When you amalgamate your debt into a new fixed mortgage loan – it certainly makes the payments easier and often lowers the interest cost considerably – all very good things! But, remember that the banks are “in it to make money” and they definitely do make more money in a fixed rate product over a variable rate one. As well, they often tell you it is a good idea to extend the amortization out to 25 years to make the monthly payments easier on the budget, all the while knowing full well that you will often pay three times the amount of debt over the life of the mortgage. A fixed loan structure calculates interest “semi-annually” or as BNS likes to call it…calculated “half-yearly.” That means that interest is pre-set on the outstanding balance twice a year – usually January and July. Interest is laid down and essentially pre-calculated based on the payment structure you choose. If you were to put a lump sum payment down on your loan, let’s say in March, the principle would go down by your prepayment, however the interest would not adjust downward based on the lower balance until the product opens and adjusts the interest again, which would be in July. Essentially, you have two 6-month blocks of interest that is not adjusted until the product “semi-annually” reviews the outstanding balance and recalculates the interest. I always advise clients to choose a variable rate loan if amalgamating debt. It is the only Canadian product that will readjust the interest monthly based on the outstanding balance, (similar to a line or credit) allowing clients to have a true “pay-for-what-you-owe” product. Why would you want to pay interest on interest in a fixed structure? Instead, consider a low rate variable product and avoid a compounded, up-front interest structure.
October 31st, 2019|Daily Advice Tips|