Choose biweekly payments. Ask for biweekly payments rather than monthly payments. With more frequent payments, you’ll save thousands in interest. Take, for example, a $100,000 mortgage with a 25-year amortization and a seven per cent interest rate. Making biweekly payments, you'll pay $188,596 in total. In contrast, when you make monthly payments, you'll pay $212,038. The biweekly option saves you $23,442. Alternately, consider shortening your amortization to 20 or 15 years. Yes, your payments will be larger, but the good news is you'll save thousands in interest.
Make a lump sum payment. When you negotiate your mortgage with your bank, make sure lump sum payments will be applied to the principal, says Biscott, because they aren't in all cases. Then, when possible, use a tax refund or a work bonus to make a lump sum payment. Check your mortgage documents to find out how often and how much you're allowed to pay down.
Renegotiate your mortgage at renewal time. When your mortgage comes up for renewal, don't accept the first rate you’re offered from the bank. Check around and get quotes from other banks and lenders, then renegotiate with your bank.
5 bad money habits to kick:
• Spending without a budget. Without a budget, you don't know how much to set aside to cover your fixed costs, so you may overspend and find yourself in a pinch.
• Cash advances on your credit card. Unlike making a purchase on your credit card, when you take out a cash advance, you start paying interest right away.
• Payday loans. Payday loan services use your paycheque as collateral to allow you to borrow money for short periods (two weeks) at astronomical interest rates –between 300 and 900 per cent (or more), according to advocacy group ACORN Canada (Association of Community Organizations for Reform Now). This traps most customers into a cycle of debt they can't pay off.
• Getting an additional credit card when your first is at the limit. If you've maxed out your credit card and can't pay it off, call a credit counsellor such as CreditCounsellingCanada.ca for help rather than get yourself deeper in debt with another card.
• Treating your mortgage as a pot of money. Sometimes it makes sense to refinance your mortgage if it's a cheaper way to borrow money than a line of credit. However, Lynn Biscott, president of Fernwood Consulting Group Inc., a financial education and communications company based in Toronto, warns against frequently taking out cash. You can easily rack up more debt than you can handle and you will delay getting your mortgage paid off.
This story was originally titled "Get a Fresh Start on Your Finances" in the February 2009 issue. Subscribe to Canadian Living today and never miss an issue!
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