Interest rates seem vitally important in a week in which the Bank of Canada raised its benchmark rate for the first time in seven years and fixed mortgage interest rates have been steadily rising. As you prepare for the possibility of borrowing costs ahead, it is important to understand rates only have a limited impact, until adding amortization and principal.
Amortization refers to the period of time over which you will gradually repay what you owe and principal is the amount you borrowed. Both get some discussion when setting up a mortgage, line of credit or a loan, but what is not always considered is "how much does my debt actually cost me?"
To protect yourself against the risk of higher rates, focus on paying down your principal and shorten your amortization. The more effective you are at reducing your total household debt load, the less vulnerable you are if borrowing costs gradually move higher in the months and years ahead.
With a mortgage, the simplest way to begin to reduce principal and amortization is to make payments on an accelerated biweekly basis, rather than monthly. It is essentially making a 13th monthly payment each year if you do this. The benefit for people just starting a mortgage is an automatic reduction by roughly two years - 23 instead of 25 - and a lower overall interest cost.
You can also take advantage of your mortgage's prepayment options by further increasing the accelerated biweekly payment and/or making lump-sum payments. Prepayment options vary greatly from lender to lender. It is important to choose a lender whose prepayment options best suit your needs.
When we focus on the interest rate alone, we often underestimate what we are really paying. It is important to ask questions about what payment options lenders offer when discussing mortgages with your mortgage professional in order to find out what is the right fit for you and your particular situation. By thinking about the overall picture and increasing your payments as you begin the mortgage process, you are effectively decreasing the impact of future rate increases.
Do you have questions about rates or mortgages? For a free, no obligation consultation to see how you can reduce your overall cost of borrowing, please contact one of our trusted professionals by phone at 204-954-7620, by email at firstname.lastname@example.org or online at One Link Mortgage today! We are here to help.