Like most Canadians who are homeowners, paying a mortgage can be financially stressful.
Paying a mortgage is undoubtedly the most expensive monthly expense on a budget, but these payments set you up for your future, as your home is an investment.
When buying a home, it’s highly crucial to ensure you do your research on financing your home. One of the most crucial things to take into account is interest rates on the mortgage. There are also other vital facts to consider, which could essentially help you save money on your mortgage.
Let’s look at the various ways you can save money on your mortgage.
Ways to save money on your mortgage
1. Consider Interest Rate Options
The two interest rates you can choose from are a fixed rate and a variable rate (also called an adjustable-rate mortgage/ARM), and these get based on your risk appetite.
A variable-rate may be lower than a fixed rate, but your payments will increase when they rise. If you have a limited budget, this can cause financial strains when the costs become unaffordable. If you’re not afraid of the risk, then a variable rate mortgage can be a way to save money potentially. The upside is that if interest rates drop, you’ll pay less towards your mortgage. It’s a risk you will take on.
If you choose to select a fixed rate, you’ll have peace of mind knowing that your payments will remain the same throughout the whole term of your mortgage loan. When interest rates rise, you’ll have the security knowing your rates will remain unchanged.
2. Switch to Biweekly Payments
Changing your payment frequency monthly to biweekly can give you one extra month’s worth of payment towards your mortgage over one year and potentially shave off two years from your mortgage. In simpler terms, instead of making 12 payments per year, you’ll pay 13 payments in a year.
Switching to a biweekly payment will allow you to pay your mortgage off quicker with the less interest you’ll be paying. You won’t even notice the difference when paying biweekly, as essentially, you’re still paying the same rate every month.
Speak to your lender first to ensure there are no penalties involved, as this will counteract the switch’s whole point. The benefits of switching need to outweigh the costs to ensure you save money over the long run.
3. Make Additional Lump Sum Payments
If making biweekly payments is not viable for you, consider making additional lump sum payments towards your mortgage loan. Whether you use your holiday bonus or money gifted to you on your birthday, these extra payments towards your principal balance will reduce your loan’s term and reduce the interest you’ll pay.
First, speak to your lender to ensure there are no penalties that can get incurred, and if you get the go-ahead, consider making additional lump sum payments as often as possible. Even if it’s an extra $50, they all add up over time.
4. Negotiate Rates with Your Bank
If you’re buying a home, don’t settle on the first offer you receive. Shop around and tell lenders that you’re looking for the lowest interest rate, and your bank may negotiate a lower rate with you.
Your bank will consider lower rates if you have more than one product or service with them, an unsecured loan, multiple bank accounts, etc. You’ll be viewed as a valuable customer the more products you have with them.
Your bank must feel they don’t want to lose you as a customer.
5. Round Off Your Payment Amounts
If your mortgage loan payment is $564 per month, consider rounding off the amount to $600 and proceed to do so for the rest of the loan’s term. The additional amounts paid will benefit you in the long run, as you will cut your loan’s term and pay less towards interest.
This option is an easy way for you to save money on your mortgage over a long period, and it won’t affect your finances in any way if you can afford the additional $40-50 a month.
Many mortgages allow increased payments by up to 20%, with the difference going directly towards the principal amount.
6. Limit Penalties
Financial institutions will generally allow you to repay a portion of the borrowed amount without any penalties. Consider paying the allowed amount without penalties before you break your mortgage, resulting in paying the relevant penalty.
7. Cash-Out Refinance
If it’s a struggle to make ends meet and you can’t pay your mortgage on time, consider accessing the equity in your home by utilizing a cash-out refinance option. This option will give you access to a large sum of money that can get used to paying off your credit card debt and any other remaining debt you have. In turn, you get to reduce your monthly payments towards other debt.
Cash-out refinancing will increase your monthly mortgage loan repayment, or it will lengthen the amortization, or possibly a combination of both.
Ensure you are mindful of the risks involved, as you could potentially make additional consumer debt over time, which you want to avoid. The benefits, though, will be reducing your high-interest debt and lowering your monthly expenses.
There are a lot more options you can consider to help you save money on your mortgage. Others include using a mortgage broker to help negotiate lower rates with lenders, saving for a larger down payment before getting a mortgage loan, and avoiding paying mortgage insurance twice, amongst other things.
Do your research and find a solution, or even multiple solutions, to help you with your saving. Don’t settle for the first low-interest rate, but instead, continue to negotiate with your lender to relook your mortgage loan terms and start saving today!