How to cut the costs of carrying a mortgage

The Bank of Canada has already raised interest rates twice last year. And there’s speculation that as the economy heats up, we can expect further rate hikes, sooner rather than later, and lenders will pass the full cost of those hikes on to borrowers. BMO Bank of Montreal projects the key lending rate will rise to two per cent by the end of 2018.

Here are some tips to help you beat the cost of higher mortgage payments:

Go fixed

A variable rate is lower, but the spread between rates on variable and fixed mortgages has already shrunk since the Bank of Canada rate hikes. Although the rate on a fixed mortgage is higher, it offers peace of mind if you’re concerned that interest rates are rising.

If you’re renewing your mortgage, it might be wise to consider a switch to a five-year fixed rate. Borrowers with variable-rate mortgages are already feeling the impact, with more of their payments going to cover interest.

Anyone searching for a home should get a mortgage pre-approval, which guarantees the current fixed rates for up to 120 days.

Pay off your mortgage as quickly as you can

Go for the five-year fixed term and plan to pay off your mortgage sooner by making a concerted effort to make extra payments whenever you can.

Most mortgages come with annual prepayment options of between 10 and 20 per cent on the anniversary of the mortgage or throughout the year. If you’re diligent with your prepayments, you can shorten your 25-year amortization schedule by a number of years. The prepayment privileges come with a cost, but it’s often worth paying off your mortgage early.

Any time you get some extra money, such as a tax refund or bonus, kick it into your mortgage. This prepayment goes directly towards paying down the principal of your mortgage. Even minimum prepayments as little as $100 can add up pretty quickly.

Make bi-weekly payments instead of monthly. Instead of making 12 payments a year, paying your mortgage every two weeks comes to a total of 26 payments each year instead of 12. This means you make one extra monthly payment a year, allowing you to pay off your mortgage ahead of schedule.

Get outside advice

When in doubt, see an expert who knows more than you do. A mortgage agent can be of great assistance in evaluating the options that can lower your monthly payments. Financing rules and strategies can change at anytime. A mortgage broker can save you a lot of money by keeping you informed and helping you understand your options

While many bankers should be looking out for your best interest, they work for the bank, not for you. Talk to a mortgage broker for an alternative opinion. It’s their job to help you.