Mortgage Renewal 240 200It comes in the mail to thousands of Canadian’s everyday … a mortgage renewal from their bank and according to CMHC more than 60 % of renewals are signed and sent in.

Many home owners pay 1,000 of dollars too much for their mortgages because they don’t review their current needs before they renew.

Here are three things you should consider before you sign the paperwork to renew your mortgage….

Mortgage Payment

Your monthly mortgage payment and it’s impact on your cash flow is the single MOST important consideration when renewing your mortgage.

The current cost of living for an average baby boomer is much higher than most people think. Take the time and review your ACTUAL spending habits and living expenses BEFORE you commit to the new payment amount.

It may make sense to extend the amortization to allow for changes in your cash flow. Ratios like Gross Debt Service Ratio (GDSR)* and Total Debt Service Ratio (TDSR)* are only guidelines.

These ratios used by institutions to qualify potential customers but rarely have much to do with whether the payment is really a good one for you. What usually happens is if your payment it too high you will end up using your credit card or line of credit to finance your life. (If this is a mortgage to purchase rather than a renewal then it might make sense to borrow less to keep the payment within your budget)

Impact of Other Debt

Many live on credit cards for at least a couple of months of the year, purchase/lease a new vehicle every 3 years and use the line of credit for a annual vacation. Make sure when you do the math for your new mortgage payment do not to assume your credit balances will stay at zero.

Ideally you should learn to live without any personal debt and use any previous monthly credit card payments toward your mortgage to pay it off sooner. For example a 190 dollar a month credit card payment used it toward a 250,000 mortgage at 5% percent will cut your amortization by 5 years on a 25 year mortgage, and save you more than 35,000 dollars in interest.

The bottom line here is if you are in the habit of having personal debt in addition to your mortgage …  make sure to account for this in your payment calculation. If not you could find yourself with mortgage payment you cannot afford and an ever increasing credit card bill.

Interest Rate

Interest Rate is last thing to consider when dealing with a mortgage, but vital to saving money over the long term. Some times the lower rate comes with a longer term some times shorter. The more flexibility in your mortgage can also cost you additional interest charges in your mortgage.

This is why it is so important to seek out a knowledgeable mortgage broker and if necessary bring the mortgage documents to your own lawyer for review before you sign. I have seen cases on a mortgage renewal, the new contract was missing key components of the previous contract.

Nothing like finding additional fees, costs or limitations you had not expected.

 

 

Thanks to http://401kcalculator.org for the use of the picture.