Most Canadians are concerned about their mortgage for long enough to get the documents signed at their bank. After this, the annual statement comes in the mail and the mortgage goes to the back burner of their lives. We make our payments on time and think little else of the largest debt most of us will ever have.
Switch over to a family who has lost an income earner due to injury, loss of job, or the death of a spouse and the picture changes drastically. Paying the mortgage becomes an enormous burden to the remainder of the family’s budget if it is getting paid at all. If you have any concerns about losing your job, having your hours reduced or otherwise seeing your income drop, then you need to think about how you would manage to keep up with your mortgage payments.
On the bright side, you do not need to be in a crisis before planning for one. Adopting the ideas presented here will insulate you from the uncertainty of the future of Canada’s economic outlook.
Mortgage Amortization as a Tool
Your mortgage amortization serves as a calculation that determines the amount of years it takes to pay back the original amount you have borrowed as well as the interest. What a surprising amount of people do not know is that it is also a powerful tool for managing income changes as well.
Chad in Barrie purchased his first home with his local bank and wanted to pay down his 200K mortgage as quickly as possible. One of the ways suggested was to reduce his amortization from 25 years to 20. This effectively increased his monthly payments by $159.25 and would pay off an extra 10K from the mortgage owing in the first 5 years.
Barrie Mortgage Broker Insight
Then Chad came and spoke to me as his Barrie mortgage broker and I took a look at his overall situation. I noticed his eagerness towards paying off the mortgage quickly however there were a couple of details that could potentially do major damage to Chad’s plan if not addressed. First of all, I addressed his employment in the construction field that although lucrative at this time in his life, was an industry that had very large swings in how busy it was. I explained to Chad that if he was to get laid off, he would have a hard time making his mortgage payments at such an aggressive payment plan. Next, I noticed that this was a conventional mortgage meaning that Chad had put 20% of the home’s value as a down payment. This meant that there were lending options where he could still choose a 35 year amortization if he desired. Now I could present him with an income management system for the good times and bad.
Mortgage Plan Achieved in Barrie
I showed Chad that by choosing a 35 year amortization, his monthly payments have dropped by $335.39 (which is $600 income before taxes). This will protect him and his family in a significant way in the event of a crisis event. Chad looked confused as if I had not understood his desire to pay off this mortgage asap. So I showed him that with the mortgage we secured him, there are penalty free prepayment privileges when his income is strong to pay down that extra 10K he was shown by his banker. This is an annual opportunity to pay down up to 20% of the original principle borrowed or in Chad’s case up to 20K per year.
Chad left my Barrie mortgage brokerage office feeling that no matter what happens with his job or even the general economy that his family was protected from things he could not control. My greatest concern for Chad and other clients in his situation is that when they take on a debt as large as a mortgage and try to pay it off aggressively they can get hurt. If there is a loss of income and an inability to pay the mortgage, the damage is hard to overcome. The average cost of foreclosure or the “power of sale” process here in Canada costs the home owner 50K on average. In every case, a little planning with your Barrie mortgage broker goes a long way.
So now it is time to take out that mortgage statement from the drawer, blow the dust off it and consider your own situation. Do you have an income management plan that incorporates your mortgage as part of that plan? If there was a dramatic loss of income tomorrow, how would you deal with it? Utilizing your amortization to your advantage is just one way you can stay in control of your financial ship when the waters get choppy.