Save on your mortgage
THERE ARE SIGNIFICANT SAVINGS available to you through shortening your mortgage period. However, a shorter mortgage period means a higher monthly installment. Alternately, the mortgage period may be reduced by paying lump sums towards the loan balance earlier
The point has been made that although you may qualify for a longer mortgage period, you may opt for a shorter period based on your ability to pay and in order to save on your mortgage. In real life terms, a young person starting a promising career may struggle with such considerations:
“My current salary does not comfortably allow me to buy the home of my dreams, yet, in a few years’ time, I’d be able to afford these payments easily. Should I make the sacrifice? Should I tolerate the pressure now and take responsibility for a mortgage that will be a stretch?”
“I’d better speak to my fiancé about this. We plan to get married next year! Our pooled funds will ease the pressure.
Taking responsibility for a mortgage payment that is higher than is comfortable is a significant risk that must be carefully evaluated. Job loss or changes in the economy that drive up the interest rates could make the monthly mortgage payment unmanageable. Counting on the help from family members or friends is dangerous. Even marriage relationships can break down.
Alternately, it may be better to secure the home of your dreams by soliciting a longer term loan from a family member or friend using similar considerations. Such a loan may be negotiated to fit your expectations of increased earnings in the years ahead. Then, it would be important to negotiate flexibility in the timing and the amount of the loan repayment, yet giving firm assurance that the loan will be repaid.
Some would-be mortgagees, especially those starting out their professional and married lives, have been fortunate enough to secure lump sum money gifts toward their mortgage.
Then, too, your credit rating affects your ability to secure a mortgage and particularly to secure a mortgage with a high down payment. Mortgagors will frown on a potential mortgagee who has a poor credit rating, especially if that mortgagee plans to raise the downpayment through a gift from a close relative. This situation does not adequately demonstrate the candidate’s readiness to take on the responsibility of a mortgage.
The way the repayments on a mortgage usually work is that the mortgage installment is applied first to pay the accumulated loan interest and the remainder of the installment is then applied to the balance of the debt that remains unpaid
Obviously, at the beginning of the mortgage when the debt balance is high, most of the early payments are charged to interest. In fact, it is not until well
into the middle of the period of the mortgage that any significant sum is applied to reduce the principal. On the other hand, most of the capital of the mortgage is paid during the last few months of the mortgage.
This profile of interest charges and principal repayment provides diverse opportunities for making savings depending on the course of your finances during the mortgage period. The more principal balance that is repaid earlier than scheduled, the less total interest will be charged to the loan.
•Louise Fairsave is a personal financial management advisor, providing practical counsel on money and estate matters. Her advice is general in nature; readers should seek personal counsel about their specific circumstances.