If you’ve applied for a mortgage or renewed your mortgage you already know these processes can be stressful, time consuming, daunting and fraught with lots of questions. No doubt questions like: “Did I think of everything?”, “Am I getting the best rate?” and “Is my term right for me?” have crossed my mind over the years; they still do.
For today’s post during Financial Literacy Month #FLM2014 I thought I’d collate some mortgage tips for homeowners of all ages. This post is actually somewhat of a self-help article since I’ll be starting the mortgage renewal process within the next year. So let’s get into it…
Tips for the first-timer
- There are definitely pros and cons to renting and buying. Everyone must make their own decision on this. I firmly believe buying a home, at least right away when you start your working career, is not for everyone for many reasons. Consider making a list of pros and cons that will speak to you.
- Once you’ve decided that you want to buy, get pre-approved. This can “lock-down” the borrowing rate for the next 90 or 120 days so you don’t need to worry rate increases within the rate-holding period.
- As a first-time home buyer there are certain privileges you are entitled to. Make sure you do your homework and understand the benefits, conditions and implications of each:
- First-Time Home Buyers’ Tax Credit. This tax credit gives you a tax break on up to $5,000 of your closing costs.
- There is also the Home Buyers Plan. This program allows you to withdraw funds from your registered retirement savings plans (RRSPs), up to $25,000 in a calendar year. You have to repay all withdrawals from RRSPs within a period of no more than 15 years, repaying an amount to your RRSPs each year until your HBP balance is zero. There are more terms and conditions to be mindful of so check out that link above.
Tips for the second or third-timer
Even after you survived your first home purchase I can almost guarantee there are some lessons learned.
- Use a mortgage broker. Here are some of the benefits gained from using a mortgage broker:
- They gladly take your financial needs and “crunch the numbers” for you.
- They are less biased. Unlike banking representatives, mortgage brokers are not usually tied to any one bank, they work for you to get the best rate, terms and conditions from multiple lenders.
- You don’t pay them; they are compensated by the mortgage lender you choose.
- Be wary of cash back mortgage products. These come with certain fixed-rate mortgages and the effective interest you pay is usually higher than what’s available for other (non-cash back) mortgage products. With few exceptions cash back mortgages usually come with a higher total borrowing cost.
Tips for any-timer including those wanting to slay the mortgage (beast)
- Forget about mortgage insurance, for many reasons.
- Consider your goals. Is a paid-off home and becoming debt-free sooner than later important to you? Is investing (versus mortgage prepayments) more important to you? How long will you stay in your home? Answers to these questions help you determine the “right” mortgage. And only then can you determine the appropriate mortgage rate, amortization period and prepayment features for your needs.
- Shop early and often. Your existing mortgage lender will make you a renewal offer often just a few weeks before your current term expires. But there is absolutely nothing stopping you from shopping around before then and comparing mortgage rates.
- Flexible prepayment privileges rock. Personally, I’m looking for at least 20/20 pre-payment options at my time of renewal. This will allow me to increase my payments up to 20% of the original mortgage balance every year and/or increase my payment amount up to 20% each year. I also need the option to pay my mortgage weekly or accelerated bi-weekly.
- Be wary of the IRD. You may already know if you break your mortgage term you’ll be subject to a penalty – how big of a penalty will depend upon the type of mortgage you have and other factors. For example, if you have variable rate mortgage the mortgage penalty is usually just three months’ interest. If you have a fixed rate mortgage the mortgage penalty could be in the thousands; it’s the greater of three months’ interest or the interest rate differential (IRD). Some lenders have penalties as high as 3% of the mortgage principal or even 12 months of interest. If you think you might break your mortgage before it’s up for renewal I suggest you find a lender who discounts the mortgage penalty, go variable or at least take a short-term fixed rate mortgage. Check out this handy mortgage penalty calculator here.
- Go online. With my current lender I see the balance remaining on my mortgage and I get annual statements. Knowing the balance remaining is a motivating factor to slay the mortgage (beast).
- Compare mortgages easily. The DIY mortgage service called intelliMortgage greatly simplifies the mortgage research process. Like I mentioned above my mortgage term is up for renewal next year and I’ve already used the Mortgage Builder tool on intelliMortgage (affiliate) to build a “customized” mortgage so I only pay for the features I need. It let me compare my preferred term, a 3-year variable, to other options from seemingly every major lender.
The first-time homebuying experience can be a very challenging one to navigate. The mortgage renewal process isn’t necessarily a picnic either. This is why I think it makes sense to use online mortgage services to educate yourself and then work with a mortgage broker to get the best services and professional help at the lowest possible cost.
What are your tips or lessons learned for the first-time homebuyer or mortgage renewal process?
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
Interesting article, thanks for the info. I too am a staunch supporter of “forget about mortgage insurance”.
Mortgage insurance is a terrible product vs. alternatives available!
While I definitely agree that the banks are biased, you are naïve if you think that Mortgage Brokers are unbiased. The simple fact that they are paid by the companies they place the business with makes them extremely biased and just as unlikely to put the client’s interest first, as the banks. All lenders will provide brokers with higher commissions if they place more business with them. Buyer beware! I was able to do much better by doing my own homework and ultimately negotiating a great rate with a bank (that I had no other connection with).
I see your point, buyer beware, but I generally think they put clients first. All lenders will provide brokers with higher commissions if they place more business with them; true, but brokers work for you 🙂
If you can negotiate on your own, even better, but that effort is worth time (which is money).
The bank sent me a mortgage renewal contract. Instead of taking it to the branch to negotiate a lower rate as usual, I just wrote in a 1% reduction and initialed it, then mailed it back to the head office. Guess what? They just went ahead and processed it !
Wow, nice mortgage tip there, just re-write your own contract 🙂 Thanks for sharing Joe. Great to read lil’ wins like this.
I seem to be the odd man out when it comes to my views on home ownership. I still believe home ownership makes sense, even in expensive housing markets in Toronto and Vancouver. If you don’t want 6-figures out debt hanging over your head, you have to be willing to make the financial sacrifices necessary to pay off your mortgage sooner. If a single guy living in Toronto can pay off his mortgage in 5 years, just think how quickly you could pay off you mortgage if you made it a priority.
Fair point Sean. It’s about sacrifices sometimes and you’re certainly making a few to be debt-free.
Love this,
I wrote a brief piece earlier where I talked to a former bank insider is this what he said about bank mortgages.
“(The) big difference between a mortgage broker and a rep in the branch is that the mortgage broker simply offers the mortgage at a competitive rate, refers it to a bank, bank pays him/her cash. Only a bank rep actually tries to negotiate the rate upward for their own “SR”. This is why walking into a bank branch looking for a mortgage is just about one of the stupidest financial decisions anyone can make.”
WOW, in a good way. Thanks for sharing Barry!
My tip: go with a variable rate mortgage. You save money compared to a fixed rate about 80% of the time and won’t be stuck with a (potentially) huge mortgage penalty in case you decide to move. But if it has to be fixed I’d go with a 1-3 year rate and avoid the 5 year fixed rate
I think that’s solid advice Dan.
Four points that we can discuss:
1) I feel that if you have to dip into your RRSP to buy a house you probably shouldn’t buy a house;
2) Mortgage payments should be synchronized with your pay period. Paid monthly? Pay off your mortgage monthly? semi-monthly same — your goal is to minimize money sitting in your bank account.
3) Variable vs fixed. Get variable rate mortgage but pay it off at the fixed rate. I.e For example, you can get a 5 year variable or fixed for 3.0 and 3.8 resp. Choose the variable but set your monthly payments as if you took the 3.8 one. The extra you pay on principle insulated you tremendously from future rate hikes.
4) choose the longest amortization you can (say 25 years) but pay it off at your desired level (i.e. 15 years). This costs you nothing but gives you flexibility.
5) Consider renting. Renting is much more predictable and makes a lot of sense for many lifestyles. I don’t think anyone under 25 and kidless should buy a house. If you do, it likely means your like is a bit boring. The world (or at least the country) is out there!
Wow, great comments None. Nice to see you here again.
1) Agreed!
2) If possible, yes, but not always possible. I like paying as often as possible to keep interest costs lower, that’s just me (i.e., at least bi-weekly accelerated).
3) Variable (rate) usually wins most times but fixed (rate) can provide insurance for homeowners. Piece of mind is important but that comes at a cost so there is no clear winner all the time.
4) Agreed with long amortization early-on but folks should consider less amortization with more equity in their home.
5) Nothing wrong with renting!
Mark
I think you missed my point on #2 – paying off the a variable at a fixed rate tremendously stacks the deck in your favour. Start up excel and try it. Basically interest rates have to double over the 5 years to at worst, break even (assuming they don’t go up 1% immediately but that is highly improbable).
https://www.dropbox.com/s/e5l2is1zcrutkqh/mortgage_optimize.xls?dl=0
Of course, if interest rates stay static or even go down then you make out huge. I see this as VERY low risk for potential returns.
4) pay off fast – not necessarily. spreading risk around in good too (this includes risk of lost gains). You subscribe to this as well because I do believe you invest yet STILL have a mortgage 🙂
Thanks None. I thought point # 2 was about synchronizing mortgage payments but regardless, yes, paying off variable at “fixed rate” is a great idea 🙂
We were first time buyers a couple of years ago (actually, it will be two next month!) and we didn’t use the Home Buyers Plan because we wanted to keep that money invested in our retirement accounts. It’s nice to have that AND the house at this point.
No doubt, I totally agree with NOT using the HBP.
Going online to review our mortgage and finding the best way to kill it was what motivated us to pay it off so quickly. Once we saw the numbers it kind of gave us a kick in the butt to work hard and slay it. Great post lots important tips for homeowners of all ages to read up on.
Investigate the Smith Manoeuver if you are Canadian… Flexible payment options are a must, because you just never know what life will throw your way. be mindful of your borrowing costs. I say this because many see a $200K mortgage number and may be inclined to ensure it gets priority over a $3K CC bill, when in fact what is more important is the interest rate. if you can get ahead on your mortgage this might also help you out in an emergency, as you can sometimes, depending on those flexible payment options you’ve signed on for, miss or skip a payment or in extreme circumstances pull from your mortgage that you pre-paid ahead. Lots of good tips up there, but the only one I disagree with is the HBP, which I suggest to stay away from if possible. let retirement money ride for the long term and you will usually end up ahead – Cheers.
I’ve considered the SM Phil, but with my mortgage debt into the six-figures, I’m not too comfortable with leveraged investing at this point. I might change my mind in a couple of years when the mortgage is lower.
I have some non-reg. investments which is why is is tempting for me…maybe worth a chat in the New Year over some drinks.
Thanks for your comment! (Not a huge fan of HBP as well, never used it).
Do you not consider your home a leveraged investment? It’s all a matter of perspective… 😉 I look forward to a real *klink* in the New Year – Cheers.
I do…but…not sure I want to liquidate my non-reg. assets given the capital gains but worth looking into especially when my mortgage renews next year. Worth more discussion… 🙂
Hi Mark,
Please how can l speed up my mortgage payment and cut the time to 15 years.
Let me know if you have articles in the past that addressed this question.
Thanks
Will work on that one including sharing the tips I’ve done 🙂 Thanks for the idea!