Seven things you need to know about mortgages

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August 9, 2017/Punch

There are different facts on mortgage. These are seven things you need to know about mortgage, according to

  • How much of your payments goes towards interest: Most mortgage payments are what they call blended payments, which combine repayments of the principal as well as the interest at once. When you start paying off your mortgage, a significant part of your payments are going towards the interest, not the principal. Over time, however, the principal of your loan decreases, which means that the amount you will owe in interest decreases as well. As such, the portion of your payment that goes towards the interest will decrease over time, and the amount that goes towards the principal increases over time. This is why additional lump sum payments make such a big difference when it comes to your mortgage; they go directly towards your principal, whereas your usual mortgage payments do not.
  • Your current lender won’t always give you the best deal at renewal: Most homeowners renew their mortgage with the same lender that holds their current mortgage. No problem there, except that more than half of homeowners renewed their mortgages without negotiating different terms than what was presented to them in their renewal statement, according to a 2015 mortgage consumer survey. Lenders are betting on the fact that you won’t want to switch lenders, and, therefore, aren’t bending over backwards to try and keep you. That means that you can probably find better rates and/or more flexible terms elsewhere.
  • Lenders want your monthly housing costs to be less than 32 per cent of your income: When your lender qualifies you for your mortgage, they use a system based on your reported and provable income as well as your debts.
  • A mortgage does not equal a guaranteed good investment: A home is a big investment, and if you have a large mortgage, most of your net worth is tied up in one place. As any good financial planner will tell you, having all of your eggs in one basket is not a good long-term investment strategy; it is the opposite of diversification. Still, everyone needs a place to live and if all goes well, you will end up with equity in your home. Although you should not assume that you will be able to sell your home and cash in whenever you want to. Housing markets are cyclical, and the ups and downs can take decades to weather. If you want to buy a home, buy it because it fits into your overall long-term financial strategy, not because you want to retire in five years and need the income from the sale of your house.
  • Missing a mortgage payment does not automatically mean foreclosure: It is pretty obvious that missing a mortgage payment isn’t a good thing. But life is full of unexpected surprises, and if you find yourself in a situation where you can’t come up with your mortgage payment for one month, don’t throw your hands in the air and wait for the bank to issue an eviction notice. Foreclosure proceedings are a lengthy process, and everyone – your lender included – wants to avoid them if at all possible. So if you know you are going to miss a mortgage payment, or if you already have, pick up the phone and call your lender. You may be able to negotiate with them and figure out a new or interim payment plan to get you back on your feet, or maybe an early refinancing in order to lower your monthly payments.
  • Mortgage insurance could protect you as well as the lender: If you have a high-ratio mortgage, which means that you have a down payment of less than 20 per cent, then you are required to get mortgage insurance, which protects your lender in the case you default on your mortgage. But the three main providers of mortgage insurance also have programmes in place that homeowners can take advantage of if they fall into trouble.
  • You can get longer terms: The fixed-rate mortgage is one of the most popular products, but it is not the only game in town. If you like having the certainty of a fixed mortgage payment, then you want to keep that certainty for as long as possible. Generally speaking, the longer the mortgage term, the higher the interest rate. But if you expect interest rates to rise in the next several years – which, rates being at a historical low, they almost certainly will – then you may be willing to pay for that certainty. Terms exist for up to 25 years.

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