Real Estate

Help needed in Saving Mortgage Interest

  • Last Updated:
  • Aug 23rd, 2019 5:52 pm
[OP]
Newbie
Aug 22, 2019
12 posts
6 upvotes

Help needed in Saving Mortgage Interest

Hello,

I'm new here but have been a long time lurker. I'm looking to purchase a property for around 1 million with 20% down payment. I currently own another property worth around 500K that I plan to sell. I can put in about 250K proceeds from the sale.
However, the sale and purchase will likely not line up so I won't have the extra cash for down payment until after I close on the new property. I plan to use the proceeds of my current property to lower my borrowing costs of the new property. So I'm thinking of the following scenarios to lower my interest costs and would like some advice in which option is the best, or if there's a better option I didn't think of.

1. Purchase new property on 20% down and do a 5 yr fixed as the rate is lower. Do pre-payments after sale of first property. Interest paid over 5 years is higher but overall interest for the amortization will be lower at the end of the amortization.
2. Purchase new property on 20% down and do a 1 yr fixed. After sale of property, refinance and put in more principle to lower monthly payments and interest costs for the remaining 4 yrs when compared to option 1.
3. Purchase new property on 20% down and do an open variable mortgage until sale of property and then lock it down for 5 years.

I feel Option 2 is the best way to go. But would love to hear your thoughts.
2 replies
Deal Guru
User avatar
Mar 23, 2008
12436 posts
8944 upvotes
Edmonton
You can work out the numbers for all three scenarios on your own, so I’m not sure what you’re asking. Keep in mind you you can invest the money from the sale of your current property until you use it to pay down your mortgage. But you’ll pay income tax on it.

C
Deal Addict
Jan 15, 2017
4236 posts
3759 upvotes
Ottawa
The challenge with any open mortgage, whether variable or fixed, is the higher interest rate which not only means you will pay more, but it also means that you have to qualify at a higher rate.

As for closed fixed, a 5 yr or 1 yr could work. You will need to work the numbers. Just make sure that you have a clear understanding of how the pre-payment options work. Different lenders have different options. Some allow you to make a lump sum up to 20%, double up your payments, and increase your payments. Some have limits on the total options allowed will some allow different combinations of each.

In your case, a $800K mortgage with a 20% lump sum allows you to pre-pay $160K. That leaves you with $90K that you may be able to use to increase or double up payments or simply wait until you can pre-pay a lump sum again.

I would suggest though that you disclose to your lender that you plan to take advantage of the pre-payment options and that you have a clear understanding of what is permitted and what is not. Don't just take someone's word for it. Pre-payment options are often noted as 20-20-20 or 15-15-15 with very few in the industry understanding thoroughly the limitations around it with issues like anniversary dates and other limitations.

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