6 ways to reduce your mortgage costs

It’s never a bad time for a financial health check. And since for most homeowners’ financial well-being is directly linked to your mortgage costs, re-evaluating your mortgage is key.

Before getting a mortgage, look at how much of your income goes towards your payments. When you review these costs, you should consider options that can lower your payments and reduce the amount of interest you have to pay.

Here are three ways to access lower interest rates:

1. Get and keep a high credit score

Maintaining a higher credit score makes you a more attractive debtor. This will enable you to negotiate a lower interest rate. Most financial institutions consider credit scores in the 800 to 900 range to be favourable. A long history of good credit will give you access to lower rates. Get your free credit score before meeting with an advisor.

2. Use a broker

A licensed mortgage broker can give you access to the best mortgage rate possible. A broker can access a pool of both traditional and non-traditional lenders from which they can then offer you the lowest rates possible. Although brokers are paid by the lender, they are also acting for you and are not tied to specific lenders.

3. Consider a variable-rate mortgage

The interest on a variable-rate mortgage is often lower than a fixed-rate one. This enables you to pay less interest with your monthly payment. Choosing a variable rate comes with the risk of paying a higher rate at some point. That’s because the rate will change with the prime lending rate set by your lender.

There are also ways to reduce the amount of interest you pay over the lifetime of your mortgage. Here are three strategies you can use:

4. Increase your down payment

You can put down as little as five per cent to buy a home under $500,000, but when you put down less than 20 per cent you have to get mortgage insurance. A larger down payment also decreases the monthly cost of the principal and interest of your mortgage loan, as well as the total interest over the life of the mortgage.

5. Increase payment frequency

When arranging your mortgage, ask your broker to structure it so you can make accelerated biweekly payments. If you do so, the monthly payment is divided by two and the frequency of payments increases to 26 times a year from 12 times annually. Therefore, you’re paying the equivalent of 13 monthly payments a year and accelerating your payments, you’ll increase the amount that goes towards the principal.

6. Make lump-sum payments

Ensure your mortgage allows you to make lump-sum payments. Making an annual lump-sum payment can help you pay off your mortgage years earlier and reduce your interest costs.

The bottom line

Reducing your mortgage rate and increasing how much you pay towards your principal will help you reduce your overall mortgage costs. It’ll also make your finances healthier because your monthly expenses will shrink and you’ll spend less to pay off your mortgage.

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