Mortgages

                 Image lifted from KellyCaldwell.ca)

        Mortgages

This blog does not have topics listed in any particular order of importance or area of impact, but is just a collection of thoughts I have about these particular financial issues. If you think they raise valid points or refer to good sources of information, please feel free to share them with those who you think may benefit from the knowledge

I remember my feeling of total confusion when it came time to get my first mortgage in 1981.  I had no idea of where to go or who to talk to, and then a new business opened up called "The Mortgage Place".  "Perfect" I thought, "this must be the place to get a mortgage".  It was not until much later that I realized my mortgage was with a bank and "The Mortgage Place" was actually a mortgage broker.

I was fortunate that I engaged their services, although I was totally unaware at the time of the $300 they tacked on to my cost of getting a mortgage.
However, they did manage to get a full half a percent off of my interest rate that I would not have fought for.  That half of a percent saved me $650 over the next 5 years, so it was a good investment, but if you can save half a percent on today's mortgage of $150,000 over a 25 amortization period that would amount to a $9550 saving.   Well worth the effort of shopping around every 5 years to ensure you are getting the lowest rate possible.

Shop your mortgage every time the term ends.  Do not automatically renew with the same institution.

In 1981 there were not as many options as now to using the services of a mortgage broker.  The internet has provided access to information for the masses in a lot of areas and mortgages are no exception.  

www.ratehub.ca provides a wealth of information on mortgages, including rate comparisons, and like so much about the web that I like....it's free!  Simply telling your mortgage holder that you can get a better rate elsewhere may result in them offering it to you.  The squeaky wheel DOES get the grease, so don't be shy about asking.

One of the best pieces of advice I received was from one of my co-workers.  The railroad is full of interesting characters with lots of stories to share, but this guy was well-respected and had another career in real estate outside of the railway, so I acted on this one.  

His message was simple....On any mortgage, get the shortest amortization you can afford and make principle pre-payments with any extra cash you get.

When I learned how a principle pre-payment was applied to my mortgage, I was amazed at how much I could save by utilizing it.  In the beginning of a mortgage repayment the interest is front end loaded so the amount you are actually paying on the principle is quite small (at the interest rates I was paying then).  If your weekly mortgage payment (always pick weekly accelerated, it shortens the amortization) is $300 the interest is over half of that amount, at the start.  When you prepay the principle the amount is applied by moving you down the schedule as far as the amount will take you adding up the principle amounts from each week.  The interest portion associated with each principle payment is your savings, therefore a $1000 payment will save you that much at least in interest.
You can't beat that rate of return!  

Make sure you include an all-in-one mortgage product like Manulife One in your comparison.  The interest is not frontend loaded and it may be worth the monthly admin fee they charge.  

www.ratehub.ca/best-mortgage-rates/all-in-one

The mortgage calculator at www.ratehub.ca is quite good, but even the amortization schedule there does not break down the payments to a weekly level, so divide the numbers by 52 to get an idea of the weekly amounts.  When you are living paycheque to paycheque it helps to put all your expenses in that format so you know what you are paying for.

Just for fun (and by fun, I mean, the banks') try doubling the interest rate on the mortgage calculator and look at the effect on your interest and principle payments....scary eh?

More on mortgages and home buying later.