Time To Topple Mortgage Myths

Mortgage myths can confuse even experienced borrowers – don’t fall for the traps.

Source: Hannif Highclass c/o Genie Sabre Realty Inc.
Publish:MY BLOG: Toronto Real Estate: October 9, 2012

Myth 1: Lowest interest rate loans are best

Unfortunately many borrowers will judge one home loan against another simply on the interest rate, which can be a big mistake.
If they make their decision on this “headline” rate, it could cost them tens of thousands of dollars extra, Resi Mortgage broker Hannif Highclass says.   “Most borrowers don’t look at the comparison rate but they must,” Highclass says.

“Check the comparison rate. It’s a great rule of thumb that helps you understand at a glance the true cost of a loan.
“It includes all the upfront and ongoing fees that need to be paid during the course of the loan.”

Fees and charges can add several basis points to the cost of the loan. Read the mortgage contract for all the details.

Myth 2: Bad credit ratings prevent borrowing

Your credit rating can both help or hinder the type of mortgage you are offered. If you have a poor record, it does not automatically mean you won’t get a loan.

But it can mean a lender will consider you a greater risk and want to charge a higher interest rate.
Not all unpaid bills and default histories will stop you getting the best deal.

Yashna Singh of VERICO Clearview Mortgages says defaults on utility bills or phone bills can be explained and overlooked.

“But it is very important to make sure you tell your lender about your history,” Yashna says.
“Don’t let them find out when they do your credit worthiness search.”

Myth 3: Re-advanceable Mortgage. are the best way to cut your interest.

Here’s a way to do it:This is a mortgage that has 2 entities, the home equity line of credit (HELOC) and the regular mortgage. Nothing unique about this setup EXCEPT that as you pay down the mortgage, the credit limit on the HELOC increases. This is a key feature that is needed when implementing the The Smith Manoeuvre (SM).

Financial research company Canstar analyst Mitchell Watson says there are much better ways to cut your interest costs than using the The Smith Manoeuvre.

You can save interest by increasing your mortgage payment frequency. When you select an accelerated weekly or bi-weekly payment option, you are essentially making the equivalent of one additional monthly payment each year which will help pay off your mortgage faster.

“Better still, do both – use an SM (account) and weekly or fortnightly payments.”

Myth 4: Staying with the same Finance company at renewal time.

When a mortgage comes up for renewal, it means the mortgage is Open. You can pay it down or off without penalty… you can transfer it to another Lender without penalty. You can even renew the mortgage with your current Lender… BUT it also means your current Lender can change the terms of your mortgage.. they can change the prepayment privileges and the they can change the PREPAYMENT PENALTY FORMULA.

Personally, each of the big six banks gouge you with this pre-payment penalty.

Here’s another tip…..ING isn’t the only Lender with a fair prepayment penalty calculation… there are other great Lenders that are not as well known…..with rates that are the same but usually better, AND they DON’T make you sign a collateral mortgage charge….

In a perfect world, you have savings before you start buying things you don’t need. But, realistically, this never happens. People are naturally social, and most of the time socializing costs money, and no one is going to religiously check their bank account every time they want a cup of coffee. So the trick is to manage the things you don’t need, pay off your cards and still put some money away for emergencies.

This is no easy task, as having to mitigate for emergencies is a tough pill to swallow. It literally requires you to let money sit somewhere. Watching it grow introduces a huge temptation to go on spending sprees, especially if you manage to cultivate it to several months’ worth of income. However, when your car breaks down (goodbye, $1,700) or you get smacked with a speeding ticket, you will be relieved it exists.

You will notice that up until this point, I have purposefully ignored the existence of cash. That is entirely because cash is the devil, the purveyor of wanton expenditures. Cash sitting in your wallet is begging to be spent, like an itch you can’t quite reach. It is easier to control your spending when it isn’t in cash form. Don’t believe me? Think about all the times you started your day with $60 in your wallet and ended it with zero, then can’t recall where it went. That’s pretty much all the time. Keep it to a bare minimum.

Juggling your money is a never-ending game, but the benefits of doing it successfully are numerous. Eventually that system becomes second nature, like putting on pants. Not only is being debt-free a huge stress reliever, but it builds amazing credit, which will open the doors to better financial packages for mortgages and car loans.

Unless you are rich, marry rich or get lucky, the reality is that the potential for being in debt will plague you for life. This is even more so if you have foregone the benefits of a full-time job (ahem, yours truly). It will require an even tighter grip on your wanton expenditures. A system that works coupled with an iron will is the only way to avoid that maelstrom.