There could be thousands of dollars sitting in your tax account.
Some lenders put the money you pay for your taxes with your monthly mortgage payment in an interest-bearing tax account but others don't. Does your lender need to pay your annual property tax on your behalf?
In addition to your mortgage payments, you also have to pay the balance of your tax bill. But, although having your lender pay property taxes for you seems convenient, it can cost you extra money.
Firstly, some lenders charge a yearly tax administration fee for paying your taxes for you. This can cost up to $450. Secondly, because property tax rates rise between 3 and 5 percent each year, your lender will collect an "inflated" payment to accumulate a tax account surplus which acts as a buffer. This money is held in a tax or escrow account.
When taxes rise, instead of renegotiating your monthly mortgage and tax payment, your lender will dip into the tax account and take out the difference to pay your taxes.
Please note, over time, extra money accumulates in this tax account. Sometimes, even thousands of dollars are sitting in there and they won't get credited back to you until you pay off your mortgage.
Alternatively, if you opt to pay your own taxes, the balance in the tax account will be credited to you since the lender is no longer paying your taxes on your behalf.
To maintain the convenience of taxes automatically getting paid and save money, why not set up a payment plan directly with your Town or Municipality? That way you don't pay more an admin fee to your lender and you don't pay more than you have!
Have mortgage questions? Don't hesitate to call (647) 773-4849. I can help you make sound financial decisions in real estate.
Sarah A. Colucci
Sr. Mortgage Agent, Lic. M14000929
Mortgage Edge, Broker 10680
Email in confidence: firstname.lastname@example.org
A mortgage is the most significant financial obligation a borrower will undertake in their lifetime. If we compare the costs associated with loans such as student and car loans, for example; a mortgage loan is not only exponentially higher but also a lot more expensive.
Not many borrowers understand what’s involved in paying a mortgage besides their principal and interest payment and, of course, the mortgage rate they receive. Unfortunately, mortgage terms and conditions are generally poorly understood by a large percentage of mortgage borrowers, which contributes to costly mortgage fees.
In many instances, mortgage terms are not explained in enough detail to borrowers by the professionals who originate or administer them, which leads to confusion.
If you plan to buy a home soon, here are some of the potential fees attached to home loans to watch out for:
Mortgage Insurance or High-Ratio Mortgage Insurance
Many borrowers do not have 20% available to put down towards their purchase price to avoid paying mortgage insurance. According to the Government’s rules, if a borrower does not have a 20% downpayment, their mortgage loan must be insured through CMHC (Canada Mortgage and Housing Corporation) or another insurance corporation such as Genworth or Canada Guaranty Insurance Company. High-ratio mortgage insurance can cost up to 4 percent of the total loan amount and in some cases, 4.5 percent. On a $300,000 mortgage loan, it could cost borrowers $12,000 in insurance fees.
The total loan amount would be registered for $312,000.
High-ratio mortgage insurance does not have to be paid up front, although it can be. Most of the time, borrowers keep the insurance premium attached to the original mortgage amount, and the total loan gets amortized out to 25 years. Unfortunately, because the premium is amortized with the loan, borrowers will pay interest on their insurance premium.
PST (Provincial Sales Tax) on the insurance premium will need to be paid up front and therefore, will get deducted from the mortgage advance on closing.
What other fees do borrowers look consider?
Some lenders will deduct a processing fee or mortgage administration fees from the net advance to the solicitor on closing. Sometimes, this fee can be between 200-350 dollars. We find these fees are applicable for lenders using a third party administration company such as First Canadian Title who acts as the middleman between the lender and the lawyer. First Canadian Title is also a title insurance company and can title insure the property.
If the lender does not use a third-party company such as First Canadian Title, then there won’t be any extra processing or administration fees deducted from the net advance on closing.
Property Taxes: Pay on your own or let the lender pay for you?
Borrowers will often allow the lender to pay their property taxes on their behalf, so they don’t have to worry about it. One less thing to think about, right? Well, not really.
Often, if the lender is collecting property tax money on your behalf, two things will happen.
First, you will most likely have to pay more each month for your taxes so the lender can accumulate an ‘in-house tax account’ for you. To keep up with increasing property taxes each year and not have to keep negotiating your mortgage payment, they will need to collect more than what’s owing to create a buffer. Many people are surprised to learn their lender has thousands of dollars sitting in their tax account.
Secondly, the lender may charge you a yearly administration fee for collecting taxes on your behalf.
Avoid these additional costs and fees by setting up a pre-authorized payment directly with your Municipality.
When setting up a mortgage and signing any associated documentation, ensure the prepayment penalty gets explained to you. If you decide to pay off your mortgage earlier than your contract allows and for more than your prepayment privilege, you will get charged a penalty. Different lenders use different calculation methods, and some are more expensive than others. Ensure you discuss how the penalty gets calculated so you can plan for any associated fees with breaking your mortgage down the road.
As a senior mortgage agent, I can help you sort through the fees to ensure you save money and get the best mortgage product for your situation.
Mortgage Broker or Bank?
There is often a misconception that brokers charge fees that banks don’t. Usually, if a borrower is getting a prime mortgage product and has excellent credit and enough qualifying income, not only is a brokerage fee not applicable, but the interest rates are usually more competitive. Mortgage brokers get paid an origination fee by the lender directly and they do not charge the borrower.
Of course, if a borrower is getting charged a brokerage fee, they should always double check the price and ensure it is just for their situation.
Should you pay off your mortgage earlier than 25 years?
The answer depends on a few factors. Firstly, if you have liquid investments, it would depend on what yield they were earning. If mortgage interest rates are much lower as they are today, it makes sense to keep your money in the bank instead of using it to pay off your mortgage. You could lose thousands of dollars of investment gains.
Secondly, if that is not an option, you can simply use the privileges within your mortgage contract to significantly reduce your amortization period and satisfy your financial goals.
What many borrowers don’t consider is just by changing payment frequency and adding extra money to their payment, their amortization period can shrink dramatically. So for example, if payments are set to monthly mortgage payments, by changing to a weekly or bi-weekly, accelerated payment, can have huge benefits.
Many borrowers are often interested in a line of credit because it's flexible. They appreciate the fact that if they needed to pay it out entirely or make a lump sum payment down the road, they would not be charged a penalty. This is true, however, secured lines of credit usually come with higher mortgage rates.
In reality, and in my experience, most people who have high balances on their line or who are ‘maxed out’, find it difficult to pay them off completely or make extra payments. They end up making monthly payments at a higher interest rate and lose money.
On the other hand, to help with personal finance, I offer closed mortgages that have a pre-payment privilege of up to 20%, and in some cases even 25%, per year. This means that borrowers can pay 20% of their original principal balance without a penalty. On a $500,000 mortgage, that's $100,000 each year without penalty. This approach allows borrowers to make a principal and interest payment while still being afforded the privileges of a "semi-open" credit product. In most cases, this is a sound, long term solution.
Of course in a closed mortgage, a borrower cannot access funds like they would in a line of credit. That's why it's important to set up your credit products with your plans in mind and work with a mortgage broker. I often work with borrowers to segment their credit product to what makes sense.
For example, having a larger closed mortgage portion and a smaller line of credit portion that is manageable while still being able to pay off their mortgage sooner.
In conclusion, the answer is YES you should pay off your mortgage as quickly as you can. Always speak and work with a professional.
Have a mortgage question? PM me on Facebook or call 647-773-4849. Buying a home? Need to consolidate costly credit cards? Call today or visit www.coluccimortgages.com
Sarah A. Colucci
Sr. Mortgage Agent, Lic. M14000929
Mortgage Edge, FSCO Broker #10680
Research shows most mortgage borrowers search for the best interest rate but hardly ever read through the terms of their mortgage contract which can end up costing them more money down the road.
In the last few years prepayment penalties have received a lot of attention.
For example, in 2014, the CBC released an article exposing a penalty a couple had to pay in the amount of $17,000 when they decided to sell their home and move abroad. TD eventually softened the blow but it’s wasn’t until after the couple went public.
A class action law suit was also launched against CIBC in 2011 by Siskinds LLP after a number of borrowers claimed “that CIBC applied terms and conditions to certain mortgage contracts to allow it unfettered discretion for calculation of mortgage prepayment penalties.” Some people were forced to pay over $50,000 in penalties.
Royal Bank was also in the spotlight in 2011 when Brian Hyytiainen went public about his penalty that cost him $13,000. He later appealed the penalty to the RBC ombudsman and Chambers Banking Ombuds Office. According to the article published by the Toronto Star, his request for a reduction of this amount was declined.
If you’ve noticed a pattern of higher penalties amongst big banks, you’re on to something.
Big banks have the highest and most expensive penalties due to their calculation method. In a fixed rate mortgage, which is the most popular type of mortgage borrowers obtain, big banks use the Bank of Canada’s benchmark rate to calculate penalties. These rates are often highly inflated and can give the impression borrowers received a bigger discount off of their interest rate than they really did. In turn, this triggers a larger penalty.
Is it any wonder that big banks make millions, if not billions of dollars from pre-payment penalties? It shouldn’t be. Mortgage contacts are designed to make lenders money and big banks will use every avenue they can to generate a profit.
In conclusion, if borrowers don’t understand what they are reading and most importantly, signing, they won’t be able to protect themselves from bad terms which can be costly.
As an experienced mortgage agent who prides herself on facilitating clients with the right mortgage for their lifestyle, I don’t like to focus on interest rates as much as I do mortgage terms.
I occasionally come across borrowers looking for the best pricing only but the bulk of my clients come to me for advise and the best mortgage which means more than just the interest rate.
If borrowers rate shop they may get the lowest rate but may also be stuck in a punitive mortgage contract, one that has “no frills.” Prepayment privileges, penalty calculations and more may be all skewed to be astronomically more expensive in exchange for a better rate. Not many borrowers want this type of mortgage if it’s explained to them in detail.
To learn more, you can always contact me at (647) 773-4849. I am always willing to either advise on a particular mortgage or even help borrowers read the fine print of their existing mortgage contracts.
The Office of the Superintendent of Financial Institutions has released a mandate to banks to require a 2% buffer against bad loans.
OTTAWA ─ June 4, 2019 ─ Office of the Superintendent of Financial Institutions
Today the Office of the Superintendent of Financial Institutions (OSFI) set the Domestic Stability Buffer at 2.00% of total risk-weighted assets, effective October 31, 2019.
This reflects OSFI’s view that key vulnerabilities to Canada’s Domestic Systemically Important Banks (D-SIBs) remain elevated. The key vulnerabilities include Canadian household indebtedness, asset imbalances and institutional indebtedness. Against this backdrop, a favourable credit environment and stable economic conditions continue to provide a window of opportunity for D-SIBs to increase their capital holdings.
An effective capital regime ensures that banks are holding adequate capital to protect against risks to the financial system, while also encouraging them to use their buffers during times of stress to avoid asset-sales or drastic reductions in lending.
This announcement is consistent with the Financial Stability Board remarks that financial supervisors like OSFI should “consider using the current window of opportunity to build resilience, particularly macroprudential buffers where appropriate.”
Announcing the buffer demonstrates OSFI’s view that increased transparency will support banks’ ability to use this capital buffer in times of stress by increasing understanding of the purpose of the buffer and how it should be used.
" Building Resilience: OSFI Sets Domestic Stability Buffer Level At 2.00% ". 2019. Osfi-Bsif.Gc.Ca. Accessed June 5 2019. http://www.osfi-bsif.gc.ca/Eng/osfi-bsif/med/Pages/dsb201906-nr.aspx.
By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929