In our fast-paced, always-connected world, what could be more appealing than the chance to take an all-expenses-paid vacation? For most of us, when we hear of a deal like that, our first thought is, what’s the catch? Unfortunately, the same is true of so-called “mortgage vacations” some lenders are offering. If it sounds too good to be true, it probably is.
Get the Facts
When it comes to your mortgage, it’s crucial to understand the terms of any “special offer” and fully grasp how they could impact your finances over the life of your loan. A mortgage vacation is simply an opportunity to not make mortgage payments for several months by prepaying your mortgage in advance. Maybe you are going to be away and don’t want to deal with bills, or perhaps your first child will be born in a few months and you want to be able to focus your attention on the joys (and challenges) of new parenthood without having to worry about paying bills. Regardless of the reason, if you have enough income to pay extra each month, taking an occasional break might sound appealing, and some banks are more than willing to help.
On the surface, the way a mortgage vacation works is simple. If your payment is $1,000 and you want a three-month break, you would need to pay an additional $3,000 in advance. As a Calgary mortgage broker who has seen a number of these “amazing” offers, this is not as very good idea.
What’s Wrong With a Vacation?
Vacations are fun: great memories, photos, good times! You might even get a tan, right? With a mortgage vacation what you get is interest capitalization. This means the interest from your “missed payments”, even though you paid in advance, will be added on to the outstanding principal on your loan. It sounds a little crazy, doesn’t it? There’s more. Some banks say they will adjust your mortgage’s amortization period so it doesn’t go beyond the original period. This means your regular payments could actually increase to account for your new, higher principal.
We’ve talked about another risk of prepayment before: pre-payment penalties can hurt! Lenders make their money on interest. And they don’t want to lose out — especially in these times of low rates. If you are able to make a large payment on your mortgage, the terms of your loan might actually result in penalties, known as IRDs or Interest Rate Deferrals. These usually apply to closed, fixed mortgages and come into play if you make a payment larger than your loan’s pre-payment privileges allow or pay off your mortgage before the amortization date. Talk to your Calgary mortgage broker to make sure you understand the pre-payment terms and penalties of your loan.
When you buy a home, you are making an investment in a secure, independent future.
If you have the resources and discipline to do the hard work necessary to pay extra on your mortgage, you are also capable of saving and paying off your mortgage early. For those looking to renew or refinance, Mortgages by Candice offers a variety of customizable options that can help you meet your financial goals. Taking a few months off from your regular payments might be appealing in the short term, but doesn’t mortgage freedom sound amazing? And for those who want time off, rather than take a mortgage vacation, the smart move is to put that extra amount you would be prepaying into a high yield savings account, so you’re the one earning the interest, not a bank.
There are many factors involved in a mortgage, so it is understandable that many are tempted by “special offers”. Your Calgary mortgage broker Candice Light offers this list of frequently asked questions for those just getting started with home loans.
Not all vacations turn out as good as they sound at first. When rates are low, banks offer mortgage vacations to appear flexible, but they are really another way to earn themselves money. Whether you are ready to start the pre-approval process to purchase your first home, or you are looking at refinancing an existing loan, you need an experienced Calgary mortgage broker to help you get today’s great rates and terms that can help you realize your financial dreams. Contact Mortgages by Candice today to get started!