Savvy about your Mortgage?

November is Financial Literacy month, which means that there is no time like the present to brush up on your financial terms.

It may not always make for the most interesting reading, but when it comes to staying on top of your finances, knowledge is directly linked control (which is also linked to success). Last week we explored some basics around RRSPs. This time we’ll check out the other side of the balance sheet with mortgages.

The power of negotiation

When it comes to mortgages, lenders want your business. If you have credit in good standing and the property in question meets lending criteria, then you are often in the driver’s seat. There is definitely negotiation room when it comes to mortgages- and you can often spell two lenders off against each other to get the best deal- but you have to know what you are talking about.

Amortization

This is the length of the entire mortgage loan, which in most cases means 25 years. You can speed up repayment by reducing your amortization, which will increase your payments- but decrease the interest you are going to pay out in the long term (which adds up to a shocking amount).

Term

This is the duration of the interest rate that you lock into for a given period of time (usually anywhere from 6 mos. to 5 years). It is the term that determines your interest rate- which will ultimately dictate how much your mortgage payments are as well.

It is with the term and the rate that is associated with it that you’ve got the bargaining power- especially when your mortgage comes up for renewal.

Variable vs. Fixed Rate

There are differing schools of thought on whether ride out the fluctuations in interest rates, or whether you lock into the long term.

A variable rate means that you have a variable rate that is based on the prime lending rate (which is set by the Bank of Canada) + or – percentage points.  The upside is that if rates go down, you benefit. The downside is if rates go up, you are on the hook.

Given that rates have been so low for so long, it is becoming more commonplace for folks to lock into a fixed rate.

Regardless of what your rate preference is, you should always be prepared for a rise in interest rates (which will increase your payments). Many experts predict that a hike is coming sooner rather than later.