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Beyond Interest Rates: What To Look For In A Mortgage

by PJ Wade

If you choose a lender and a mortgage based entirely on the interest rate, you may have bought "the sizzle" and ignored the quality of "the steak." Since mortgage interest is usually not tax deductible, the rate does matter but Canadians often fail to look beyond interest to see other ways to save.

Interest on the interest:
Canadian federal law limits compounding to annual or semiannual calculations with the blended repayment plans offered by most residential lenders. The frequency of compounding, or calculating interest on the interest, determines how quickly the mortgage debt grows. Other repayment methods, such as flat or fixed plans, may involve more frequent compounding, quarterly, monthly, so read the fine print carefully.

Pay more frequently and pay less:
Most mortgages are repaid monthly, but weekly or biweekly repayment is often possible. However, accelerating payment frequency does not automatically pay your mortgage off more quickly. Carefully calculate what you'll pay off in a year to be sure there is a savings. Shortening the amortization period by a few years is another way to achieve the same end.

Pay now or pay more later:
If you need to finance more than 75% of the appraised value of the property in question (this is called high ratio financing), mortgage insurance is required by Canadian law. This insurance protects the lender should you fail to repay the mortgage. As the borrower, you pay the one-time premium of up to 3.75% of the mortgage amount or principal. The premium rate is linked to the size of the mortgage. With a 5% deposit and $100,000 mortgage, the premium would be $3750, but with a 10% deposit the premium would be $2500. The premium may be paid separately or added to the mortgage. If you have the cash to pay the premium, consider putting this money, and anything else you can raise, towards the deposit and reducing the premium at the same time.

Arrange two to save:
To avoid paying mortgage insurance when you need a lot of financing, arrange or take over a conventional first mortgage, that is, a mortgage for less than 75% of the appraised value, and arrange a second mortgage for the balance. How does the cost of the conventional mortgage plus a second mortgage compare with the cost of one large mortgage plus the mortgage insurance premium? Examine interest rates, terms, prepayment privileges, legal costs, and payment convenience to be sure two mortgages, instead of one, saves you money.

Built-in opportunities:
Set yourself up to win financially. Open mortgages with prepayment privileges allow you to pay off your mortgage debt more quickly and save on interest. This is especially important if you sell before renewal since it may cost thousands in penalties to pay off your mortgage early.

More Canadian News:

The 5% Down Payment Solution

Don't Overimprove Your Greatest Tax-free Investment

B.C. Legion behind "Build it For Ourselves" Housing

Technology Reinvents Canada's Real Estate Boards

Published: July 20, 1999

Use of this article without permission is a violation of federal copyright laws.

Futurist and Strategist PJ Wade is "The Catalyst" -- intent on "Challenging The Best Become Even Better." PJ earned this title by translating the dynamic impact of Boomers and their multi-generation families into relevant insights that start people thinking and taking action—in business and in life.

Author of 7 books and more than 1600 published articles, PJ encourages individuals to become their own futurist. PJ writes and speaks about the insight, knowledge and solid decision-making skills that professionals and their clients need to live and work in this vortex of change. For instance, since PJ knows that home is headquarters for the new decades-long "unretirement," she wrote the popular book "Reverse Mortgages: Best Friend, Worst Enemy... Your Choice! (CatapultPublishing.com), which is filled with suggestions and insight on protecting and using home equity. Her new business book, "What's Your Point?," which identifies 7 common mistakes professionals unknowingly repeat to their detriment, will be published in 2009.

As The Catalyst, PJ provides strategic communication, client appreciation and advanced education services to the financial, tourism, lifestyle and service sectors -- and the clients they serve. A frequently-quoted financial and business commentator, PJ is a thought-provoking strategic speaker who offers practical, real-life suggestions on leaving "the box" behind and embracing Forward Thinking -- a talent she regularly demonstrates in this column. For more on blogs, books and topics, visit TheCatalyst.com.

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