22 May

Are Your Mortgage Terms More Important Than Rates?

Mortgage Tips

Posted by: Roberto Pelaccia

This is a great question! A lot of people, especially first time – of even second time home buyers – don’t necessarily know the answer to this question. The reality is that 70% of Canadians break their mortgage before their renewal date comes around. This is a significant number! Especially when you’re looking at paying a penalty if you want to break your mortgage before the renewal date.

In this article I’m going to talk about whether or not mortgage terms are in fact more important than rates. So keep reading if this is something you’ve ever wondered about.

Reasons you may need to end your mortgage early

Let’s be honest here and say that life happens. In this day and age, life moves so fast that it’s impossible to predict where we will be next year, let alone a few years from now. So chances are, you may need to get out of your mortgage early. Here are some reasons why:

Divorce or separation

No one believes that they will get divorced, but unfortunately, approximately 38% of couples divorce before their 30th anniversary. This means, people have a four in ten chance of getting a divorce. Due to this rate, you may need to get out of your mortgage early so you can purchase a home for yourself and move on with your life. You wouldn’t want to be forced to pay a penalty or even remain in the house until your mortgage renewal comes around right?

You get a random offer

This does happen. Someone could be driving by your house and they fall in love with it, so they have to have it. Maybe they even give you an amazing offer because they’re literally trying to convince you to move out of your house when you had no intention of selling. So, if you do get one of these once in a lifetime offers, wouldn’t you want to be able to take advantage of it?

Get a lower rate

The housing market is always changing. Therefore, you need to be able to change with it. It’s always a good thing to be able to break your mortgage early to take advantage of a lower rate.

Pay it off in full

What if the day comes that you have the ability to pay off your mortgage in full. This could be because you’ve been saving and have enough to do so, maybe you’re come into a lot of money through an inheritance. Whatever it may be, you always want the option to pay it off and walk around knowing you don’t have a mortgage and your home is officially paid for. Proper mortgage terms can make sure you have this option.

Mortgage terms are more important

Like I said before, life happens. And life rewards the people who are prepared for the unexpected. So, while there are a lot of things in your life you can’t control, making sure you have mortgage terms that will allow you some flexibility when unexpected things happen will help you avoid a lot of headache down the road.

The key is to avoid limiting yourself to what you can do with your life and your mortgage. Give yourself the flexibility to make changes and do something different. So, when you’re going through the process of buying a house, make sure you have those flexible mortgage terms because frankly, those terms may allow you to take advantage of lower rates down the line. That’s why mortgage terms are more important!

 

25 Apr

BREAKING A MORTGAGE – CAN YOU DO IT?

Breaking the term of your mortgage early

Posted by: Roberto Pelaccia

Do you have a mortgage? So do I! Looks like we have something in common. Did you know that 6 out of 10 consumers break their mortgage 38 months into a 5-year term? That means that 60% of consumers break a 5-year term mortgage well before it’s due…but do you also know what the implications are of this? Let’s take a look!

People need to break a mortgage for a variety of reasons. Some of the most common include:

· Sale and purchase of a new home *without a portable mortgage
· To take equity out/refinance
· Relationship changes (ex. Divorce)
· Health challenges or life circumstances are altered

And a whole other variety of reasons. So what happens if you have one of the above reasons, or one of your own occur and you have to break your mortgage? Here is an example of what would happen:

Jane and John Smith have lived in their home for 2 years now. When they bought the home, they recognized that it would need some major renovations down the road, but they loved the location and the layout of the home. They purchased it for $300,000 and have 3 years left but would like to access some of the equity in their home and refinance the mortgage to afford some of the bigger home renovations. This refinancing would be with 3 years left on their current mortgage. So, what are Jane and John looking at for cost? There are two methods that are used to calculate the penalty:

POSTED RATE METHOD (used by major banks and some credit unions)
With this method, the Bank of Canada 5 year posted rate is used to calculate the penalty for Jane and John. Under this method, let’s assume that they were given a 2% discount at their bank thus giving us these numbers:

Bank of Canada Posted Rate for 5-year term: 5.14%
Bank Discount given: 2% (estimated amount given*)
Contract Rate: 3.14%

Exiting at the 2-year mark leaves 3 years left. For a 3-year term, the lenders posted rate. 3 year posted rate=3.44% less your discount of 2% gives you 1.44% From there, the interest rate differential is calculated.

Contract Rate: 3.14%
LESS 3-year term rate MINUS discount given: 1.45%
IRD Difference = 1.7%
MULTIPLE that by 3 years (term remaining)
5.07% of your mortgage balance remaining. = 5.1%

For the Smith’s $300,000 mortgage, that gives them a penalty of $15,300. YIKES!

Now, Jane and John were smart though and used their Dominion Lending Centres broker to get their mortgage. Because of this, a different method is used.

PUBLISHED RATE METHOD (used by broker lenders and most credit unions)

This method uses the lender published rates, which are generally much more in tune with what you will see on lender websites (and are generally much more reasonable). Here is the breakdown using this method:

Rate when you initially signed: 3.24%
Published Rate: 3.54%
Time left on contract: 3 years

To calculate the IRD on the remaining term left in the mortgage, the broker would do as follows:

Rate when you initially signed: 3.24%
LESS Published Rate: 3.54%
=0.30% IRD
MULTIPLE that by 3 years (term remaining)
0.90% of your mortgage balance

That would mean that the Smith’s would have a penalty of $2,700 on their $300,000 mortgage

A much more favourable and workable outcome! Keep in mind that with the above example is one that works only if the borrower has:
· Good credit
· Documented income
· Normal residential type property
· Fixed rate mortgage

For Variable rates mortgages, generally the penalty will be 3 months interest (no IRD applies).

If you find yourself in one of the scenarios that we listed at the start of this blog, or if you just need to get out of your mortgage early, be smart like Jane and John—review your options with a DLC Broker! In the example above, it saved them $12,600 to work with a broker! It really does pay to have a Mortgage Broker working for you.

Originally published by Geoff Lee on the Dominion Lending Centres Blog