Securing favourable mortgage terms is crucial for any real estate project. With the help of a mortgage broker, the process of comparing lenders and securing the best rates will become much easier.
Contrary to common belief, mortgage interest rates are negotiable. Your choice of mortgage type, repayment frequency, and amortization period all play significant roles in tailoring your mortgage to suit your specific requirements.
Given that purchasing a property is likely one of the most substantial investments you’ll undertake, obtaining favourable conditions is essential. In Canada, mortgages typically extend over 20 to 25 years, underscoring the importance of securing optimal conditions.
Should you simply choose the lowest rate?
Navigating the complexities of the mortgage world can be challenging. While securing the lowest interest rate is essential for minimizing your loan’s total cost, exclusively prioritizing this aspect overlooks other essential factors. Indeed, although the interest rate is important, it’s just one of the many factors to weigh before signing your contract.
In addition to negotiating your mortgage rate, it's essential to address other terms and conditions to ensure your mortgage is advantageous in every aspect. To provide clarity, here are various aspects to consider in securing a favourable mortgage loan at the lowest rate.
1. Identify which lender offers you the best deal
Many individuals opt for the convenience of obtaining a loan directly from their current bank. However, this may not be the most cost-effective option and could potentially increase financial obligations. With numerous lending institutions available, it’s essential to shop around and compare offerings from different financial institutions.
Before finalizing any agreement, thoroughly evaluate the terms and conditions, considering the long-term implications. You may be surprised at the discrepancy in offers from various institutions.
2. Choose the right type of mortgage
You should also determine which type of mortgage to get. An open mortgage typically has a shorter term and comes with a higher interest rate compared to the other options. However, it offers the advantage of allowing you to repay the loan at any time, either in full or partially, without facing penalties.
This level of flexibility empowers individuals to adjust their repayment schedule according to their financial circumstances. For those expecting a significant cash influx soon, from selling a property or receiving an inheritance, an open mortgage proves to be an ideal choice.
On the other hand, a closed mortgage means a lower interest rate over an extended period, requiring borrowers to make fixed payments throughout the mortgage term. Unlike an open mortgage, closed mortgages typically incur significant financial penalties for early repayment. However, they provide borrowers with peace of mind and a longer timeframe to fulfill their payment obligations.
3. Decide between a fixed or a variable rate
Your decision between fixed and variable mortgage rates depends on your comfort lever for risk and uncertainty.
Opting for a variable rate means your mortgage will align with market changes. While this could potentially lead to lower rates, your monthly payments will fluctuate based on market conditions, including changes in the prime rate and reference rate.
The upside is the potential for reduced payments when rates decrease, but the downside is the risk of rate hikes during challenging financial times. For instance, from 2000 to 2010, the Bank of Canada's key rate fluctuated between 0.25% and 6%.
On the other hand, a fixed rate offers stable monthly payments for a predetermined period, typically around 5 years. While it may be slightly higher than a variable rate due to its stability, it shields you from rate fluctuations, simplifying financial planning.
4. Choose your payment frequency
The frequency of your payment can also greatly influence your mortgage’s overall cost. Strategically planning your repayment schedule can result in substantial interest savings over the life of the loan. Let’s explore the various options for mortgage repayments.
1. Monthly mortgage repayment: This involves making one payment each month, totalling 12 payments annually.
2. Biweekly mortgage repayment: Payments are made every two weeks, resulting in 26 payments per year. Many prefer this option to align with their pay schedule.
Calculation: Monthly payment x 12 ÷ 26.
3. Accelerated biweekly mortgage repayment: Like biweekly payments but with slightly higher amounts.
Calculation: Monthly payment ÷ 2.
4. Weekly mortgage repayment: Payments are made weekly, totalling 52 payments annually.
Calculation: Monthly payment x 12 ÷ 52.
5. Accelerated weekly mortgage repayment: Like weekly payments but with slightly higher amounts.
Calculation: Monthly payment ÷ 4.
Use a mortgage calculator to help you
Using a mortgage calculator is invaluable when navigating the complexities of mortgage repayments. This tool allows you to simulate your mortgage payments and monitor your loan’s progression over time. By doing so, you can confidently make informed decisions about your mortgage.
Here's an example illustrating the difference between weekly repayment and accelerating weekly repayment.
When a buyer secures a $200,000 mortgage at a fixed rate of 3.5% over 25 years, the monthly payment amounts to $1,000. Opting for regular weekly financing reduces the weekly payment to $230.77, while choosing accelerated weekly financing raises it to $250 per week.
While the accelerated weekly payment is only $19.23 higher each week, it leads to substantial interest savings totalling $13,000 over the 25-year term.
5. Determine the term and amortization period of your mortgage
Understanding the difference between the mortgage term and the amortization period is essential for prospective homebuyers.
The mortgage term refers to the timeframe, typically spanning from 6 months to 10 years, during which the mortgage agreement remains in force. At the term's conclusion, renegotiating the mortgage terms is necessary if there's an outstanding balance. Homeowners commonly renew their mortgage contracts 4 to 5 times before fully paying off their debt.
On the other hand, the amortization period represents the entire duration, usually up to a maximum of 25 years, required to repay the entire loan. Opting for a too-short amortization period can lead to prohibitively high monthly payments, significantly impacting your quality of life. Conversely, an excessively long amortization period results in accumulating unnecessary interest over time.
Striking a balance between these factors is crucial for identifying the optimal amortization period that aligns with your financial circumstances.
How can I get the best mortgage rate on the market?
To secure the best mortgage rate on the market, collaborating with a mortgage broker can be highly advantageous. Acting as your ally, a mortgage broker meticulously exploring various options to identify the most suitable rate and mortgage type for your unique requirements.
With their expertise in the mortgage system, they navigate its complexities with ease, ensuring you understand the process, make informed decisions, maximize savings and steer clear of potential pitfalls.
What's even better is that utilizing the services of a mortgage broker comes at no extra cost to you. They are compensated by the bank you ultimately choose, meaning you receive expert guidance and recommendations without any additional expenses. It's a mutually beneficial arrangement!
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