IT IS WORTH all your efforts to shop around for a lower mortgage rate. If all the other costs are basically the same between two potential mortgagors but one of them offers a point lower in the interest rate, then it is worth your while to pursue the mortgagor with the lower interest rate.
A simple example of this is say, a $200 000 mortgage for a 25-year period. At a ten per cent interest rate, you will pay cash totalling just over $545 000. At a nine per cent interest rate, you will pay cash totalling about $503 000. You can save over $40 000 in cash just as a result of that one per cent point difference in the mortgage rate.
It is even useful to seek personal financial advice on this important negotiating point of the mortgage for even a half of a per cent point can make a difference. The saving must be weighed against any differential costs between the two mortgagors. Furthermore, a financial advisor can also assess the present value of the relative benefits of different mortgage offers along with your changing ability to pay over the mortgage period.
In particular, your mortgage rate may be quoted as a fixed rate for a given period of the mortgage or as a variable rate.
Typically, the variable rate mortgage starts with a lower interest rate. However, the variable rate changes according to the prevailing economic conditions. It is those changes that may expose the mortgagee to inordinate increases in the mortgage rate.
Increases in the mortgage rate are reflected in increases in the monthly mortgage payments. Such increases may place intolerable strain on one’s personal budget. So, beware and seek professional advice on the mortgage rate. The cost of an uninformed decision can far outweigh the cost of timely counsel.
It is also usual for some job seekers of banks, insurance companies and other financial institutions
to be offered reduced interest rates on personal loan and reduced residential mortgage rates as a fringe benefit. Specific assessment of this benefit is really important in making that job choice. The savings of interest on such loans can draw a significant economic distance ahead of the other job offers.
Then there are two major points about the mortgage period. One relates to the age of the mortgagee and the other relates to the savings available. The mortgage period will depend on the age and the paying capacity of the mortgagee.
Most mortgagors will not consider a mortgage period that will extend beyond the mortgagee’s 65th birthday. The typical starting period for negotiating the mortgage is 25 years but, more recently, some mortgagors are considering 30-year mortgage periods.
Where the mortgage period will extend beyond the 65th birthday of the mortgagee, the period is reduced commensurately. Thus, if you are 35 years old, you may qualify for a 30-year mortgage if other terms are acceptable to you. However, if you wait until you are 50 years old, you will not normally qualify for a mortgage which will exceed a 15-year period.
Yet, although you may qualify for a longer period mortgage, you may opt for a shorter period based on your ability to pay. That is because the shorter the mortgage period, the higher will be your monthly payment. Similarly, on the other hand, you may ask to extend your mortgage period to better match your ability to pay.
The next article will consider how adjusting the mortgage period can provide savings for you.
Louise Fairsave is a personal financial management advisor, providing practical counselon money and estate matters. Her advice is general in nature; readers should seek personal counsel about their specific circumstances.