Whether you’re buying a home or purchasing a property for investment, it’s important to know about mortgage interest. How much you know and understand this concept greatly affects your payment capacity and financial viability.
Your mortgage interest doesn’t have to be fixed and here’s why
First-time home buyers might think that they have no viable mortgage options and they’ll only have to accept whatever is presented to them by their lender. What they’re not aware of is that they’re missing out on the opportunity to save on mortgage interest payments.
Here are several factors that may affect mortgage payments. By knowing and applying these different techniques, you’ll definitely be able to reduce your interest rates.
What comprises mortgage payments?
There are several components that form part of mortgage payments, each playing a specific role:
- Principal or amount borrowed – commonly known as the principal of the loan, this is the total amount you intend to borrow, less any interest;
- Prime interest rate – this is important when a borrower selects a variable rate of interest on their mortgage. This rate is affected by the prime rate set by the Bank of Canada.
- Mortgage interest rate – in order to offset the risk taken on by a bank or lender in case a borrower defaults on a loan, this is the rate applied to the amount of the loan.
- Outstanding loan amount – the total loan amount that a borrower must pay, which gradually decreases as periodic payments are made.
- Loan term – pertains to the period of time opted by the borrower to pay off the total loan amount. A shorter loan term equates to higher monthly payout, but less interest is incurred; the inverse is applied for longer-term loans.
Learn how to compute for your mortgage interest
A common complexity concerning mortgage interest is the difference between compounding and the manner of computing for it. While Canadian mortgages are mostly compounded semi-annually, interest payments are calculated and paid on a monthly basis. A monthly rate is typically used by your bank or lender, based on an annual rate that cannot exceed the industry acceptable standard of 6%.
Choosing to Pay the Principal and Interest vs. Paying Interest-Only
One common arrangement for mortgage payments is to pay both the principal amount plus the interest. This is ideal for homeowners who want to own their home by paying their mortgage in full.
Paying the interest on the loan is ideal for property investors who rent out the property they purchase on that loan. Paying for the interest alone means that the borrower has significantly lower monthly dues while earning more through monthly rent payments from their renters, making this a form of passive income for them.
Fixed vs. Variable Rate
A fixed interest rate is a locked-in amount for a specific period of time and is not impacted by any market change. After the fixed-rate term has lapsed, usually within 3 or 5 years, the borrower can opt for a new fixed-interest rate or try a variable interest rate arrangement.
Many factors affect the variable-interest rate. Market swings greatly influence interest rates, as well as market bubbles. If you’re a risky borrower, who’s willing to monitor indicators and factors, then variable interest rate is a better option for you.
Want to save on interest rates? Try these tips!
Opt for extra payments
This is applicable if you have a variable interest rate. If you earn extra income and you’d like to apply that on your loan, this will reduce your outstanding loan amount.
Avail of a shorter term
The shorter payment term you choose, the less interest you need to pay.
Schedule payments more frequently
Having more payments allow you to earn extra payments when compounded in a year. This can be accomplished by setting up an auto-charge or auto-debit loan payment arrangement in your account.
Shop for the best rates
It is also important to canvass for various lenders, to see who offers the best, most practical and most ideal interest rates, depending on your needs. Do a comparative search so you can enjoy the benefits based on the arrangement you prefer. A mortgage broker can help you shop, compare and select the best mortgage for your needs.
Tools and Calculators: Benchmarking mortgage rates across Canada
There are several tools available online to help mortgage availers and loan borrowers sift through all the terms, rates and figures that may at times, become confusing or overwhelming.
This mortgage calculator helps you generate an amortization schedule for your current mortgage. At a glance, you can already learn how much interest you will pay on top of your principal balances. This tool will also show you how much interest you can save by increasing your mortgage payment. This can also help you analyze if you need to refinance your mortgage in case of unforeseen changes in personal circumstances.
Breathe easier by getting the best mortgage deal
One of the most comforting feelings is knowing that all your ducks are in a row in terms of your mortgage. To have the assurance and peace of mind that you made the right choices, get expert advice from a mortgage broker. Visit our site to know more about how we can help your mortgage decisions in the process of purchasing your ideal property.