Mortgages - Pre-Approval
Pre-approval of a mortgage is when your lender has reviewed all your financial information and has determined the maximum amount of money you are able to borrow. Some of the advantages of pre-approval include:
- You know exactly what you can borrow and you will be able to look at those properties you are able to afford.
- You do not have to worry about rising interest rates while shopping for a home as the mortgage lender usually will guarantee the current interest rate for between 60 and 90 days.
- You are at an advantage when you do make an offer to purchase as the seller knows you are more likely to get the financing.
- You save time when you do apply for the loan as you have already assembled all of your paperwork.
Many banks and financial institutions are competing for your business so it makes sense to shop around. Most lenders will reduce their posted interest rates so do not be shy about bargaining with them. Your abillity to negotiate the rate will often depend on how much business you have with the institution. You can contact banks and lenders directly or you can work with a mortgage broker. A mortgage broker is extremely helpful as they will help you to find a lender offering the best mortgage package out there.
Once you have selected your lender, you will need to provide your financial information. Your lender will want the following:
- Personal information such as number of dependents and marital status.
- Details of employment, including a letter from your employer verifying your salary.
- Banking and investment information.
- Details of your assets - car, other property, etc.
- Information with regard to loans and other liabilities.
- Permission to do a credit check.
When your application has been completed the lender will advise you how much you are able to borrow and you can begin the search for your new home.
Accelerate Your Mortgage Freedom
For most Canadian homeowners, paying off their mortgage as quickly as possible is a top priority. Paying down extra principal in the early years by whatever means possible can shorten the life of your mortgage and dramatically lower the interest you will pay over the long term. Here are a few tips on how to make this happen.
Tip #1 - Increase your payment annually to the most you can afford.
The upside is that most lenders will allow you to reduce the payment back to the previous level if it turns out to be too great a burden or your circumstances change.
Tip #2 - Prepayments give great return on investment.
If you pay an average of 5% in mortgage interest, for each $1,000 by which you reduce your mortgage principal, you will save $50 in after tax cash every year. If you are paying taxes at a marginal rate of 40%, you have to earn $108.33 each year to pay the interest on every $1,000 of principal outstanding....a heavy burden, but also a tremendous implied benefit to reducing this balance.
Tip #3 - Utilize your RRSP-driven tax rebate as a mortgage prepayment method.
Even if you can only prepay annually, make sure tax refunds are set aside for paying down your mortgage. Many Canadians borrow (at prime) to buy an RRSP to ensure the maximum rebate. When applied to the mortgage principal, this refund is a "gift that keeps on giving". Combining the refund with the tax-free interest earned on the RRSP over the subsequent years will quickly outpace the short-term interest costs of the RRSP loan.
Tip #4 - Increase the frequency of your payments.
Make accelerated bi-weekly payments to get a "free" principal reduction equivalent to one full mortgage payment every year - painlessly.
Tip #5 - Make use of double-up privileges wherever possible.
Tell yourself that you will "skip-a-payment" whenever necessary....then only skip when you absolutely must.
Tip #6 - Round your payments up.
By adding even a nominal amount of, say, $10 per payment, the amount of interest you are saving will be unbelievable, and the extra money relatively painless to part with.
Tip #7 -Pay a lump sum whenever possible.
By decreasing the principal of the mortgage, your payments will not be allocated as much to interest, thereby accelerating the end of your mortgage.
Tip #8 - Keep payments the same when mortgage rates have fallen.
If the payment amount has not been a problem so far, then keep it the same, thereby paying down the principal faster.
Tip #9 - Raise payments in line with increased income on an after-tax basis.
If your income increases, do not keep your mortgage payments the same. Although the disposable income may be fun to spend on unnecessary luxuries in the short-term, the long-term benefits of being mortgage free faster far outweigh the short-term sacrifice.