By Gareth R. Jones
I wish to thank everyone who read my previously posted article entitled “All You Need to Know about Mortgages”. The responses have been overwhelmingly positive for which, I am very grateful for the opportunity to provide some insight. At the close of the article, I mentioned that in purchasing real estate there is a popular expression, “location, location, location” and in mortgage financing there is a different one, “amortization, amortization, amortization” and I have been asked to expand on this. Let’s take the following example:
Mr. and Mrs. New Purchaser are interested in purchasing a home for the first time and are completely unsure and intimidated by all of the mortgage options available and the decisions that must be made in order to join the majority club of home ownership. It had been determined through a suitability, questioning conversation that based on their income, down payment, expenses and future plans that a $300,000 mortgage is within their affordability and comfort zone. Much to their surprise, there are further choices to be made on how this money is repaid to the Lender. They assumed that they would just pay a set amount each month for the term of the mortgage (5 years), then renew it down the road and continue to pay based on the outstanding balance. It did not occur to them that how and when this money was repaid would determine the outstanding balance at the end of the 5 year term and would impact the principle amount on renewal.
In mortgage financing there are a multitude of options to consider, such as: amortization, term, fixed or variable rate, Mortgage Life Insurance, property tax payments, early discharge penalties, refinances, double-ups, payment frequencies, pre-payment priveleges and numerous items.
For now, I would just like to demonstrate the difference made by choosing a “payment frequency” correctly, and one that suits your needs and goals. Notice the outstanding balance at the end of these very similar scenarios:
Note: Scenario #2 paid down $10,018.35 more than Scenario #1, using the same interest rate and over the same period of time. The difference being that there were 26 bi-weekly versus 12 monthly payments.
As you can see, changing the payment frequency to bi-weekly from monthly is a very simple, rewarding option. Most people are paid bi-weekly and mortgages can usually be coordinated with your pay periods. This change also has the least noticeable impact on your cash flow.
As indicated earlier, there are many opportunities in customizing your mortgage to suit your lifestyle needs now and later. The key is to know what to ask for and whom to ask.
Gareth R. Jones A.M.P.(FSCO Licence #M08009150) is a Mortgage Agent with Home Loans Canada- (the Brokerage arm of CIBC Mortgages, Lending and Insurance). FSCO Licence #10423. Gareth can be reached at Gareth.Jones@HLCmortgages.com.
