How to Negotiate New Terms on Your Mortgage Loan

How to Negotiate New Terms on Your Mortgage Loan

A big part of paying your mortgage off is knowing how to negotiate new terms when the time comes. The mortgage term and amortization period work together to affect your interest rates, overall costs and, what you’ll be paying regularly.

Amortization Versus Term

The amortization is the length of time it will take to pay off a mortgage in full. The term is how long the contract is in effect. One of these can last anywhere from six months to a decade. During your term, you are locked into the conditions that have been outlined in the contract. These include either fixed or variable interest rates.

Remember, most of us have several terms over the life of a mortgage.

When the term ends, you can renew the terms on your mortgage loan. Here’s what you need to know to make that work in your favour.

What is the Principal in Terms of a Mortgage?

The principal is the amount of money that you have borrowed and need to pay back. Calculating the amount of principal that you owe when you start out with a mortgage is easy. All you need to do is subtract the amount you put forward in a down payment from the home’s final selling price.

Keep in mind this is an important factor in deciding how much you can spend on a place. The amount that you borrow starts to accumulate interest as soon as you sign your mortgage papers.

Staying on Top of Payments

Staying on top of your mortgage payments also means understanding the difference between principal versus interest. In a nutshell, the principal is the money that you have left to pay on a mortgage. Interest is how the bank makes a profit. It is in excess of the principal. 

Many home loans only involve the principal and the interest. However, others can have insurance and taxes added.

The idea is to make your mortgage payments consistently so you can knock down the principal and pay off the loan.  Following are a few ideas on how to stay on top of these payments.

How to Avoid Mortgage Payments Falling into Arrears

You want to avoid your mortgage payments falling into arrears.

The consequences can include a damaged credit score. It’s rarely the case, but a lender can take legal action after 15 days have passed without a payment.

Missing a few payments can mean the beginning of the power of sale or foreclosure. A little proactive planning can help avoid mortgage payments falling into arrears.

Two Different Methods

Basically, there are two different ways that you can avoid falling behind on your mortgage payments.

Negotiating new terms on your principal loan is the first.

  • Understanding your long-term goals can help. Quite often that means thinking about where you want to be in the next five years. Remember, many people only stay in their first home for three years on average.
  • You should also understand when the best time is to negotiate new terms on your principal loan. If the rates have dropped, you may be able to refinance or renegotiate to get better numbers during the term of your mortgage. However, you need to be aware of any prepayment penalties.
  • The bank or lending institution you’re currently using will send you a renewal letter a few months before the term is up. That’s the time to start looking at different rates to see if you can switch. Look for one of these renewal letters at least 21 days before your term is up.

Knowing your credit score is a good step when you’re renegotiating some of the terms of your current primary mortgage. It’s good leverage to have a healthy score if you’re looking to ease any financial strain.

Know Your Credit Score

Remember that you can always transfer a mortgage from one lender to another. However, you need to make sure the benefits outweigh the costs.

Ask about the possibility of a blend and extend option. That’s where your present mortgage can be extended over the longer term for a lower interest rate by blending your newer rate and your current one.

The Costs to Changing Your Mortgage

Breaking or changing your mortgage comes with costs. Quite often that can be three months of interest or other charges. Here’s a calculator from the government that can help you put some numbers together.

Here are a few other things that you should know about so that you can get the most from your mortgage term.

Why Does Principal Go Up While Interest Goes Down?

People wonder why the principal goes up while the interest goes down. Each payment pays more of the principal off. 

There are other ways to pay your mortgage off without renegotiating. For example, the interest on any loan is based on the balance that’s outstanding.

Long story short is each payment you make contributes more to paying off the principal than the one you made before.  

There’s more good news. Interest rates can be front loaded on your mortgage. As the amortization plays out, the balance shifts and you’re paying more principal and less interest.

There is one more interesting option that you want to explore to pay your mortgage down faster.

Can you Pay off the Principal Before Interest?

Of course, paying the principal before interest is another interesting option.

Some mortgages have prepayment privileges. Talk to your lender about the option of making a lump sum payment that is applied directly to your principal. These can usually be applied annually.

Keep in mind the prepayment penalties might apply if you try to pay your mortgage off early. It’s best to check with your lender to find out what scenario suits you best.

We’re Here to Help

Got questions about your principal mortgage?  Mortgage Broker Store is happy to give free advice. We have a dedicated team that has over 15 years of experience in these types of financial matters. We are both a direct private lender in Ontario and mortgage brokerage that can also act as a middleman between lenders and borrowers.

Mortgage Broker Store has clients all through the GTA and Ontario. It doesn’t matter where you are in the province, we are available to help. Why not give us a call today at 416-499-2122?

About Jonathan Alphonso

Mortgage Agent, Web Developer, and Real Estate Investor. Together with Ronald Alphonso I run MortgageBrokerStore.com. I write about a variety of topics on Canadian mortgages and real estate. Our particular specialty is dealing with Ontario power of sale and foreclosure situations.

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