When mortgage maturity approaches, and it's time to renew your mortgage, you will receive a Renewal Agreement in the mail.
The Renewal Agreement is often a very thick document that displays current interest rate offers together with mortgage terms.
Most borrowers do not understand all of the terms and more than 50% of borrowers do not know how to interpret the offers being given in terms of dollars and cents.
One example of this is an experience I recently had with a client who had her original mortgage with CIBC. Her CIBC mortgage was up for renewal and she locked into another five years. She mis-read the renewal agreement completely. What she failed to realize was that her low five-year rate was only an introductory rate for the first six months followed by a much higher interest rate for the rest of the five year term.
This meant that after the first six months she would end up paying almost one percent more than what other prime lenders were offering.
This was a very costly mistake and one that could have been avoided if she understood her mortgage renewal terms.
As always, mortgage renewal and mortgage maturity is an opportunity to seek a better interest rate and negotiate better terms. It's a time to save money.
Please contact me today if you would like to discuss your mortgage renewal.
The Canadian Government has indicated that it wants to make home ownership more affordable for first-time buyers. All of this after being pressured by big banks who are losing money they can't lend and a fair portion of the next generation of the middle class that can't seem to get in on a piece of the real estate market.
Perhaps the next course of action will be that they change the maximum amortization on high-ratio mortgages to 30 years instead of the current 25 years. But do this 'help' first-time home buyers or those who have less than 20% down?
This article from Better Dwelling argues that increasing the amortization does NOT, in fact, make home ownership more affordable. When you do the math, increasing the amortization simply means more interest payments and substantially more debt since the loan is now set out over 30 years as opposed to 25. Ideally, in any mortgage, we want to move to shorten the amortization so we pay less interest.
When it comes to affordability, what increasing the amortization does do is make monthly payments smaller which makes the cost of living easier - BUT this is not to be confused with more affordable.
In reality, what the Government banks on (no pun intended) is the probability of borrowers not questioning the logistics of their policies, and that they will only be enticed by the monthly payment, therefore, inadvertently taking on massive debt to help 'fix' the eliteness system of obtaining profits.
In my opinion, in an effort to help first-time buyers, right now, the stress-test should be eradicated and people should focus on reducing and eliminating their unsecured debt and other fruitless monthly obligations.
There has been absolutely no change to the Bank of Canada's overnight lending rate, and as a result of an extremely uncertain outlook on not only the Canadian economy itself but the global economy as well, major banks are cutting their interest rates.
Yesterday, Royal Bank of Canada was the very first bank to cut it's five-year fixed rate 10 basis points from 3.89% to 3.79%. Here at the broker channel, interest rates have also been reduced by various lenders all across the board.
This is great news for mortgage borrowers who have been anxious about rapidly increasing mortgage payments on a variable rate mortgage or for those who have mortgages coming up for renewal.
Any other variable rate credit products will also maintain the same payment assuring borrowers that payments will stay manageable for the short foreseeable future.
What's causing the sudden change of heart by the Bank of Canada?
Just a couple of months ago we were hearing that 2019 was the year for rate increases. But last week, the Bank of Canada took a sharp turn and held the overnight lending rate at 1.75% signaling that the economy is not as strong as they thought it was.
So you know, the Bank of Canada's job is to maintain stable pricing and low inflation. And, much of the decision with respect to the overnight rate is based on oil and global uncertainty as well as turmoil in Canada itself (transportation issues surrounding getting oil out of the country is causing a surplus).
Perhaps the wonderful economy is not as strong as expected and the Bank of Canada needs to revise how they are looking at things going forward?
Additionally, the US Fed has also changed their tune largely because global growth is not as strong as they hoped such as tariffs being one hurdle they are approaching.
And then there's the 'yield curve' that is flattening aggressively and this tends to signal a recession is on the horizon. Some economists also suggest 2020 is just around the corner and may be a recession year.
For all of your mortgage needs, feel free to contact our office today.
Direct: (647) 773-4849
If you prepay the entire balance of your mortgage loan before the end of its term, there will be a penalty to do so (i.e. exiting your mortgage in year 3 of a 5-year term).
Here are reasons borrowers exit their mortgage term early:
1. They sell their home.
2. They refinance with another lender.
3. They pay off the balance with inheritance or personal savings.
In order for your lender to calculate your penalty, they must follow a formula. Some lenders use a more expensive formula than others, and as a result, it is always beneficial to sort out how the lender’s penalties get calculated BEFORE you sign a mortgage contract. Of course, this exercise is necessary for any borrower who wishes to save money over the long haul. This is precisely a case of “failing to plan, planning to fail."
Here’s an example of a clause from CIBC Mortgages showing how a mortgage penalty will get calculated should the borrower exit their contract early:
If you have a fixed rate closed mortgage, your prepayment charge will be the greater of the following:
Three months worth of interest is easy to calculate, and using your interest rate, you can determine, at any point during your mortgage term, what the penalty will be. What you won’t know, however; is what the Interest Rate Differential calculation will be and if that will be higher than the three months worth of interest.
(If you have a variable rate mortgage, the penalty will always be just 3 months worth of interest).
How do you calculate the “Interest Rate Differential?"
The Interest Rate Differential or “IRD“ (in mortgage lingo) is based on the total amount you are prepaying. Here, the entire balance is being paid off.
The Penalty will equal the mortgage balance x Differential amount x the total months remaining DIVIDED by 12 months.
So, for example,
$100,000 mortgage with an interest rate of 9% with 24 months remaining.
The lenders’ current rate is only 6.5%
The differential is 2.5% (9-6.5%)
The issue with posted rates is they are not all the same and the higher the posted rate, the more expensive the penalty can be. BIG Banks (Royal Bank, TD Bank, CIBC, Bank of Montreal, Scotiabank, National Bank, etc.) all use the Bank of Canada’s POSTED RATE to calculate their mortgage penalties.
None of these financial institutions, however; actually charge the client the posted rate on their mortgage loans. What the bank does instead is provides a discount off of the posted rate, which is then used in lieu of the current discounted rates they are offering to calculate the penalty.
So for example, if your rate is 3.64%, but the posted rate at the time of the mortgage was 4.84%, they use the discount of 1.2% (4.84-3.64).
When it comes to smaller outfits or "monoline lenders" accessed exclusively through the broker channel, they often have similar prepayment penalty formulas except they plug in different numbers. Monoline lenders tend to use lower posted rates (not the Bank of Canada‘s) to calculate their penalties.
So, for example, if you’re rate is 3.64% and the monoline‘s (broker-channel only) posted rate is 3.99%, the discount is only 0.35%. One can see how this would equate to a lower penalty when entering these numbers into a basic formula.
Using a mortgage balance of $280,000 at a rate of 2.99%, taken out on September 1, 2016, and maturing August 21, 2021, let‘s take a look at the difference in calculation based on the borrower exiting January 15, 2019.
With CIBC Mortgages:
Calculation type:Interest rate differential
Learn more: Information on mortgage prepayment (open in a new window)
Remaining term:2 year(s), 8 month(s)
Comparison rate:3 year, 3.940%
Current Interest Rate:2.990%
Rate discount received:1.850%
including cash back:$6,675.84
With a monoline lender (First National Financial LP)
(Example of calculation below)
Your estimated prepayment charge is
There is definitely no debate about which lender has a better prepayment calculation.
Sometimes borrowers feel comfortable sticking to a major bank out of security and safety. It is a myth that big banks are safer than monoline lenders. If your lender should go bankrupt, they’ve already given you the money!
The proof is always in the pudding, and the argument about prepayment penalties is clear.
Have a mortgage question?
Contact me today
Sarah A. Colucci
I have over a decade of mortgage experience. I am passionate about helping my clients obtain the best mortgage and getting out debt as soon as possible.
Helping you understand shortcuts.
There are tricks a borrower can use to pay off their mortgage faster, paying less interest to the banks.
I'd like to show you an example using "Sue."
Sue currently has an outstanding mortgage balance of $100,000 on her property. The mortgage interest rate is 4%, which costs her approximately $4,000 a year in interest.
According to a recent appraisal, her property is worth $850,000, and therefore, she has a mortgage of 12% of the loan to value.
Since the bank will give her up to 80% of the loan to value, or up to $680,000 (if she qualifies), Sue takes out a line of credit for $100,000 to match what she has outstanding on the first mortgage.
Now her property is mortgaged for $200,000 or 24% of the loan to value.
Instead of using the money she has taken out on a line of credit for purchases or other purposes, Sue pays off her first mortgage of $100,000 with the line of credit. The $200,000 debt is consolidated into just a line of credit of $100,000.
The line of credit's interest rate is Prime plus 1%, so approximately 5%, interest only, which costs her $1,000 extra a year, or $5,000 in interest.
You may be asking yourself, how is Sue getting ahead with paying more money each year in interest payments?
Sue has some savings sitting in a TFSA account and she's contributing to it with each pay cheque and earning minimal return. Here's a better option:
Sue has a TFSA account that has $20,000 in it. Instead of letting the TFSA collect interest at 1%, she puts it towards her “open” line of credit, meaning she can pay it down without penalty whenever she wants. Now she has a balance of $80,000, and she is paying only $3,000 a year towards interest, which is $1,000 less than she was originally paying on her first mortgage balance.
Therefore, Sue is saving over $700 a year because she would have only earned about $200 in her savings account.
As Sue gets paid, instead of putting some of her savings into a TFSA, she deposits it into the line of credit balance which enables her to pay principle faster due to it being calculated using simple, monthly interest instead of being amortized over twenty-five years or longer.
This sounds great but what are the dangers?
The home equity line of credit‘s interest rate can change. The Bank of Canada sets the overnight lending rate, which does fluctuate. Depending on the rates, this can alter how many savings one acquires and how fast they can pay off the line of credit and become mortgage free.
If the line of credit is not used often, one may be charged inactivity fees.
Most people have good intentions when they apply for a home line of credit. However, if someone finds themselves in debt, they could accumulate a balance on the line of credit, making it difficult to pay off. This would make the HELOC very counterproductive to the goal of becoming mortgage-free sooner.
Need mortgage advice? Depending on your unique situation, there are many options to explore to save you money, helping you become debt-free sooner.
Call today for a free consultation (647) 773-4849.
It seems that the housing market in Canada has "somewhat" stabilized. Interventions to slow down growth and inflation commenced in mid 2016. From the collaboration of the provincial governments to the OSFI (The Office of the Superintendent of Financial Institutions), and the Bank of Canada, this intervention has now materialized into slowing the housing demand. In addition, there have been steady interest rate hikes, the introduction of the mortgage stress test which makes borrowers have to qualify for a mortgage using the current contract rate plus 2%, and taxes on foreign buyers.
There's also been some measures put in place to deter people from keeping properties vacant and some further restrictions on urban construction projects.
On a national scale, however, the Canadian housing market still has a long way to go before it gains the level of housing affordability that it had before the current measures were put in place. There is also a possible risk that higher mortgage rates and the current stress test persisting could hammer down demand in areas such as the Atlantic and Prairie provinces, would could lead to declining prices and less sales.
Due to all of the interventions noted, there have been significantly less overall sales. The only city that is currently experiencing price growth is Toronto after a year of steady declines.
Also, despite the relatively low national inventory-to-sales ratio, the new-home market now faces weaker demand than at any time since the 2009 downturn, and this is showing in the price indexes for new homes, where first Toronto and then Vancouver have slowed drastically and dragged the national price index down with them.
Tight demand relative to supply for condo units is only the start of the story.
Why is there a tight supply for condos?
In Toronto and Vancouver, smaller condos have a more advantageous and profitable use. As a landlord, rent is easier to garnish and tenants are willing to pay more. Single family townhouses in Toronto are also popular as more are for rent than for sale.
What's the outlook?
Bank of Canada will continue to tighten short-term interest rates from now until 2020 and they will do this to head off inflation while also sustaining the value of our Dollar. This tightening will make mortgage interest rates rise, and based on Moody's Analytics, interest rates will be 6% by late 2020.
If you need to refinance large unsecured debt or are planning to move lenders to obtain a better rate, declining house prices will affect your ability to do so based on a max lending amount of 80% loan to value and the ability to qualify.
Understanding the risks of rising interest rates are imperative to weathering the storm in a higher interest rate environment. Speak to me today about steps you can take to save more money in the long term while avoiding payment shock.
Want to know what you should do? Have looming debt you would like to consolidate? Needing to find a way into the real estate market?
Call my office today for a private consultation.
Mortgage Agent Lic. M14000929
By: Sarah A. Colucci
May 7th, 2018
Not everybody knows that mortgage broker fees are not mandatory and that they vary from brokerage to brokerage, individual agent to individual agent.
That's right. If you got charged a broker fee at some point in the past or are being charged one now, it wasn't and isn't mandatory. That doesn't mean the price was/is unwarranted, however; it merely implies the broker wants to get paid for their time and effort.
As a consumer, it always helps to understand how exactly mortgage brokers make a living. If you are aware of their pay structure, you will be able to readily determine if a fee is warranted or not. After all, nobody likes being gouged.
Let me explain...
Financial institutions, which include banks, credit unions, monoline lenders, etc., that work directly with mortgage brokers, all pay them a commission. In the broker world, this is called a finder's fee.
"A" lenders = great rates, excellent credit, fully verifiable income.
Any financial institution that is considered an "A" lender, meaning they offer the most competitive interest rates to those with the best credit and fully verifiable income, pay the most in finder fees to mortgage brokers. As a result, it's uncommon to see a mortgage broker charging a broker fee on what is considered an "A" deal.
I have heard of brokers still charging fees in addition to the commission they receive. They often do this if there was extensive work involved in getting the deal funded. Unfortunately, others "double dip" or get paid twice on the same file, which, in my opinion, is not an ethical business practice and gives the rest of us a bad name.
"B" lenders = unique financial situations, non-conventional income, bruised credit
Alternative lenders that offer slightly higher interest rates because the mortgage is deemed riskier do, in fact, pay brokers a finder 's fee. They just don't pay them as much as "A" lenders do. Usually, the work involved in closing the deal is the same, BUT some brokers feel they should always be making the same percentage of commission no matter what. Therefore, a fee will be charged in addition to the lower commission they are receiving.
Ultimately, it comes down to the broker's personal guidelines and what he/she feels they have done to justify their fee. Some brokers think getting paid from the lender (even if it is less) is still enough compensation and, in good faith, don't want to charge anything further.
How do you know if a broker fee is justified?
This is a conversation you need to have directly with your broker. For example, if you are closing an alternative mortgage for $500,000, and the brokerage fee is $5,000, know that your broker is already receiving a commission from the lender. You may want to see how the additional cost came to be realized. Was there extensive work done?
Private lenders = unique properties, deals that don't fit into the A or B category.
In this situation, there are NEVER any commissions or finder fees paid to the broker. Therefore, one will almost always get charged a brokerage fee. But again, the amount is not set in stone, and there is no pricing that is mandatory. Therefore, it's best you discuss the brokerage fee with your broker and how they arrived at their cost of doing business. If it feels like an uncomfortable question to ask, then you can always ask someone else or look elsewhere altogether. One deserves to feel comfortable in whatever they are doing especially with respect to finances.
Broker fees to exit
Nowadays, it's common to see brokerage fees charged even if the deal doesn't close. Usually, a document or fee direction is signed at the beginning, which states that should the deal not go through by no fault of the brokers', a fee will be charged. Meaning, if you change your mind after all the work is done, you will still have to pay. I had a deal like this recently, where the borrower was asked to pay a significant amount of money in the event he walked from the deal. He called me because he felt hesitant about proceeding with the other broker.
Here's a link to an article where Monster Mortgage charged a $10,000 fee to the people that decided to stick with their current lender. Read about the story HERE.
Usually, this puts people up against the wall and it doesn't end favourably.
What are your thoughts?
Very rarely, someone will call me and ask me what the difference is between a getting a mortgage through a bank and getting one through a mortgage broker. I won't give you the boring, biased list as most brokers do but I will tell you the truth. So, why do some people choose a bank and why do others want a broker?
Firstly, marketing is a significant factor in all of it. Marketing and advertising shape a consumers perspective about which route is the safest. However, in my opinion, no matter how much money gets spent on advertising, advertising will never teach you, the consumer, about what you need to know. In fact, advertising does quite the opposite - it withholds what you need to know so you can make decisions based on misaligned beliefs which in turn, makes banks and other lenders billions. Think about that.
If you're like most consumers out there, you don't spend your time researching mortgage terms and various contracts, sorting through the fine print. Why would you? That's not your job. It's the duty of your mortgage professional whether they be in the "branch" or your local mortgage brokerage.
Does this always happen, however? Does the consumer still get educated on various mortgage contracts? Sometimes they do, which is excellent, but most times, unfortunately, they do not.
The reality is if you choose to obtain financing directly from one particular bank there isn't a whole lot of mortgage contracts to sort through and explain to you. That's because the bank can only offer you their mortgage products. You may not see the problem with this since the rate is reasonable, for example, but failing do your homework in this area can cost you ALOT of money.
Here's what I mean. There are a few components to every mortgage, which left unchecked, can result in a substantial financial loss (think in terms contracts).
Do you know the pre-payment industry is a secure multi-million dollar revenue generator for most banks and various other lenders, even those accessed through the broker channel? The reason it's a reliable stream of PASSIVE income is that most consumers don't understand how penalties get calculated until they're in a situation where they are trying to sell their home or refinance their mortgage. You're probably thinking you've heard this all before and it can't be that bad. Well, it's definitely BAD NEWS. Firstly, it's your hard-earned money, and secondly, if you knew of lenders that had a more favorable way of calculating penalties at the beginning, you wouldn't be dishing out a $17,000 prepayment penalty, for example, just because your life situation changed and you need to sell or refinance.
Why brokers prevail in this area.
Good brokers will always pair you with the best lender for you. Believe it or not, some lenders offered through the broker channel have the lowest forms of pre-payment penalties around and often, they offer even better rates than your bank, too. Why not ensure you get the best rate and the best set of terms?
To become mortgage-free sooner, you'll want to pay down your mortgage as soon as you can. DO SOMETHING TODAY, if you can. Switch your mortgage payments to bi-weekly, accelerated if you're currently paying on a monthly basis. You'll shave your mortgage amortization down a few years just by completing this straightforward task. Over the next twenty or so years; you will pay way less interest to your financial institution and much more principal to YOUR equity bank.
Now, let's say you decide to do this TODAY and your bank won't allow it. It then becomes an issue of how much you are allowed to pre-pay within a given year. Ahh, the caveat - and also why prepayment privileges are essential. You'll want to be signed up with a lender who offers very flexible and generous prepayment options. I'm happy to say that lenders through the broker channel provide great privileges, some much more than your everyday bank.
Simply stated, banks do not offer the most flexible service in this ever-changing world of having no time. All appointments must be completed at the branch or adhere to rigid timelines. Closings also take longer due to the corporate and political process that must take place. Banks are hardly ever available on their cell phones or outside of business hours. Brokers, on the other hand, are usually available more often. This means you get more attention and in turn, a better understanding of what you are doing. It's a way more personal experience. So, if you don't like the corporate environment and want to have a more "real" experience, you'll probably feel much better working with a broker you trust.
Approvals that banks do not dare give.
If you're self-employed and or have bruised credit, you may feel shunned as a loyal bank customer. I hear the same thing over and over again, which are the voices of disappointment when it comes to banks not being able to offer mortgage financing to their long-term customers. Brokers have many sources they can utilize for borrowers who don't claim much on their taxes due to being self-employed or those who have poor credit. You can still accomplish your goals in real estate by working with someone who understands where to place your application. Believe it or not, I've had some borrowers come to me who were declined by a major bank but were later approved, with a BETTER rate, with another lender. Funny the way things work out sometimes, isn't it?
Due to marketing and penniless gossip, some consumers fear the high-costs associated with using mortgage brokers to complete financing. I'm here to tell you this is information is not true. Most times, when arranging a standard mortgage such as the one you would obtain at the bank, for example, there is no fee payable by the consumer to the broker. Times when there would be a fee, for example, is if you arranged a private loan and there is no compensation getting paid to the broker. Sometimes fees are payable if the work that got done was extraordinary or took a significant amount of time. This is the truth. Of course, all of these aspects of a mortgage deal would be discussed beforehand to ensure everyone is all on the same page and in agreement. I won't lie and say that not all brokers charge fees. I've unfortunately witnessed brokers who have charged astronomical amounts of brokerage fees to borrowers... this is to say, you must find someone reputable to work with and understand why you are paying what you are.
For the most part, mortgage brokers receive compensation directly from the lenders they use.
Thanks for taking the time to read this article. It's not to say banks are this evil entity no one should use. Banks have their place. My point is brokers create competitiveness in the market because we can de-monopolize banks and their stronghold and bring better deals directly to the consumer.
For all of your mortgage needs, call 647-773-4849.