 2.0%. If you can put down 20%, you can avoid any additional insurance fee.
Down Payments – The Bigger the Better
As mentioned above, when you put a 20% down payment on your purchase you can avoid the CMHC premium. More importantly the larger the down payment, the lower the amount of interest you will pay over the life of your mortgage.