The importance of buying a home goes far beyond finding a place that feels like home. This is likely the largest undiversified investment you will make. Especially in the Vancouver area, which according to Demographia is considered the second least affordable housing market, being a successful homeowner requires a dispassionate approach to buying a property.
That’s all fine in theory, but when you’re actually buying a home, cruising around town with your Real Estate agent checking out listings is way more interesting than comparing interest rates and mortgage penalties.
This article will give you ten practical tips to save money on your Langley mortgage, so you can get back to comparing Real Estate listings.
1. On average, variable mortgages cost you less
Most Canadians stick with a 5-year fixed mortgage, usually because they like the financial security of knowing what payments to expect. Is it the best option? Maybe, but it depends entirely on your situation. Aside from a brief period in the 80’s, you would have paid less in interest every year by sticking with a variable rate mortgage. Sure, you don’t get the security of knowing exactly what your payments will be, but that security costs money. Make sure it’s worth it. So, why would anybody get a fixed mortgage? Well…
2. Borrow more with a 5-year fixed mortgage
Mortgage lending guidelines are getting tighter. Right now if you applied for a 5-year variable mortgage at 2.50%, you’d need to qualify for the mortgage at 4.79%. If you applied for a 5-year fixed mortgage at 2.99%, you’d need to qualify at 2.99 %. That means you can afford a lot more with a fixed mortgage. But that’s not always a good thing.
3. Finance less than you can afford
Most people buy the biggest house the bank will approve, but they’re going to be in serious trouble if interest rates go up, or they’re hit with a (bad) financial surprise. Find out how much you qualify for, and then buy something smaller. In twenty years, you’ll be glad you did.
4. Avoid pre-payment penalties
Nothing kills equity quite like a brutal mortgage penalty. I’ve had clients looking to consolidate their credit card debt, only to be charged $10,000 by the bank because their terms didn’t allow for refinancing mid-term. Penalties on variable mortgages are pretty reasonable and quite easy to calculate, so if you see a better mortgage deal come along, or you simply want to sell your home, you’ll find yourself in a better position. For fixed rate mortgages, you need to watch something called the “posted rate”. It’s how many banks trick you into paying more for a penalty, using the Interest Rate Differential calculation.
5. Increase your payment amount and frequency
Compounding interest is incredibly powerful, but it’s a double-edged sword (I’m looking at you, credit cards). I’d suggest buying a smaller home than you can afford, amortize it over 25 or 30 years, but make payments as though you’re amortizing over 10 or 15 years. You can decrease the payments later if it’s too much to handle, but every extra dollar goes directly to the principal. If you’re paid on a weekly or bi-weekly basis, increase your mortgage payment frequency to weekly or bi-weekly. The effects of compounding interest will be leaning in your favor, and the total interest paid will go down substantially.
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6. Buy in the suburbs
Vancouver is a fun city, but it’s ridiculously expensive. You can find bigger homes at a more appealing price if you look outside the downtown core. With Translink finally starting to offer more rapid transit options, such as the rapid bus in Langley or the new Sky Train line being built in Coquitlam, the commute downtown is reasonably short. You’ll save on car insurance and gas, all of which could be applied to your mortgage!
7. Shop your mortgage around
Just like buying a car, you need to comparison shop. Maybe even bring your knowledgeable friend along for the ride. Proper negotiating doesn’t need to take a long time, but it can save you a fortune in interest or penalties. Like any negotiation, be ready to walk away from the table. Know what matters to you and what doesn’t. Put yourself in control of your mortgage – nobody can care about your finances as much as you.
8. Negotiate your renewal
Don’t stop shopping just because the deal has closed. Lenders have been known to inflate your renewal rate because most won’t bother demanding a better deal. Renewal letters are typically sent out about three to five weeks before your term expires, which isn’t much time. Start shopping around a few months before your term expires to make sure you’re really getting a good deal on your mortgage renewal.
9. Don’t use a big bank
Okay this isn’t a strict rule; I’ve seen some great mortgages at big banks. But so many people simply call up one of the local banks, and accept whatever terms they offer, which is a fantastic way to overpay on your mortgage, if that’s your goal. Simply put, you don’t have much leverage walking into a bank. You need to really check out your options, compare offers and read the fine print. That’s where you find the real cost of anything.
10. Do use a mortgage broker
What’s the quickest way to shop the mortgage market? Use a mortgage broker, of course. Brokers deal with a number of different lenders from all over the country, but work for you, so you don’t have to spend a couple of days running from bank to bank.