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Life doesn't always go as expected. We change our plans, or our plans are changed for us.
Why then, do we plan our finances like our future is set in stone; like nothing will change in the next 5 to 10 years?
One prime example of this is how we choose to pay for our house.
Tip of the Week
Plan for Change. Re-think your 5-year fixed mortgage.
If you're like the majority (66%) of Canadian Mortgage Holders, you have a 5-year fixed mortgage contract. And it makes sense if you're strictly thinking about your monthly mortgage payment. The 5-year fixed mortgage generally has the lowest interest rate, and thus will likely be your cheapest option if you stick to the contract...
But sometimes we change our plans.
Sometimes we decide to do a kitchen renovation or an addition on the house.
Sometimes we decide we need a bigger place.
Sometimes we decide to take a better job in another city.
Or sometimes plans change for us.
Sometimes we need to fix our roof.
Sometimes we get laid off and things get financially tight.
Sometimes we get ill and can not work at all.
The changes above - and many reasons not mentioned - could easily cause you to break your mortgage contract. In fact, over 70% of fixed 5-year contracts are broken during their term. That's an enormous amount of broken contracts.
But why is this a problem? Because it costs money to break a mortgage contract.
As of today - at one of the major Canadian banks - your estimated penalty for breaking a 5-year fixed contract into year 4 is $10,188. Other major banks are similar.
If it's you that gets this penalty, it will easily eliminate the savings you had gained with your lower monthly payment (by choosing a 5-year term over other options), plus it will cost you thousands on top of that; leaving you with more owing on your house and a longer payment time than if you had just chosen a shorter term, or a more flexible mortgage option in the first place.
Now, you may know what your next 5 years will look like. If over that time you'll be sticking with the same jobs, same house, same financial situation, and you have no extra expenses, no plans to use your equity, and no extra money coming in that could help pay off your house faster - well, then the 5 year may be (not guaranteed) your best option.
But if you are not sure what the next 5 years holds for you and your household...
Maybe there's a possibility of a house renovation in the next 5 years, and you would probably use the equity in your house to fund it.
Maybe there's a possibility you might need more space within the next 5 years.
Maybe you're unhappy with your job, and you might change in the next 5 years. (How would the change in income - positive or negative - impact your desire for a payment amount change?)
It doesn't matter what it is; if there is change, it may impact your mortgage contract.
If it's possible you could be like the 70% and break your contract, it's probably worth it to bet on change happening, and save yourself some money!
An Introduction to Manulife One
Free Online Seminar
Tonight, Oct 29. 7 PM
Learn how you can take control of your mortgage, pay off your house faster, and save thousands of dollars while doing it using this Mortgage Alternative.