Buying a home is seen as a rite of passage for many but it comes with a lot of commitments. There are maintenance expenses, taxes, and mortgage payments to think about. The mortgage associated with owning a home is often the biggest expense homeowners have. For many, consistently meeting up with the outlays can seem overwhelming. The good news is that mortgage payments don’t have to be written in stone. This article focuses on practical ways to lower your mortgage payments and make them more manageable.
Factors affecting mortgage rates
One of the major factors affecting monthly mortgage payments is the current mortgage rate. The higher the mortgage rate (interest rate), the more homeowners pay every month. Part of this amount is the principal and part of it is the interest associated with the mortgage.
Currently, the mortgage rates are quite low due to the Bank of Canada (BoC) benchmark rate and the government bonds yields that are smaller than historical benchmarks. This means that we’re in a unique position to capture this value using a few methods.
If you’ve not bought your property but want to understand what kind of mortgage payments to expect, use this free mortgage rate tool. In the end, mortgage payments mainly depend on the mortgage rate you are getting from your financial institution. If you’ve already bought your property and have been making payments on it for a while, there’s another method available. Refinance the remainder of your mortgage back to the original term length to reduce payments.
For example, a homeowner with a 30-year mortgage has been paying for 10 years. After financial troubles, they refinance the mortgage and spread it out over 30 years again. They’ve effectively reduced their monthly mortgage payments. This method comes with a warning. When refinancing to a longer-term, you’ll have additional interest charges so go this route only if you’ve exhausted other options.
Avoid mortgage insurance
There are many people who aren’t able to pay up to 20% as a down payment when purchasing a property. Instead of denying the application, lenders make it mandatory to pay for mortgage insurance. This can add up to tens or hundreds of thousands of dollars over the course of your mortgage or roughly 2.8 -4% of the entire mortgage in Canada.
This program is beneficial to those who don’t have enough money for a sizeable down payment but comes with drawbacks. A straightforward way to reduce your monthly payments is to make a larger down payment. If you can save a 20% or more of the price of the property, you won’t need mortgage insurance.
Refinance at a lower rate
The mortgage market is volatile and the rate being paid today depends on many factors. Some of them were touched on at the beginning of this article. It’s important to know that, over time, the prevailing rates may be much better than the one you initially signed up for.
If this is the case, it may be a good idea to refinance your home and lock in the current mortgage rates. This method is only effective if there’s a large disparity between the rates you’re paying and what lenders are offering for new mortgages. That’s because you need considerable equity in your property and good credit history. You’ll also have to pay a penalty if you are canceling your mortgage earlier than its term. If you do the math and realize you’ll be in a similar position even after the refinancing then it’s best to avoid it.
Mortgage payments stay with you, in many cases, for decades. If you’ve purchased a property and realize the payments are causing you undue stress, it may be time to work on reducing your monthly bill. This article has looked at three effective ways to reduce your mortgage payments without affecting your property. Each one has pros and cons so it’s important to consider how it will affect you over the long term. If nothing here suits your particular needs then your best option may be to downsize your property.