Ask your Broker or your banker the following Question;
How have you structured your own mortgage and why?
Aside from discovering that an overwhelming number of mortgage professionals have their own residence set up in either short term fixed (1yr or 2yr) or a variable rate mortgage (a previous topic) you may gain an interesting perspective on creating Options for unexpected events. After all your Broker has likely helped hundreds, or even thousands of clients over the years and will have based their own decisions on much of that experience.
1329 completed transactions later we have certainly seen some patterns emerge, and have tied to apply the lessons learned to our own personal financing whenever possible.
A Brokers role with clients is to take a longer term view and create options, options to help protect clients from events which may never occur, options for circumstances few clients would even think of. Few among us ever expects a job loss, health issues, business challenges, lawsuits, etc.
Taking a few extra minutes at the start can save you tens of thousands mid-way along.
The following ‘zero-cost insurance plan’ creates a safety net via strategic use of pre-payment privileges. This goes well beyond the simplistic ‘skip-a-payment’ policy offered with many lenders.
The target audience for this plan is typically in their 40’s or older and has less ~15 years left on their mortgage. They are fiscally responsible people, as are the majority of Canadians.
The first step is choosing a lender with an aggressive match-a-payment/miss-a-payment program, I know of only one that ticks all the other important ‘options’ boxes as well (i.e. 20% open prepayment privileges).
The heart of the plan;
On paper, we take a ~15-year amortization back out to 30 years, on paper only. Not in reality. We then implement the match-a-payment option, this doubling of the baseline payment will reduce the effective amortization to as little as 11 years and 6 months.
For each doubled payment (bi-weekly ideally) there is a banked ‘missed payment’ option.
With an extra few minutes of forethought and set-up time up front we create an option to allow a client to potentially skip up to 30 payments in a row in a single 5yr term.
A touch more useful than being able to miss a single payment should the need arise.
Of course none of us plans to miss a payment at all. Again this is a hedge, something that costs nothing and need never be acted upon.
This plan effectively acts a bit like an insurance policy (something that you should also have in place, as this strategy not a replacement for quality insurance coverage) costing nothing to have in place. Other than a few minutes foresight and planning.
Not only is there the option to miss payments, just as importantly there is the less aggressive option of cutting the payment in half by reverting back to the original contracted 30 year amortization. An excellent option should you decide to rent the property out, perhaps after buying a new home. Although that is yet another conversation with additional dynamics.
Key Point: Mortgage payment and amortization have a symbiotic relationship, as you increase one, the other decreases, and vice versa.
Key Point: A lender will not allow you to stretch the amortization past the original contracted length. Not without triggering penalties and legal fees. It is a one way street – so make sure you are on the correct side of it.
With this plan you (the client) are in the driver’s seat. Rather than being locked into a higher payment, you have effectively created a two- step buffer should anything in life change radically.
Via a simple e-mail or phone call you can:
- Reduce the monthly payment by 50 per cent, simply by reverting back to the original amortization.
- Reduce the payment to zero for an equal length of time for which they have been making double payments (within the term of the mortgage only, as the miss-a-payment option resets to zero at the start of each new mortgage term).
This all about creating options for the unpredictable paths our lives follow. This is a tool, one which may never be used, but is comforting to have handy.
As a happy personal anecdote, the fact that my wife and I had been enacting this strategy for 2 years gave us significant confidence when we wrote an offer on another property without having our current residence listed for sale, let alone sold.
We knew that if we needed to we could turn off the payment on the old house for up to 2 full years reducing the carrying costs to nil. This was a huge confidence booster regarding the ‘what if we get stuck with two properties’ topic.
Ultimately our former home sold within a few months (back in 2012 before it took only a few minutes to sell a home). Having this please in place gave us the confidence and comfort to make a move on a property and in a market that we might otherwise not have.
This is part of my own approach to being more of an A-Z solutions oriented Broker than simply just A-to-B. You are concerned with an approval and a rate, I am concerned with the dozens of other things that I see life throwing my clients ways.
Look past the short term nature of the initial transaction, past the perceived basic needs, and have some deeper conversations with your Broker. Ask them to tell you their own story.