Simple financial help to reduce mortgage stress
A study conducted a few years back revealed that the number-one cause of stress for more than half of Canadians is financial – specifically related to mortgages and debt. While mortgage rates have dropped recently, overall household debt continues to climb, which bodes no relief from financial stress. It’s not hard to see why mortgages play a key role in this. After all, it’s the single biggest financial commitment you’ll ever make and meeting your mortgage commitments requires other financial trade-offs. Add to that a weaker economy and it’s no surprise the M-word can cause so much stress.
The approach of spring marks the start of “mortgage season” following the downtime of the winter months so this is a good time to assess your mortgage options, whether you already have a mortgage or are looking to buy for the first time. I believe with sound choices and planning, you can take back the financial reins from your mortgage and reduce some of that stress. Here are some tips that can help you do just that.
1. Make sure your mortgage fits your pocket
This is an important first step: be careful not to sign up for a mortgage that puts more pressure on your finances than you can reasonably handle. Be honest with yourself about your limits and the payment plan you can you stick to. What are you willing to compromise on? What’s most important to you? Answering these questions will help you assess your options and make needed trade-offs. For example, it may make sense to trade off your perfect location for a lower-priced home or to downsize your home to fit your budget.
2. Research best rates… but don’t stop there
You obviously want the best rate possible for your mortgage so take the time to research what’s available. A good website for comparing rates is www.ratesupermarket.ca. In looking for a great, stress-free rate, don’t forget to examine other product features that may or may not fit your financial needs. You want to ensure you pick a great product, not just a great rate. So ask lots of questions about the features of the mortgage as a whole. For those torn between a variable and fixed rate, consider a “best of both worlds” rate that combines the two, a feature available from some financial institutions. That way, you’ll hedge your bets regardless of which direction interest rates go.
3. Choose your amortization carefully
Deciding factors may include your cash flow and how stable/fixed your income is. A longer amortization results in lower mortgage payments but it also equals more interest on your mortgage over time. If you choose to extend your amortization, pay down the mortgage as quickly as possible and refinance to a shorter amortization as soon as you can.
4. Maximize your regular payments
Some financial institutions allow you to double your scheduled payments. Whenever possible, take advantage of this. Consider putting tax refunds towards your mortgage as an unscheduled extra payment. There are lots of advantages to getting your mortgage paid off as quickly as possible, not the least of which is reduced interest costs and lower financial stress over the long term.
5. Don’t overlook the option to pre-pay
Financial institutions have different rules on how much you can pre-pay without penalty and also when you can make these pre-payments. Coast Capital, for example, allows customers to pay up to 30 per cent per year of the original mortgage principal at any time. Find out the pre-payment allowed on your mortgage. Every extra dollar you can manage in pre-payments gets you mortgage-free faster, whether the funds come from an unexpected gift, a bonus from work, or a lottery win (good luck!).
6. You may be able to draw on your mortgage to meet other financial needs, but devise a repayment plan
One option is a home equity line of credit. Another option is a mortgage product that allows you to withdraw funds from your extra payments whenever needed, which means you avoid the stress of additional borrowing. If your financial needs are relatively small, or if you’re faced with a short-term cash crunch, your financial institution may also allow you to skip a payment. In short, there are various mortgage products available that provide different ways to access funds from your mortgage. If this is important to you, make sure you do some research to determine the best product for your needs.
Bottom line: Don’t let mortgage stress get you down. As always, discuss your needs and concerns with your financial institution because we are here to help.
Kathy McGarrigle is chief operating officer for Coast Capital Savings.