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Sunday, February 25th, 2024

Why we’ve locked in to a 10-year mortgage

Our new home in Scarborough is a detached, three-bedroom side-split that cost nearly $560,000.  We borrowed nearly $515,000 to buy it,  a sum  that makes me queasy.

With the help of a mortgage broker, we chose a 30-year mortgage from ING Direct, and locked-in to a 10-year term at an interest rate of 3.99 per cent. We will pay about $1,128 every two weeks.

Related: Avoid these 5 costly mortgage mistakes

As new homeowners, we want to make sure that we are not cash-strapped in case of unexpected expenses. On the other hand, we want to pay down this enormous debt as quickly as possible. That’s why we considered the down payment, amortization, mortgage term and interest rate, and pre-payment privileges very carefully.

Here are some of the things we considered:

Down payment: Our $56,000 down payment was about 10 per cent of the purchase price.  Not having a  20 per cent down payment meant that we had to purchase mortgage default insurance through the Canada Mortgage and Housing Corp. We chose to have the premiums, about $11,000, added on to the mortgage, rather than paying a lump sum upfront. We could have made a higher down payment, but we chose to some of the proceeds from the sale of our condo to pay down other debt that carries a higher interest rate.

Amortization: A 30-year amortization with payments every two weeks is comfortably affordable,  after we have paid off some other debt. A 25-year amortization would have meant paying less interest over the life of the mortgage, but it would have increased the payments by about $240 more each month.

Related: First time home buyers share their lessons

Term: We considered locking into a five-year term at 2.89 per cent. But we preferred the peace of mind knowing that our payments will not change for 10 years. If we want to break the mortgage before the end of the term, we will pay three-months interest. The mortgage is portable and assumable, meaning that if we sell our home, we can take it with us, or the new buyer can take it over, if he or she is qualified.

Related: Time to lock in your mortgage, experts say

Pre-payments: Each year, we can increase our regular mortgage payments by up to 25 per cent of the original payment amount. We can also make lump sum payments of up to 25 per cent of the original mortgage amount on any regular payment date.

After 10 years we will have made $293,000 in payments, but only $110,000 will have been principal . That’s why the pre-payment options hold the key to paying off this mortgage early..

Also read:

How we paid off our house in three years

The true cost of home ownership? Ouch!

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