How to Shock-Proof Mortgage Payments

One of the factors that strengthen an individual’s net worth is the number of properties you own. It’s wise to pile up on assets rather than on liabilities. Not all can acquire as many assets in a one-time-payment scenario, however, and this is where mortgages come into play. While mortgages are technically considered a liability, they still allow a person to acquire property through their own financial capacity, transforming their expenses into a valuable asset in the end.

How to Shock-Proof Mortgage Payments
 

For mortgage payments, you actually pay for the principal and interest. There are two types of mortgages based on interest rates:

  • Fixed-rate mortgage asks for the same amount of principal and interest every month. The amount you pay is based on the bond market or the prime lending rate when the loan was made and approved. Fixed rate mortgages are likely to be higher than variable rate mortgages, but it offers more financial security for the payers, especially those on a strict budget since you will be making the same payments every month.
  • Variable-rate mortgage, on the other hand, requires varied amounts depending on the prime lending rate set at the time of payment. Though they tend to be riskier, it will still end up requiring a lesser amount of payment for borrowers, especially if the prime lending rates decrease from time to time. Payers need to be more financially stable to opt for a variable rate mortgage so you can easily adjust their payments if the prime lending rates go up.

While owning properties through mortgage is a good option for those who do not have the financial means to make large investments, you must still be careful when making mortgage transactions. Ending up in the middle of a foreclosure because the payments have become too high to pay for is a highly undesirable result. To protect yourself from this, here are a few tips:

How to Shock-Proof Mortgage Payments
 

1. Have a robust credit score. The credit score is based on the individual’s payment history, credit utilization, credit history, new credit accounts, and credit account mix. If you have a robust credit score, the lender will see you as someone capable of paying off large loans, which makes them more willing to lower their offered mortgage rates and payments.

2. Anticipate benchmark rates. As the nation’s central bank, the Bank of Canada is responsible for Canada’s monetary policy. It also influences how much you will have pay for your mortgage since it also sets the benchmark rate that governs each lender’s prime lending rate. The bank usually sets a benchmark rate at 0.25% above the target for the overnight rate.

In view of this, you might be glad to know that there are no Bank of Canada rate changes. This will also be good for existing variable-rate mortgage payers since their prime lending rates will stay as is. The bank sets its benchmark rate eight times a year, so learn to anticipate for this so you can prepare for your payments accordingly.

3. Get a mortgage broker. For mortgages that deal with something as critical as owning new property, it is best to consult with mortgage brokers. They are experts in studying the financial market so you won’t end up paying more than what is actually required. More importantly, mortgage brokers can help find the best mortgage that suits your situation and financial capability.

4. Self-regulation. Just because you’re capable of paying loans, it doesn’t mean you have to get one on every chance it is offered. You might be acquiring more loans than what you had originally intended and this might overwhelm you when you start paying off each of them. Slow down on your borrowing so you won’t get a bad case of payment shock when rates become too high to manage.

How to Shock-Proof Mortgage Payments