Lowering Mortgage Interest
Homeowners will always find ways to get the best terms and deals in their mortgage application. Obviously, you will seek the best offer in terms of the most affordable rates that can be offered by your lender. But are you aware that you can still sweeten the deal by exploring the possibility of a bi-weekly payment arrangement to further lower the interest rate? It is actually a straightforward way of significantly reducing the total interest that you must pay for your mortgage.
A biweekly mortgage plan is a mortgage loan that provides for payments every two weeks instead of the usual monthly payment schedule. This is a payment mode that results to faster payoff of the loan principal and interest. Through this payment setup, a borrower is making 26 biweekly payments which is equivalent to 13 monthly payments in a year. This extra payment that the borrower makes results to significant savings in terms of the total interest paid for the mortgage loan.
You can significantly shorten the repayment period by a number of years and generate savings in interest. The amount that you can save will depend on the loan amount and the applied interest rate. However, you must understand that if you are not planning to stay in you home longer than 5 or 6 years, this payment mode will not have much impact.
Another reason why you have to consider biweekly mortgage is the convenience that you enjoy paying the same amount as that of loans paid monthly but divided in two smaller amounts paid every two weeks. But before you finalize your biweekly payment arrangement for your mortgage, you have to make sure that you can afford to pay the additional amount that is required each year for the entire repayment period.
The biweekly mortgage is actually a budget tool which homeowners can use to pace their payment mode while maximizing the potential savings that can be earned in the form of reduced interest payments. Mortgage companies normally charge a fee when borrowers opt for the bi-weekly mortgage. There are also companies that charge a set-up fee when traditional mortgage loans are converted to bi-weekly mortgage.
As an example, let us assume that you took out a $150,000 mortgage that will be amortized for 30 years at a fixed interest rate of 6% per annum. If you are going to adopt a monthly payment mode, your monthly amortization will be equivalent to $899. That total amount that you are going to pay for 30 years will be $323,968. The payment breakdown will be $150,000 return of principal and $173,968 interest payment.
On the other hand, if you are going to go for a bi-weekly mortgage payment, then your total interest payment will be reduced to $136,671. This means that you are save a total of 37,296 in interest payments.
All in all, biweekly mortgage is a practical payment for most homeowners. This is an ideal payment option especially for those fixed income earners who receive their income every two weeks. This allows you to spread out your mortgage obligation on the basis of the fixed schedule of release of your earnings. This makes it a lot easier for you to allocate the right amount of your income to pay your biweekly mortgage payment obligations. For some borrowers, this is a better option than paying a larger amount in one single go at the end of each month.
Before you make a go for an accelerated payment mode, it is important that you clarify with your lender all the incidental fees and charges for setting up a biweekly mortgage. Lending companies normally charge upfront and pre-payment fee. It is essential that you work the figures so that you will be able to determine the amount that you actually save.
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Mortgage Interest FAQ:
Question: Main house in Canada, is the mortgage interest deductible?
I work in US, but my family is in Canada, and we bought a house in Canada (no house in US). Wonder whether the mortgage interest paid is tax deductible.
Answer: Yes it is. However, you should talk to a professional as there could be a requirement for you to withhold 30% of the payment and then the bank would have to claim this back from the government. As no bank would want to do this, they would just increase your payment by enough to cover the withholding, which you would not want. So, talk to an expert first.
Question: Does interest rate affects mortgage in Canada?
My sister lives in France and she says their mortgage is locked in at the price of the time they buy the property. Is it like this in Canada?
Answer: You can have locked in mortgages in Canada and you can have flex able mortgages that have fluctuating interest rates. You can also have mortgages that fluctuate and when you like you can lock the rate and change the mortgage to a fixed rate.
Question: Mortgaging to start a business / Tax deductible interest in Canada?
I’ve got a business start up question, I’ve not been in Canada too long and I’m finding the Tax laws here a little daunting. If I mortgage my home to pay for my business start up, does the interest on that mortgage become Tax deductible? I’m not sure how it works in Canada, it might not be as straight forward as that, in fact I’m sure it’s not.
Answer: There is also another option. Some banks will give you a business loan “with a personal guarantee” So you can get your business loan with all of the taxation benefits of the loan, while you put your personal home up as collateral on the loan.
The more important thing this type of loan does is creates a separate paper trail for tax and business purposes. For example interest paid on the loan would be directly attributable to the business, therefore if you ever got audited by the CRA its much less likely that interest could be attributed to your person.
Question: Can I write off my mortgage interest payments if I’m renting out my basement?
I live in Canada and renting the basement in my principle residence. Would I be able to write off the total amount I paid for the year or only a portion?
Answer: CRA (Canada Revenue Agency) allows a percentage of all rental expenses equivalent to the percentage of the space that you are renting out in your home. This can be based on a “square” metre or food base of the total area. Expenses would include your mortgage interest , property tax, utilities, repairs, insurance, etc. If your basement area is equivalent to a third of your home you can claim a third of your expenses.
Question: In Canada, is a mortgage for land different than a mortgage for a house?
I am interested in purchasing some land that I will use for recreational purposes. It isn’t farm land and I won’t be building a home on it. I have the ability to put up to 75% down in cash, but I would rather only put 25% down. Can a traditional mortgage be used to purchase land? Are there any differences? I imagine land must be able to be financed somehow.
Answer: In Canada, raw land is usually tough to get a mortgage on through a normal bank. Banks will want 50% down or in some cases they don’t want to touch it unless you are going to build on it eventually.
Credit unions are more open to land but again, they will want 25% down at least.
Another way to get it done easier is if you have lots of equity in your house, refinance it to take the equity out and use that liquid cash to pay for the raw land. You will as well be able to get a lower rate because its a more tangible asset than just raw land.
Question: About ING Direct Canada mortgage rates. Are the posted rates negotiable?
I talked to their call centre rep and he said that all the rates on the website are 100% NOT negotiable.
Answer: The rates are usually not negotiable.
Question: Should I lock in my variable rate mortgage?
I live in Canada and right now the interest rate on my variable rate mortgage is very low. I don’t really think that interest rates will go any lower. I have 4 years left on my current mortgage. Should I lock in now?
Answer: There is no way to give a true answer without knowing all of the details of your transaction. It sounds like you want to refinance. If you only have 4 years remaining, then most of your payment right now is NOT interest. So, refinancing may hurt you more than help. I’d run it by a financial consultant (not from your bank but a different one, possibly independent) for the final word.
Question: How much are the interest rates in Canada expected to rise over the next few years?
I am locked into a 5 year mortgage at a rate of 4.49%. In looking around, I have a mortgage broker who can offer me prime – .1 % over a 5 year term–which would be 2.15%. My question is, if I were to pursue this avenue, are the interest rates projected to rise above 5% in the next 5 yrs or so? Additionally, how much longer will prime remain at 2.25%? It will cost approx $2000 to break the current mortgage–is it worth it?
Answer: Read all the fine print with mortgage brokers as they have many hidden fees and costs. Have you already forgot how the mortgage crisis started in the US?
As far as costs go every 1% less on interest rates can save you around $100 a month on payments (for a $200,000 mortgage). The rates are predicted to remain low until around 2012 now. So if you lock in that cheap right now you could come into a renewal at some high rates! I would talk with your financial advisor to see if it makes financial sense for you.