For most Canadian homeowners, one of the best ways to achieve financial freedom is to pay off your mortgage. Yet, there’s one simple and easy strategy that can help you pay off your mortgage in a shorter time frame that many people don’t take advantage of. You can benefit from a lower mortgage rate simply by choosing a closed versus open mortgage.
Every homeowner wants to get the lowest rate mortgage possible, yet many homeowners shy away from closed mortgages and pay a higher rate for the flexibility offered by an open mortgage. The reality is that this strategy often ends up costing you more money than you save. Unless you’re in an unusual situation where you’re expecting a large influx of cash – for example, an inheritance or a legal settlement – and you plan to use it to pay off your mortgage before the term of your current loan ends, closed mortgages are usually your most cost effective choice. While they don’t offer the flexibility of making additional payments whenever you wish, most closed mortgages still allow you to pay an additional lump sum payment annually. There is usually a limit to what you can add in these annual payments, but it is typically a generous amount, such as ten or fifteen percent of the loan each year. This would normally be more than enough to handle any additional payment the average homeowner might have available. In addition, you can pay down your mortgage by any amount at the end of the loan’s term. Talk to your lender to find out what provisions their closed mortgages offer for repayment. In most cases, you’ll find the lower rate closed mortgage is your best option.
What if you already have a mortgage in place? Well, if your current mortgage loan is charging a higher rate than some of the very attractive interest rates now available, then you should look into the options for refinancing your loan. If your mortgage hasn’t completed its term, you may still find that your lender will let you renegotiate a new mortgage now, particularly if the term for the new mortgage is a long one. It’s a good way for your mortgage lender to lock in your business for a longer period of time, rather than risk losing it when renewal time comes around. Even if there’s a penalty to get out of an existing mortgage, the penalty usually reduces as you approach your renewal date. You may find that there is a relatively low cost to renew early, versus waiting until the current term concludes.
If you’re thinking of renegotiating your loan, you should bear in mind that we’ve already seen interest and mortgage rates starting to rise recently. If you decide to wait until the term of your current mortgage loan expires before renegotiating, you could risk a higher rate at renewal time, and that means paying more than you have to for many more years to come. For more creative financing strategies, contact your Coldwell Banker professional.