The point of this post: do the work to understand how the mortgage lending system works so you can save the most money.

If you want to get the very best interest rate (read: lowest bottom line price) on your mortgage, you need to know how to see yourself the way the bank does.

No, not like that. (Well, sort of like that.)

Really, you need to understand how lenders determine the value of your mortgage business so you can use that information to wring the very best deal out of them.

1. Save up for a real down payment. No, really.

It seems that everyone wants you to get into the housing market as soon as you possibly can. There's a lot of talk (from lenders) about making the housing market easier to get into for first time buyers. When you hear that, translate "easier" to "more profitable to lenders" and you'll be hearing what they really mean.

Every dollar you can put towards a down payment on your first home is a dollar you won't be paying interest and CMHC default insurance (to insure the lender, not you) on.

Saving up a hefty down payment comes with a load of benefits to you, not least of which is the fact that it should get you into the habit of saving for a specified goal, and reduce the sticker shock that a mortgage payment, property tax, insurance, utilities, and maintenance on your new house can produce.

It also saves you money on the bottom line price of your house. It's easy to sit in front of a mortgage lender and not really pay attention to how much money you're spending beyond the actual sale price of the house you're buying, because everything is presented to you in only one number: your monthly payment.

Don't let be lazy. Figure out what a 20% (or more) down payment is on a house that you can reasonably afford, and save like you've never saved before.

2. Get a copy of your credit report and pay the extra money for your score.

Most lenders only pull a report and score from one bureau (and they have absolutely no obligation to tell you what your score is or what details are in your report), but if you want to be really on the ball, get a copy from both credit reporting agencies in Canada and cross-reference them.

The first benefit of pulling your own credit history (and no, it doesn't lower your score when you do it) is that you can fix any errors you see on it before you start the mortgage shopping process, or - if your score or history is pretty poor - spend the next six months making sure that every payment is made on time and you never go over your credit limits.

The second benefit is that you can get the most accurate rate quote from a bunch of lenders without getting your credit record pulled multiple times (see #9). The lender can't actually submit an application based on the strength of the credit bureau report you give them, so they'll eventually need to get one for themselves, but this way you can limit the amount of inquiries against your record to one.

3. Get to know your own numbers.

Sit down with your tax return, current paystubs, and credit report and do some math before you start getting quotes on your mortgage. If you have variable income because you're paid hourly or are self-employed, figure out what your average income has been for the past two years.

Write out how much you make (before taxes), how much you have to pay on loans, lines of credit, and credit cards every month (you know what I'm going to say if this number is large and you're thinking of adding a mortgage to the mix, right?), and a short list of your biggest assets (savings and retirement accounts and vehicles, mostly).

The hour that you spend on this will save you an enormous amount of time when you start shopping around for a rate, believe me. It might even help you get some clarity on your personal finances while you're at it.

4. Leverage your other business.

To the bank (as an institution), you are a walking dollar sign, and they really don't want you to walk away. In fact, they want as much of your business as they can get their hands on, and if they already have it, they want to keep it.

If you are already a customer, walk into your appointment knowing the value of your business. How long have you been with them? Do you have accounts, loans, and savings with them? It matters.

5. Understand the different mortgage flavours.

Variable or fixed? Open or closed? It doesn't matter which one is the one the bank is pushing that day. It matters what you need. Variable rate mortgages (these days) come with a lower price tag (and a smaller overall discount) than fixed rate mortgages, but with a higher amount of risk (that rates will go up). Generally, you can convert your variable rate into a fixed rate in at any time, but remember: the fixed rate available when you convert won't be the same fixed rate you're offered now.

Open mortgages have a much smaller discount than closed mortgages because the bank doesn't want to give you a good price on a product that could walk out the door tomorrow. You'll pay a higher price for the ability to move or pay out your mortgage any time during the term, so only choose one of these if you think the likelihood of doing either of those things is close to 100%.

6. Know who is allowed to give what discount.

If you're at a bank, the person sitting across the desk from you has a predetermined discount amount on every single type of mortgage the bank offers. They can give you that maximum discount without getting permission from anyone else. This amount varies depending on what flavour of mortgage you choose, but is often in the range of 0.25%-0.5% on variable rate (closed) mortgages and 1.3%-1.5 % on fixed rate (closed) four or five year mortgages. The longer a term you choose, the higher the discount.

A bigger discount has to go through either their manager or a special back office team that is in charge of approving non-standard discounts. This is where your value as a customer works to your advantage if you've been a long-time customer and have other products with them. Make the case for the value of your business, including how credit worthy you are (this is why you need to know your own credit history).

7. Remember, if they're giving to you with one hand, they're taking something away with the other one.

Every lender has a couple of "branded" mortgages. Think the CIBC Wealth Builder® or the RBC Energy Saver™, two programs that add all sorts of other features to your mortgage. These are pre-packaged, pre-discounted mortgages that offer cash back, energy audits, or other benefits designed to give you the feeling that you're getting a good deal.

Programs like these mean that not only will you pay a penalty to pay off or transfer out your mortgage before the end of the term, but you'll also have to pay back all the other benefits you've received in the form of cold, hard cash.

Mortgage lenders only want one thing: your ongoing dollars, and they're not in the business of giving those dollars away because they're nice. Calculate the interest cost to the end of term on a no-frills mortgage, and then compare that number to the interest cost less cash back or benefits paid to the end of term on one of these branded mortgages. Take the time to do the math. It's not terribly difficult.

8. Get it in writing.

Unless you've received the quoted rate in writing, the lender has zero obligation to give you that rate should their discount policy or posted rate change before you apply. Pay attention when they explain how long the quote is good for and under what conditions it can change. If they don't tell you, ask. While you're at it, get them to write that down too.

You'll also want to have a written quote when you shop around so you can prove what you've been offered from other lenders. (You're going to shop around, right?)

9. Shop around (and don't let them pull your credit report)

This is the "Rinse and repeat" part. Take your credit report, income and expense information, and other written quotes with you when you visit all the banks and brokers you can. Tell them right up front that you want them to base their quote on the credit score you have in your hand, and that you don't want them to pull your credit bureau report unless you decide to apply with them.

Why not pull your credit report multiple times? When a lender looks at your history and score, you look like you're shopping for credit, and your score goes down. Not what you want when you ARE shopping for credit...since you have to shop around to find the cheapest credit going.

Yes, this is a long list. But really, is the time spent on getting familiar with your credit report and personal balance sheet wasted? Can finding a further 0.25% discount on the biggest purchase of your life be worth the time you spend talking to every lender you can find?

I leave you with a final number: $2,357. The amount of interest you'd save on a $200,000 mortgage by chopping 0.25% of interest off of a five year term.Worth it? Anything you'd add?

(*UPDATED to add: Jason Hull at Hull Financial Planning goes on to expand on the value of shopping for a mortgage and how it can defeat your Monkey Brain.)

The point of this post: living on a budget is (most of the time) tedious and hard. Reward yourself and remember why you're doing it to make it seem less so.

If you are in the first, exciting stages of setting up your financial plan, organizing your money, and living on a budget so you can buy a house, pay off debt, retire comfortably, or reach some other financial goal, then I have some advice for you: settle in.

Unless you're one of the fortunate few who can save money effortlessly, this next bit of your life is going to feel like trench warfare, minus the mud, rats, lice, frequent bombs, disease, and occasional all-out attacks with guns and stuff.

Living on a budget so you can set aside money you would otherwise spend is a war - a long, boring war of attrition that even Steven Spielberg wouldn't be able to make into a good movie.

I guarantee that you will reach a point of budget fatigue. After the first sense of purpose and accomplishment has worn off, after the feeling of urgency to reach your goals turns into frustration at having to plan your spending weeks or months in advance, you will question whether it's worth it.

You'll remember back to your pre-plan days of spending (and then panicking) and spending (and panicking again) with nostalgia, and wonder if maybe just living with no plan and hoping nothing bad happens would be better than the constant struggle to exercise self-control at the grocery store.

There's no fix for this, but I have two tips (from the trenches, as it were) to make it easier, and trick yourself into being responsible on those days (or weeks) when you are so heartily sick of taking the long view that you feel like cashing out your emergency fund and running away to Mexico. 

1. Reward yourself with short term goals

Sometimes we in the personal finance world get a little too fixated on long term goals - thirty years until retirement, twenty years until you pay off your mortgage for good, ten years until you send your kids to university. We like those goals because they're so far in the future that we can plan for them. (We also get to talk about "the magic of compound interest" and get all starry-eyed).

The problem with a financial plan that is only about your long term goals is just that: they're long term. When do you get to achieve anything? When do you get the high of ticking the box?

Make one of your short term goals something that you will enjoy. Set aside some small amount of money every week for something you want (A nice bottle of wine? That new book you can't get at the library? A jar of Nutella and a spoon?) and then get it. 

2. Remember that your enemy is you - so change your attitude

It's very easy (and convenient) to get frustrated with your partner for spending too much, your income for not being enough, your grocery store for not honouring coupons, or the personal finance book that told you how to divvy up your  money.The real reason that living on a budget - or trading money now for money in the future - feels so unbearably tedious sometimes is because it IS unbearably tedious....unless it's not.

A good way to forget the tedium is to remember why you're living like this in the first place.I'll give you an example: I hate having a budget when I go to the grocery store (hate. it.), and have many shopping trips when it feels like I'm marking everything off my list as "would have been nice to have, but can't this week".

On days like those, I have to make a conscious effort to remember why I work so hard to plan our meals, pay attention to unit prices, and shop the sales...it's so I don't have to.

In my perfect world, I have no budget at the grocery store. If I want to stuff my face with an entire tub of Häagen-Dazs coffee ice cream, I'll put it in the cart without thinking about unit price, or what I'm giving up in the budget to get it...and I'll go home, turn on Dr Who, and eat it with zero guilt.

Do you hear angelic music?

No Häagen-Dazs TODAY = lots of Häagen-Dazs SOON is an equation one that has motivational resonance with me, and it has great power to change my attitude.What changes yours? 

The point of this post: there are bankers out there who actually care more about doing a good job for their clients than for the bank, and they're worth finding...and keeping.

Today, we're making friends with bankers.

Lets pause here for a minute, so you can catch your breath and maybe stop laughing. 

Remember that bankers get paid to sell you stuff - it's in the job description.

Sure, every single person in the branch - whether behind the counter or the desk - is actually a salesperson, and gets lots of pressure from management to sell something to every person who walks in the door. Sure, their annual performance is based (mostly) on how often they signed up new credit card accounts, or sold bank branded managed portfolios of mutual funds.

Don't let that stop you from finding a great banker and cultivating that relationship. Use your knowledge of how the system works to access the best the bank has to offer (its great people), while seeing through the fluff marketing meant to convince you that the institution itself cares about your best interests and not solely the business dollars you represent. 

The best bankers are dinosaurs, but they still exist.

The banker you want to find is the one who still views herself as a service provider, and chafes at the constant "sales! Sales! SALES!" pressure she gets at every meeting. The best bankers have worked at their institution for years, know the products in and out, and - most importantly - know exactly how they work.

The best bankers will analyze what you actually need from a bank account, loan, or credit card, and match you up with the most cost-effective product for you. They will call you back when you're trying to figure out what that transaction was in January of last year.

The best bankers care about what you want, tell you about new products that you might actually need, and take no for an answer if you've heard them out and disagree with them. 

So how do you find this mythical beast, the banker who cares?

Now for the big question: how do you find this rarity, the banker who cares for his or her clients, doesn't really want to be a salesperson, and knows the bank for the Byzantine labyrinth of rules, guidelines, and discontinued products that it actually is?

The boring news is that you look. Start with the bank you currently have some accounts with. Book an appointment to talk about your existing products, and see how it goes.

Plan on making multiple trips. Don't agree to anything in the first go-around, but listen carefully to the advice you're getting, and examine it's merits once you get home. Know what you need from your accounts and ask lots and lots of questions.

Give them all the information they ask for. Yes, if you have assets, accounts, or lending outside of that bank, you will be asked about them, but if you've found a good banker, you'll be shown the comparable products, told about the benefits, and left to decide. You may even find that it's in your best interest to consolidate more of your business with one bank (or you may not).

If you get the hard sell, make appointments at the other banks in town, or see if you can find someone else to talk to at another branch of your current institution. 

Why go to all this trouble, when you're still going to be getting sold to?

Finding a good banker will mean that you have someone with a conscience on the inside, someone who can translate the bank-speak and scare-sale language into plain English, tell you what rules you have to follow and which guidelines don't apply to you, and help you navigate the ins and outs of active, maintained but no longer sold, and inactive account types so that you're getting the best, cheapest bank products with the minimum of hassle.

Isn't that worth a little legwork? 

The point of this post: if you can't be honest with your partner about money and financial planning, why are you with them?

A healthy financial infrastructure is cost-effective, simple, flexible, and intuitive. It keeps you on budget, moves you closer to your goals, gives you a logical way to make choices when you have extra money (or not enough), and decreases your stress levels.

Let's talk about something sensitive, just for fun: your relationship with your significant other and how it can weaken your financial infrastructure.

And so you can't possibly misunderstand my point of view, here's my (very) unvarnished opinion: if you can't share accounts, assets, and financial goals with your significant other, then you have no business being in a relationship.

How did that grab you?

That advice runs counter to most modern financial planning wisdom, which generally recommends that you maintain separate accounts in order to protect yourself in case of a relationship breakdown.

In my career, I have come across every kind of financial arrangement between partners that you can think of. I've heard all the arguments, read (most of) the books, and - in my personal life - lived out an eleven year financial partnership with my spouse.

I'm not telling you that you have to hold every account or asset in common, or that you must pool every cent and have equal spending authority. I'm just telling you it's a good idea.

At minimum, you need to agree on a system that you both feel is completely fair. You have to discuss it, set it up, and communicate about it regularly. You have to be understanding and gracious towards each other, and not cherish every little annoying instance when he got to spend an extra $23 on socks, but you haven't bought a new book in years.

You don't have to discuss every little purchase (although it's not a bad idea, at least at first), but you do have to agree on what to discuss.

You have to agree on what your shared goals are and how you're going to reach them. (You have to agree on how you're going to pay for your personal goals, too, by the way.)

Come to think of it, in order to establish and maintain a healthy financial relationship with your partner, you have to nurture a healthy relationship with your partner and commit to maintaining it through good and bad.

Anything less and you might as well not partner up in the first place. 

The point of this post: it's your job as the borrower to figure out if you can actually afford the mortgage the bank says you can.

When you think about how much money you make, do you use made up numbers or real ones?

If you think that's a strange question, then you've never applied for a mortgage, or you weren't paying attention when you were in the lender's office.

When banks and brokers talk about your ability to "afford" the mortgage you're applying for, they are using the word "afford" the way Vizzini uses the word "inconceivable" in The Princess Bride.

Read: they're using it wrong.

"Afford" (to the lender) means you are using 40% or less of your gross income to pay for your principal, interest, and property taxes, and to make minimum payments on all of your other debt.

"Afford" also means that you're using no more than 32% of your gross income to pay for your principal, interest, property taxes, and heating.

The last - but most important - thing the bank means when it talks about "affording" a mortgage payment is the interest rate. If you are in the market for a fixed interest rate of at least five years, the bank will base your minimum payment on the five year discounted rate that they're offering you. That means that right now, with some banks offering a historically low five year fixed rate mortgage at 2.99%, your ability to afford a mortgage for the next twenty-five years is based on a fixed rate that is lower than it's ever been.

Ever.

Before I break down those numbers a bit and maybe even give you an example, I need to tell you this: in my banking career, I was (often) in the position of telling people that - according to the bank - they could afford a mortgage payment that sounded crazily high to them. I was also (very often) in the position of telling people that - according to the bank - they couldn't afford a mortgage payment that sounded crazily low to them, but that's a story for a different day.

So let's take a look at some applicants who can "afford" the mortgage they're applying for:

Case Study: The Roberts Family

Westley and Buttercup Roberts need a bigger house than the one-room peasant shack they're renting now, and together, they bring in $6,325 a month before taxes or deductions. Their only debt is the minimum payments on their credit cards, their car payment, and the last little bits of Buttercup's student loans, which total $600 per month. They've painstakingly saved up a $25,000 down payment from their pirating and cow-herding jobs.

This means that, according to the bank, Westley and Buttercup can "afford" to purchase a $370,745 home and carry a $1,711 monthly principal and interest payment.

What the bank is thinking:

The bank came to this crazy conclusion by calculating 40% of Westley and Buttercup's monthly income, subtracting $800 to account for their monthly debt obligation and future property taxes, and by assuming that they will put 5% down and purchase the current five year fixed rate of 2.99% over 25 years. They ran the same calculation using 32% of the Roberts' monthly income, and subtracting only the property taxes and assumed $65 per month heating bill.

What Westley and Buttercup should be thinking:

As smart people, Westley and Buttercup immediately hear the number $1,711 and laugh. They know that $6,325 isn't a real number, and that their actual take home pay is $4,420 after taxes and employer deductions.

They realize that mortgage rates will eventually go up, and that it's more than possible that - come renewal time in five years - their mortgage payment will increase by $300 or so per month.

They know the cost of food, insurance, utilities, maintenance on their car and home, and other necessary spending will only increase over time. They are painfully aware of the fact that they're only making minimum payments on their credit cards and therefore paying 19% interest. They understand that their car payment will never actually go away without serious effort.

They even have the foresight to realize that eventually they want to have children, that parental leave is great but cuts your income in half, and that the cost of daycare if neither of them are able to stay home will easily cost upwards of $800 every month.

So what's the right number, then?

Rob Carrick at The Globe and Mail suggests that banks start using the "Total Debt Servicing + Savings Ratio", meaning that you can "afford" a mortgage payment only so long as you are able to pay it, your property taxes, the minimum payments on your debt, and save 10% of your income without exceeding the 40% of your pre-tax income threshold.

That would reduce Westley and Buttercup's maximum affordable mortgage payment to $1,451, which translates into a home price of $315,000 - $330,000 depending on how much of their $25,000 down payment they use (and that's another whole post for a whole other day).

Lenders will never, ever use this calculation, because it will result in fewer mortgage sales for lower numbers. Their pot of gold is at the end of the rainbow that the unicorns are frolicking under, and don't you forget it. It's up to you to translate their "affordable" into the land of reality - where taxes, daycare, insurance, and all those other mundane things live.

I guarantee you that going by the bank's number will max you out in every possible way. It will mean you pay more in interest, time, and stress than is healthy for your bottom line, your mental health, and your relationships.

The only way to calculate if a mortgage payment is really, truly affordable for you is by tracking and diligently planning your spending over time. It means exercising your discipline and self-knowledge, and it can be hard work, but blithely going along with the bank's version of reality is harder work in the long run.