I have mentioned in the past that you, the home buyer, should first and foremost choose rate, then gimmicks. When Ottawa's gas stations all seem to change prices at the same time, competition watchdogs call for inquiries. When mortgage rates change, within hours, all lending institutions seem to change as well. When scanning the Sun's rate analysis on Sundays, very little difference is noted between the lenders. No inquiry is called.

Lenders have learned, at your expense, that most Consumers won't challenge rate. That being true, lenders now vie for your business by spending thousands advertising prepayment privileges. Some lenders will allow you to double your monthly payments anytime, some will allow a lump sum deposit to principal so many times a year, some will allow you to increase payments every so often, and others will allow a combination of one or two of the above. Most Lenders offer these prepayments because they know you can't afford to do any of them.. First time home buyers face the budget crunch of a lifetime. Left over money will be non-existent during the first couple of years.

The best prepayment of all is to get a better rate. Consumers must shop for rate as most have learned to shop for a car, or a television set. The best place to start shopping is indeed the Sun's rate survey on Sundays. The posted rate though is hardly ever the best rate. In other words, when ABC Bank or XYZ Trust offer a five year mortgage rate at 9.875%, calling them to negotiate will probably get you a better rate. Most mortgage brokers have already done the shopping for you and that is why their rates are always better than the Lenders' posted rates.

Let me tell you a little story, then we'll get into really saving money. Harry is buying a home out of town. Harry's bank tell him that they will guarantee rate to August 1, 1995 at 10.125% for a five year term. Harry gets a written quote from me at 9.50%, and goes back to his bank to show off. His Bank then says that they will match the rate, and offer to pay for the appraisal as an added bonus. Harry asks why they did not offer that rate when he was shopping. "We did not know you were a serious shopper, at the time", said the mortgage officer. Harry decided to stay with the lender we had found for him.

Now let's talk saving money. In our case above, had Harry decided not to shop, he would have been granted a five year term mortgage at 10.125% on $137,000 worth of first mortgage. Amortized over 25 years, his payments would have been $1237 per month. But Harry did shop. He could simply take my mortgage at 9.5%, which would lower the monthly payments to $1180 per month (a savings of $57 per month), or what I suggested he do was to keep the payments of $1237 and shorten the amortization. He asked what the difference would mean to him. He thought he could use the $57 per month savings, until I pointed out that the higher payment could save him 46 months worth of payments or $54280 overall⁽¹⁾

. Either way, Harry saves money. If he can afford to pay the higher payment, he should do so. Some will argue that Harry had the option anyway within his mortgage, he could pay the lower amount ($1180) and save the other $57 per month and prepay at the end of the year. Save? Ya, right!

1. rate of 9.5% would have to stay stable over the life of the mortgage, slightly over 21 years.