Your house is probably the biggest investment you’ll ever make. If you’re smart about it, you’ll spend a great deal of time making the right buying decision. But what about your mortgage?
For most people, their mortgage is likely the biggest debt they’ll ever take on. Good decisions here can save you tens of thousands of dollars – or more. Shopping around does not mean stopping in at your bank branch and signing whatever deal they put on the table. That could end up costing you far more than it should.
In his book, Financial Freedom Without Sacrifice, Talbot Stevens provides tips that he says can reduce your mortgage costs by 30 to 50 per cent. That’s a lot.
Use a Mortgage broker
Start by using an independent mortgage broker to find the best deal. Saving just half a per cent on a $100,000 mortgage can save you over $35 a month, which is $2,000 over a five-year term. (I refer many clients to brokers and find that they generally can beat the bank’s posted rate by roughly one per cent.)
Throughout his book, Stevens uses rates that are higher than current prevailing rates, but his ideas are still relevant.
Read the fine print
When comparing mortgage options, Stevens advises you to look for a couple of clauses. If you get a long-term mortgage such as five years, what is the early repayment penalty if you decide to refinance or pay off your mortgage early? The penalty is generally three months’ interest or the “interest rate differential” – the interest the lender loses if you refinance at the lower rate. A penalty of three months’ interest is usually your better option, potentially saving thousands of dollars.
Ask about mortgage portability and assumability. These clauses allow you to transfer your mortgage if you buy another house, or to allow someone else to assume your existing mortgage if you sell.
Pay it weekly
“The easiest way to lower your mortgage interest cost by about a third,” Stevens writes, “is simply to pay weekly or every two weeks, instead of monthly.”
You’ll pay off your mortgage a little faster if you make payments every two weeks instead of monthly. This way you’ll pay the equivalent of 13 annual monthly payments instead of 12. This can save tens of thousands of dollars in interest and have you mortgage free years sooner.
Related article: Does paying your mortgage more frequently really faster?
“That’s a lot of money,” Stevens writes, “for one small change in your mortgage. But the beauty of it is, since you pay only a little more every cheque, you don’t even notice the difference. Paying weekly or bi-weekly is a simple, painless way to cut your mortgage interest cost by about a third.”
You can also take a shorter amortization period. If you want to pay monthly to match your income, shorten your amortization periods to whatever you can afford. This strategy enabled my wife and I to be mortgage free at age 39.
Related article: Ways to pay off your mortgage faster
The best strategy to reduce your interest costs, Stevens says, is to increase your payments each year as your income rises. This allows you to pay off your mortgage faster, with no sacrifice to your standard of living.
Most mortgages allow you to increase your payments by at least 10 per cent each year. “The only problem with this approach is it’s not automatic, like paying weekly or shortening your amortization period. If you want to pay as little interest as possible, with the least impact on your standard of living, you have to implement this strategy yourself.”
Like most financial strategies, these ideas require some discipline but they’re well worth it. Your lender probably won’t tell you about strategies that will get you out of debt faster, but these and others are covered in Talbot Stevens’ Financial Freedom Without Sacrifice.
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Discuss these ideas with your mortgage broker or financial planner to see what works best for you.