Get the best deal on a mortgage
With interest rates threatening to rise and the real estate market still somewhat uncertain, it makes sense to do all you can to get the best possible deal on your mortgage.
“A written budget that fully evaluates your family’s needs, spending habits and true living expenses is an essential first step,” says Chartered Accountant Tom Trainor, Managing Director of Hanover Private Client Corporation in Toronto. He suggests that everyone should understand their personal “optimal capital structure” – the metric that helps businesses define their mix of debt and equity, and how money ebbs and flows in their operation.
Toronto
Chartered Accountant Joe Marchello, Director of Finance for Condor
Properties and CountryWide Homes, says that finding an affordable mortgage
that leaves you with a comfortable financial cushion or buffer zone should
be your goal. But he adds that there is a lot more to it than that.
Lending money for mortgages is a competitive field. There are different
kinds of players, with some great deals and added perks for qualified
customers.
Here are other things that they suggest you consider when shopping for a mortgage.
Fixed rate or variable? - Your choice should depend on whether you believe interest rates will rise during the term of your mortgage (and by how much) – and your ability to tolerate some volatility in your mortgage payments. Variable rate mortgages are less expensive, but they are tied to the prime lending rate. If it goes up, so do your mortgage payments. Fixed rate mortgages are just that: fixed. You pay more, but in exchange, the financer assumes the risk of a substantial hike in interest rates, and you have the peace of mind of knowing exactly what your payments will be for the entire term of the mortgage. Bear in mind that regardless of the type of mortgage you choose, everyone must qualify based on a fixed-rate, five-year term.
Broker, banker, other? - If you don’t like to negotiate, a broker will most likely get you a better deal, says Marchello. They will present your case to a number of different financers, who will probably have different mortgage products and deals to offer you. Other mortgage shoppers may prefer to deal with their own bank or banker. They, too, often have different products and incentives – even promotions from time to time. Sometimes, the best deals are offered by a combination of builder-and-banker, where a new-home builder’s bank partner discounts rates to buyers, capped for up to 18 months or longer.
Pre-approval or a calculated guess? Being “pre-approved” for a mortgage has its advantages. You’ll know exactly how much you can borrow, which may help narrow the search for that new home or property. But if you thought you’d save time and apply for a pre-approved mortgage at the same time you shop for a lender, you might want to reconsider. Each time you present yourself for a pre-approved mortgage, the prospective lender asks for a credit check. Having several credit checks conducted within a short period of time could be construed as you having trouble obtaining credit in the first place. This could lower your score – and desirability as a loan candidate – at the worst possible time.
Pay-down triggers or perks? Banks and other lenders often offer incentives to good prospects and customers. But do some calculating before signing-up for the cash-back option which, Trainor says, is usually the least valuable. Instead, look for a better interest rate, or “pay-down triggers” that allow you to repay part of the principal of your mortgage at regular intervals, or to increase payments without penalties.
Monthly, weekly or other? Don’t underestimate the long-term savings to be had by paying your mortgage down on a weekly or bi-weekly schedule, rather than monthly. The few extra payments each year can reduce the length of your mortgage, and save you substantial amounts of cash over its lifetime.
Insurance or not? Consider a plan that will cover your mortgage payments in the event you pass away. But carefully evaluate the mortgage insurance plans the banks offer. They’re usually more expensive, and the premiums don’t decrease as the value of your mortgage goes down. Furthermore, mortgage insurance pays out to cover the cost of the mortgage, but only the mortgage, under prescribed circumstances. Term-life insurance will likely be less expensive, and will pay out to the beneficiary whether there’s a mortgage in the works or not.
Brought to you by The Institute of Chartered Accountants of Ontario
