Eight out of Ten Canadians make a trip to the doctor at least once a year to help ensure they remain physically healthy. But how many people check their financial health with an annual mortgage review? FAR less!
A career change, birth of a child, retirement, inheritance, a lot can change in a year, let alone over the course of the standard five-year mortgage many Canadians elect to go with. All can have a significant impact on the type of mortgage that fits just right.
People don’t like to face up to it but many financial experts believe an annual financial check-up is a very smart thing to do. Managing your financial health is just as important as managing your diet and exercise.
What people frequently do is put it off until they receive a renewal letter, and even then they will most likely send the contract back without even considering if it is meeting their current needs. They don’t see any point in changing their lender or terms, largely in my opinion, because they are not made aware of their options and educated on the thousands of different products they have access to. They should put more thought into a renewal, because their situation isn’t necessarily the same as it was when they signed the initial contract.
Canadians have a tendency to become complacent about their mortgage payments when they could be saving a lot of money. By annually reviewing their current and expected future risk profile, net income and current rates, home owners would be doing themselves a huge favour.
Looking at a simple example of a client with a variable rate who was single at the time he signed his original contract. Now he is married, with a child on the way, and his wife plans on staying at home with the child for the first 5 years, until the child is ready to begin school. With each life change the more adverse the homeowner has become to risk, the variable mortgage may no longer be right for him.
Rates are a pretty obvious thing to pay attention to. If they’re going up, make sure you can make the higher monthly payment that may come at renewal time, or lock into a fixed rate if you’re on a variable. If rates are dropping below your existing rate, you might look at refinancing or renewing early.
Most people have made a commitment of 25-35 years to pay off their mortgage and therefore it makes sense to have a longer term view of what interest rates will look like over that period. You should be comfortable with the horizon and also comfortable with making payments in a potentially higher rate environment.
Several lenders allow an annual lump sum payment that goes to the principal of the mortgage, and also a certain percent increase in monthly payments. An extra $100 a month towards your payment could save you bundles in interest and trim your amortization, enabling you to pay your mortgage off faster
Some people are apprehensive to maximize their mortgage payment in fear of a rainy day. If the money is put into a tax-free savings account for instance, or a lower-risk liquid investment, it would be more accessible if/when needed.
They are not aware that many financial institutions have a re-advance clause that allows you to retrieve some of the money spent accelerating mortgage payments. Granted it may become more difficult to get those funds back out if there is a dramatic downward change in housing values, and if you have not built up enough equity, but this is where understanding your entire financial picture can help.
Even something simple such as home renovations could affect the type of mortgage desired. Topping up or refinancing an existing mortgage can pay for renovations, provided you are comfortable with a blended interest rate. If you are buying a new home, you may be able to port your current mortgage, which would help offset penalties for breaking the contract. Or maybe you just want to consolidate higher-interest unsecured debt into your mortgage. Rolling that into your mortgage can significantly save on interest costs and that will help you get out of debt sooner, which is the ultimate goal, in my opinion anyways.
A mortgage can also help you become more tax efficient if you are thinking of investing in a business, buying a rental property or putting some money into mutual funds or the stock market, because the interest paid on money borrowed on a principal property can be written off against revenue from those investments.
Perhaps the most compelling reason for making changes to your mortgage mid-stream is that it is a lot easier to do something before your situation changes. Making changes to your mortgage before you go into a new venture or before you change jobs or retire would allow you to qualify much easily rather than waiting for your mortgage to come up for renewal.
More and more people are concerning themselves with living long healthy lives, visiting the doctor regularly, eating right, monitoring their cholesterol and calories. Canadians are living longer, but what about their financial health? The longer we live, the more important it is to ensure that we have a secure financial future. When was the last time you reviewed your mortgage?
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