For a number of reasons, purchasing a new home is always a major move in one's life, especially for first time homeowners. While buying a new home entails a substantial investment and probably the most costly expenditure one would make in one's entire life. In addition, if you happen to in the mainstream of the Canadian population, it is also likely that you would be taking a substantial amount of money on loan to realize the cherished dream of owning your home. Since borrowing money would require you to pay interest on the credit or mortgage for several years, may be a number of decades, it actually denotes that eventually you would be shelling out many times over for your new home or condominium compared to what you had given to the seller to acquire the residential property.
Hence, it is important that you will be required to seize each and every opportunity to lessen your outstanding credit as well as the period of time needed to clear of the mortgage on your home. In order to achieve the dual tasks, it is essential for you to appraise your mortgage carefully no less than once every year. In fact, Jim Rawson, the regional manager at the Toronto-based mortgage brokering firm Invis, is of the view that while buying a home or taking a mortgage people generally do not consider several issues that they actually ought to.
Jim Rawson has a few tips for homeowners who have a mortgage on their residential property. According to him, to begin with, it would be an excellent plan if such people always maintained a handy mortgage table, as it would prompt them regarding the amount of money they are precisely paying for the house they have acquired. He further advises that people ought to take a look at the mortgage table at least one each year with a view to acquaint themselves regarding the status of their loan and also to find out the exact amount they have already reimbursed against the credit.
A very pertinent point in this regard is to make sure that you are not reimbursing the loan in monthly repayments. Actually, when you repay your loan in monthly instalments, you only help to increase the period of clearing the mortgage on your house. And this is not profitable for you, but the mortgagee or the creditor. In fact, it is always advisable to change over to an arrangement where you repay your loan through weekly or bi-weekly instalments, as this will help you to reduce the term of your loan. In most cases, the creditor or mortgagee will have no objection if you wish to change the repayment instalment system. In fact, when you repay the loan through weekly or bi-weekly instalments, you actually make an additional monthly payment towards the loan each year. In addition, you will find that majority of the mortgages incorporate an annual prepayment aspect. Jim Rawson says that if a mortgagor is able to take advantage of this feature and make any part of it, he or she would definitely be saving considerable money in terms of interest payment.
There are several financial institutions that permit the mortgagors to pay beforehand a minimum of 15 per cent of their loan's outstanding principal amount each year. While it may not be possible to pre-pay a large amount of money towards the outstanding principal amount every year, even if you manage to pay a reasonable sum annually, it would definitely help you to reduce the outstanding amount on your mortgage as well as the term of your loan eventually saving you considerable money in terms of interest on the loan. According to Jim Rawson, while spending an additional small amount of $10 every week would not make much difference to any mortgagor, but if they accumulate this additional sum of $10 every week and use it to make a prepayment against the balance mortgage, it will eventually make a significant difference in reducing their loan amount as well as the term of the mortgage. Substantiating his view, Rawson says that usually most people get a raise in their salary annually or every couple of years and if they were to utilize even a small portion of their additional income to make prepayments against the outstanding loan principal amount, they would easily be saving considerable amounts on their mortgage, especially by paying much less on the overall interest.
The expenses of owning a home does not end with purchasing it. In fact, a few years later, you may feel the need to undertake a redecoration of the kitchen or bathroom. It is also possible that many of you may be contemplating to replace the existing roofing and have a completely new one. In such situations, you require to invest more money on your home. It has been generally seen that homeowners actually acquire this additional money by seeking a home equity loan. However, they would be better off and save money if they simply add the expenses of the home renovation to their existing mortgage at a comparatively lesser rate of interest.
The managing director of mortgages, Bank of Nova Scotia, Charles Lambert also agrees with Jim Rawson on this point. According to Lambert, if a homeowner has managed to create sufficient equity on his or her residential property at the moment and is contemplating to embark on an important reconstruction and redecoration of their home, obtaining a refinance or adding the expenses incurred in this regard to their existing mortgage would definitely prove to be an extremely gainful proposition from the financial point of view. He says that even when a homeowner had enough equity on his or her property; it is always preferable to get a refinance than seeking a new loan, such as the home equity loan, for the renovation purpose. At the same time, Lambert says that it all depends on the comparative magnitude of the renovation and doubts if one would actually like to add their home renovation expenses to their existing mortgage if they are undertaking minor jobs like giving a fresh coat to their house or something similar.
Charles Lambert suggests that if a homeowner is undertaking a comparatively small renovation work, seeking a line of credit would be the most suitable thing for him or her to do. Even when a homeowner is seeking a line of credit, he or she is able to utilize their residential property as a security or collateral. In such cases, the homeowners are able to take a maximum loan of 80 per cent of the current value of their home. In effect, homeowners have to pay one or two per cent more than the prime interest rates when they are seeking loan from any reliable line of credit. Lambert further says that the homeowner looking for loans for renovation work may also consider consolidating debt, such as a credit card balance at a reduced rate of interest by adding the credit to their existing mortgage. At the same time, he warns homeowners to be careful and not use this process as a justification only to accumulate additional loans.
Meanwhile, Jim Rawson says that one of the crucial advices he proffers to most of his clients is that if they are refinancing their mortgages only to reimburse or repay their credit card loans, they would definitely be better off if they reduced their expenditures through the credit cards. He warns that using credit cards just to be able to spend some additional amounts would eventually not help them in any manner.
Presently, people are not feeling the pinch of taking additional loans because the interest rates in Canada are exceptionally low now. However, it is sure that the interest rates will not remain so low for much long and economists have been predicting that the Bank of Canada would begin to raise the interest rates after sometime this fiscal year. In fact, if the homeowners wish to have a peace of mind, it is time that they ought to change from the variable interest rates to fixed interest rates. Jim Rawson advises that if the homeowners desire to benefit from constancy for a long period, they may perhaps start doing some research now to find loans with interest rates fixed for at least five years.
It has actually been a tradition for the interest rates to rise and fall. Therefore, at some point of time in future you may find that it is more advantageous to break your existing mortgage, as it would enable you to benefit from the low interest rates. This is despite the fact that breaking your existing mortgage would require you to pay a substantial amount as fine. For instance, if your mortgage is with the Scotiabank and you wish to break it, you would be required to pay a penalty that is equivalent to the greater of the two - three months' interest on the outstanding principal of your mortgage or the variance in the rate of interest.
Here, Jim Rawson has a word of advice for all homeowners having a mortgage. He suggests that they should consult a competent mortgage professional and the pro will be able to figure out what is beneficial for you - to break your existing mortgage or not. He adds that even if a homeowner is able to save two fractions points from the interest rates they are paying during the ensuing five years, they would definitely be much ahead. In other words, people saving on the interest rate on their mortgage would actually be making substantial savings in the end.
