In Canada, you can purchase your primary residence with as little as 5% down, provided the purchase price does not exceed $1 Million. To break it down a little more, you will require at least 5% of the first $500,000 and an additional 10% of the rest provided the home purchase does not exceed $1 Million.
As far as investment or rental properties, however, mortgage lenders require at least a 20% down payment. Buying a second home. If you’re in the market to buy a vacation home or a second home, then you may be pleased to learn second homes and vacation homes do not require a down payment of at least 20%. You can purchase these types of properties with as little as a 10% down payment. The loan amount must be at least $150,000 and cannot exceed $1 Million Investment property mortgages use rental income to qualify when your income may not be enough to service the additional mortgage loan you are requesting. However, when applying for a mortgage on a vacation property or to finance a second home, mortgage lenders will not use rental income or cash flow to help you qualify. Your income will need to service the mortgage payments. Second home programs can consider 2-4 season cottage properties, second homes for family members like children going away to school, for example, and more. Second home programs also consider recreational or seasonal properties (a plus for anyone in the market for these unique types of properties). Do you need good credit to buy a second home or vacation property? Because high-risk mortgage insurance companies facilitate the second home program, you will need a good credit score. But rest assured, you will also have access to the best mortgage interest rates under the second home program. A mortgage broker can help you with the second home program if you are in the market to add to your real estate collection. Please do not hesitate to call or write. Sarah A. Colucci Mortgage Edge, Broker 10680 Direct: (647) 773-4849 Email: sarah.colucci@mortgagedge.ca
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4 Main Reasons You Should Refinance Your Mortgage Today.
You may not know that unsecured debt differs from secured debt. Banks and credit unions consider unsecured debt riskier than secured debt, which is “secured” by its registration against title to your home or property. If you default on your unsecured debt like a credit card, for example, the financial institution cannot pursue your tangible assets like real estate to recoup the money they lent to you. As a result, unsecured debt comes with higher interest rates in order to offset the greater amount of risk it exposes the lender to. Secured debt (mortgages and lines of credit) offer lower interest rates because it gets tied to your property. If you do not make your monthly mortgage payments, the lender can launch a power of sale, forcing the sale of your property in order to recuperate the money. Therefore, secured debt poses less risk to financial institutions because they have an available recourse if things go sour. Unfortunately, unsecured debt like your every-day credit card, car loan, student loan or personal loan cannot get secured against title to your home. As a result, you may get stuck making higher interest-only payments that reduce your cash-flow and financial productivity. Initially, an interest-only payment on a large credit card balance may not feel like a large financial strain but eventually, as the balance grows instead of diminishes, you will learn you are just wasting money. In fact, you will never get out of the debt if you just make the minimum payment and instead, may become a slave to your debt while living pay cheque to pay cheque. Refinancing can be the way out of this expensive (and pointless) debt cycle. Here’s why it makes sense. Save Time When you refinance your mortgage to consolidate unsecured debt, which has no timeline for repayment because it’s interest only and compounded daily, you set yourself on a path to get out of debt quicker. By merging these higher-interest loans (sometimes over 26%) into a mortgage loan that is less than 3%, for example, you pay more of your debt faster. Simplify Your Life By removing all the excess debt that simply eats into your cash flow, you reduce your debt and end high-interest payments. You centralize all of your debt into one loan with one financial institution. Improve Your Cash Flow Everyone wants more money each month; everyone wants more monthly cash flow. When you refinance, you lower your monthly payment, experience a complete heavy debt reduction, and as a result, increase your cash flow. Leverage Equity In Your Home If you’re fortunate enough to have equity in your home, you can take advantage of it and become debt free faster. Do you have questions about having extra money each month? Or how refinancing works? Save time and APPLY TODAY. Call or write today. Sarah A. Colucci, Mortgage Agent Lic. M14000929 Mortgage Edge Broker 10680 Direct: (647) 773-4849 Email: sarah.colucci@mortgageedge.ca a Searching for the perfect home can become exhausting, especially when you know there are multiple offers being submitted by other potential buyers and further realizing with each attempt at another property your offer may not get accepted. It’s frustrating not knowing what the magic number is going to be and potentially having to take sudden risks like going over your budget.
If this struggle continues for long, you may feel annoyed, discouraged or even decide it’s best to sit out on home buying altogether. In reality, buying a home should be a fun experience and one where you can happily search for your dream home ––a property that meets all your expectations. But when it’s a seller’s market, you may end up finding this experience overwhelming and sometimes, a complete nightmare. So, how can you avoid the headache of buying a home in a heated real estate market and still have an enjoyable and successful experience? Understand Your Maximum Purchase Price One way that almost ensures you will run in a complete circle during a home search is not understanding your bottom line. It’s easy to use an online mortgage qualification tool and assume you know the maximum purchase price you qualify for but using this method can seriously hamper your chances of successfully purchasing a home. Online qualification tools are not personalized and only run a generic calculation without factoring in your employment income, credit score and monthly liabilities. If you rely on this method alone to determine your bottom line, you may find you will have to abandon your offer to purchase in the end because you may not actually qualify. Car loans, student loans, lines of credit, etc. can all reduce your purchasing power and therefore must get included in your pre-approval application to avoid disappointment. Also keep in mind that using an online qualification tool may even underestimate your purchasing power, causing you to miss out on buying a property more suitable that costs more. When you get an official pre-approval which is signed off on by a major financial institution, you can be confident in your bottom line. You will narrow down the price points you can afford and customize your home search, which increases your chances of finding the right home and having your offer accepted. Speak to your mortgage broker about the property you plan to put an offer on. Mortgage brokers don’t just offer pre-approvals to help increase your chances of having your offer accepted, they also offer guidance on each potential property you want to put an offer on. Property taxes vary depending on the property and that can add or take away from your pre-approved mortgage amount. For example, if property taxes end up being lower than what was estimated, you may qualify for a larger mortgage. On the flip side, if property taxes are more, this can reduce the amount of mortgage you qualify for. Again, the more you narrow down your bottom line, the more successful you will become in finding the right home. Mortgage brokers can help you. Make sure you disclose ALL income to your Mortgage Broker. When trying to determine the perfect price point through a pre-approval, it’s important to disclose all of your income. You may not know that the Canada Child Benefit, for example, is an acceptable form of income and can help you qualify for a larger mortgage. Be sure to learn about all the forms of acceptable income to increase your chances of home buying success. Write a heartfelt letter to the seller and attach it to your offer. At first, you may think that writing a sentimental letter to the seller about why you are the best purchaser for their home is a little corny, but when there is fierce competition that seems to focus on price, sometimes the reasons can overcome the dollar amount. Many sellers get attached to their property. They like to feel that the person buying their home really cares about it and will treat it well. Try writing a letter about the reasons you love their home and attach it to your offer! Don’t give up. It is difficult even for real estate gurus to predict the real estate market with accuracy, so don’t let failed offers discourage you. Yes, it can feel hopeless at times but the real estate market moves in cycles and it can flip to a buyer’s market on a dime. Just think, there are many homes that meet your criteria in the queue to be listed, and you WILL find the right one for you! Do you have mortgage questions? Please feel free to call or write. Sarah A. Colucci, Mortgage Agent Lic. M14000929 Mortgage Edge, Broker 10680 Direct: (647) 773-4849 Email: sarah.colucci@mortgageedge.ca There’s a new theory out there and it includes paying your mortgage off early using a home equity line of credit, otherwise known as a HELOC. Many have claimed success using a HELOC to pay off their mortgage in a record amount of time.
Does it work? When reviewing the technical aspects of this theory, it appears it’s an exceptional way to become mortgage-free in a record amount of time and save money but when putting it to practical use; it seems to be a far-fetched concept that is too good to be true for many. But let’s look at the strategy in more detail and consider the likelihood of it succeeding. First, here are some things that must be in place in order for this strategy to be successful:
Here’s an example of this method in action. Let’s say you have a $300,000 mortgage and a home equity loan secured against your house, and your next paycheque is approximately $5,000. One month, you decide to apply your entire paycheque to the mortgage. Of course, this would immediately lower your mortgage balance to $295,000. Then, let’s say, that month your non-housing expenses amounted to $2,000 using your credit card. So, you decide to pay $1,000 using your home equity line of credit. You also decide to pay your credit card balances with your home equity line as well. At the end of the month, you will owe $3,000 on the home equity line of credit and $295,000 on your mortgage BUT your credit card now has a zero balance. Then, the next month comes along and your $5,000 paycheque gets applied to the $1,000 you used from your home equity line of credit and the $2,000 you used for living expenses, also on the line of credit. The remaining $2,000 reduces the Home Equity Line balance to $1,000. Now, let’s look at what happens in the third month. Your $5,000 paycheque arrives and so you use $1,000 to pay off the rest of the HELOC, $2,000 for your living expenses, and $1,000 for the mortgage. This would leave you with an extra $1,000 that you could carry over into the next month. Of course, in the next month, you could repeat the original cycle and take your $5,000 cheque and lower your mortgage to $290,000. This strategy basically allows you to pay off your mortgage 10-15 years earlier than expected because you would make an extra annual mortgage prepayment of $20,000 or more. Realistically, this strategy is too complex to be a practical way to pay off your mortgage faster. After all, living expenses come up when they come up and there is no way to predict how much you will need every single month. Using this method to pay off your mortgage also means you're constantly using both secured (mortgage) debt and unsecured (credit cards) debt to manage your finances which means there isn’t much room for savings and you could risk paying higher interest on your HELOC since HELOC rates are higher than closed mortgage interest rates. The other problem is most people do not actually have this much discipline, but if you do, kudos to you (you would really need to have complete control of your personal finances). In reality, because life is unpredictable, it can become very difficult to keep this monthly routine going year after year. Eventually, most people would fall off this cycle and live within their paycheque. Also, if someone loses their job or if some unforeseen situation comes up like the requirement to complete home improvements, it may throw off the entire plan. The other risk is in constantly using credit cards because if you suddenly can’t pay off their balances, it ends with unnecessarily racking up high-interest credit card debt that can become impossible to pay off. In fact, most people end up refinancing to complete a debt consolidation just to get away from the infamous credit card trap. Also, playing with debt in this way is ultimately like playing with fire and one never knows when and if they will get burned. And, of course, there are better (and safer) ways to pay your mortgage off sooner. Refinance your mortgage to a lower rate. You can accomplish paying your mortgage sooner through refinancing at a lower rate (provided you have equity in your home), consolidating higher-interest debt, using additional cash flow to prepay your mortgage, which ultimately reduces your amortization period making you mortgage-free sooner. You can also make regular principal payments that range from $100 (minimum prepayment required) to 25% of the original principal balance each year without a penalty. Another way to reduce your amortization is to change your monthly mortgage payments to bi-weekly, accelerated payments. By shortening your payment frequency to 26 payments, one extra mortgage payment a year goes towards reducing the principal balance and is free from any interest. You can always try using a line of credit HELOC to prepay your mortgage in a record amount of time but if it doesn’t work, make sure you exercise all the other ways to pay your mortgage off sooner. ----->I'd love to read your thoughts on this. Please comment below. I love helping people with their mortgage financing and real estate, please call or write if you have questions. Thanks, Sarah. Sarah A. Colucci, Mortgage Agent Lic. M14000929 Mortgage Edge, Broker 10680 Direct: (647) 773-4849 Email: sarah.colucci@mortgageedge.ca Sarah Colucci is an independent mortgage professional who works with a variety of borrowers and mortgage lenders in Ontario. It is her job to assess a borrower's current financial situation and place them with the best lender that can complement both their short- and long-term goals in real estate and in life. Sarah works to produce solutions that her clients can be proud of. She has extensive experience in real estate and mortgage origination and further specializes in a variety of mortgage products for the many unique borrowers that exist and who often find they don’t fit into rigid banking policies. Sarah promises to be truthful and give honest assessments based on her experience and knowledge, and acts with integrity and honour, always doing what she believes is the right thing to do. Many financial experts, real estate gurus, and those that consider themselves seasoned investors, all have different opinions about being mortgage-free. But whether you want to stay mortgage-free or access your home’s equity to purchase more property always remains a personal choice because there is no right or wrong answer.
There are, however, a few questions you should ask yourself if you are planning on paying off your mortgage and purchasing more property.
Let’s say your current home is worth $950,000. You will be mortgage-free in the next year or your current mortgage is very small and manageable, let’s say around $150,000. The current interest rates are around 2%, and you’ve determined the area you are considering appreciates about 12% each year. If you purchased an investment property for $550,000 and put $200,000 down, you would have to increase your existing mortgage balance to $350,000. Your monthly payment would be approximately $1,292 per month. You would also have to mortgage the new property for $350,000, which would amount to the same monthly mortgage payment, approximately $1,292 per month. In a year, your mortgage payments (inclusive of principal and interest) would amount to $15,504 on each property. However, if the area appreciates 12% each year, your value would increase by $66,000 on the rental property. Now, let’s say the area in which your primary home is located appreciates 11% per year on average, which would amount to $104,500. So in this case, based on market appreciation year after year, you would earn $170,500 in equity and pay $31,008 in mortgages, yielding you a profit of $139,492 each year (give or take). Given the low-interest rates, the current market value, and rate of appreciation (which you must back up with market research), it seems to make financial sense to keep investing provided you have the appetite. Also, keep in mind, I did not use rental income in this example, which could offset further costs associated with owning the rental property. On the flip side, if you choose not to purchase an investment property, your principal residence would still increase in value and your mortgage payment would be lower because you wouldn’t need to increase the balance to access a down payment. You wouldn’t have to worry about capital gain’s tax as you would when selling an investment property. Depending on your income level and tax bracket, it may be too expensive when selling an investment property based on the amount of capital gain’s tax the Government would require you to pay. Also, you wouldn’t have to worry about depreciating assets and what that means for the mortgages you hold. After all, “Equity” is a subjective term and depends on market value, which is dictated by economic factors like supply and demand but also the global and domestic economy. Should some financial disaster occur, the equity appreciated could scale down or vanish completely, which could affect your ability to repay the mortgage loans taken out on each property. Although this occurrence would be historically rare (since most if not all properties bounce back in value when the market recovers), it is still a possibility worth your consideration. Realistically, however, rental properties provide a retirement fund because eventually, rental income pays off the mortgage, and the property generates passive income. Most Canadians incorporate rental properties into their retirement plan and consider rental income a form of an emergency fund. Also, if you are mortgaging your primary residence to make investments, the interest paid can become tax deductions, offsetting the amount of taxes you would pay on rental income, for example. In conclusion, many people dream of the day when they are mortgage or debt-free, but in reality, when mortgage rates are at record lows, it can make sense to mortgage or invest to seize the opportunity to build healthy assets. Also, owning a rental property can provide extra money to save or pursue further investments whether or not they are in real estate. Building a real estate portfolio can also offer peace of mind and help you weather the storm in the future or even offer a comfortable retirement. These types of financial decisions must get made with serious contemplation through honestly and accurately answering the critical questions mentioned above. I would be happy to help you run the numbers or map out a plan that you envision for your future. Please call or write. Sarah A. Colucci, Mortgage Agent Lic. M14000929. Mortgage Edge, Broker 10680 Direct: (647) 773-4849 Email: sarah.colucci@mortgageedge.ca Do you need help with conducting market research? I want to tell you about Purview. Purview is a land titles system we currently use to verify title ownership, legal descriptions, liens and mortgages registered, and the estimated value of a specific property. Purview also estimates yearly appreciation levels based on geographic location and sales. I would be happy to consult with you and help you conduct market research in this regard. Buying a house today has become challenging since most conventional mortgage lenders have stricter guidelines including the requirement to have good credit. Therefore, you may wonder if it’s at all possible to buy real estate with poor credit or “bruised” credit.
The good news is people are purchasing a home every day with poor credit history, and therefore, it is possible for you to get into the real estate market, which can also inadvertently set you on a path to improve your credit score in the near future. There are different mortgage loans available that are accessed only through mortgage brokers that service borrowers with bad credit. The lenders that offer these "bad credit mortgage loans" are called Alternative Lenders. Alternative lenders, also known as “B” lenders, can consider borrowers with bruised credit while still offering competitive mortgage interest rates within the alternative lending space. Some borrowers think alternative lenders are the same as private lenders that charge very high interest rates, but this is not the case. Alternative lenders are financial institutions, and most times, they are sister companies of major prime banking financial institutions and just service borrowers with bad credit. How much a down payment does a purchaser require if they have bad credit? In Canada, the minimum down payment required is 5% of the first $500,000 purchase price and 10% on the remaining purchase price, not exceeding $1 Million. Purchase transactions that have less than a 20% down payment must be insured through one of the three high-ratio mortgage insurance companies in Canada. Unfortunately, these insurance companies will only insure mortgage applications from borrowers who have good credit scores. Therefore, if you have bruised credit and less than 20% down payment, you may need a cosigner that has better credit to help you get a home loan. However... if you have at least 20% of the purchase price, whether in the form of personal savings or a financial gift from an immediate family member OR you have at least 20% in available equity, if you are an existing homeowner looking to refinance, approaching an alternative lender is a good idea. Does an alternative lender have to be forever? Just because you get a mortgage with an alternative lender today DOES NOT mean you have to stay with one forever. In fact, I usually allow people time to improve their credit scores and monthly payments by recommending a shorter-term alternative loan and working to repair their credit in the meantime. Picking a one to two-year mortgage term, for example, can help you improve your credit bureau so that when your mortgage comes up for maturity, you can go back to a regular conventional lender to get a better interest rate and lower your mortgage payment. Alternative lenders can be a bandaid while your credit score improves. Should you choose an alternative lender to refinance? Sometimes borrowers need to refinance their existing mortgages but for some reason have developed poor credit and are in a different financial circumstance than when they originally got the mortgage. If you are in this situation, you may not need to refinance with an alternative lender if you are already with a prime mortgage lender like a bank or monoline lender. There are lines of credit products available that can be a short-term fix to high-interest debt relief (e.g. credit cards), which you can use until your existing mortgage matures. These alternative lines of credit can also allow you time to improve your credit bureau. In conclusion, you can definitely purchase a house with bad credit, but it’s important to consult a professional to weigh out your options and help you make the smartest choice. Also, some borrowers think they have bad credit bureaus when in fact, their credit is acceptable, so it’s always best to check on this through a professional before signing any mortgage contract. Do you have mortgage questions? Please call or write. I would be happy to assist you in your mortgage endeavour. Sarah A. Colucci Mortgage Agent, Lic. M14000929 Mortgage Edge, Broker 10680 Direct: (647) 773-4849 Email: sarah.colucci@mortgageedge.ca Qualifying for a mortgage is challenging, especially today, thanks to stricter lending guidelines and the Mortgage Stress Test. Therefore, it’s common for some borrowers to require a cosigner to sign a mortgage contract in order to help support their application.
Cosigners can help by adding additional income and employment history to help support the mortgage payments or better credit history if the primary borrower has bruised credit, for example. Cosigners must be immediate family members like parents, grandparents or siblings and they must also meet lending guidelines such as the requirement to have good credit. Cosigners should also have assets of their own preferably real estate since they are adding more strength to the application. Although cosigners want to help the primary mortgage applicant, they often wonder how cosigning works and how it affects their long and short term financial goals. Potential cosigners may also wonder whether they have to go on title or if they can stay off title. It's important to understand that a cosigner is vouching to take on a big responsibility, which is the mortgage payments should the primary borrower find themselves in a position where they can no longer make them. Again, this is an enormous responsibility, so both the primary borrower and potential cosigner should assess the likelihood of default and what it means for both parties. The potential cosigner should also keep this in mind if they are thinking of applying for additional loans or mortgages in the future, since the mortgage loan will appear as a liability on their credit report. Does a cosigner have to go on title? Once a cosigner has decided that they do want to help, they can choose to go on title as a co-borrower or remain off title as a guarantor. If the cosigner becomes a co-borrower, then the amount of ownership gets allocated based on personal preferences (for example, the primary borrower keeps 99% ownership and co-borrower gets a 1% ownership and both become tenants in common). One issue to keep in mind before a co-borrower signs a loan is selling or refinancing in the future. If the primary borrower refinances their mortgage or sells the property, the co-borrower becomes entitled to the percentage of ownership that was originally set out in the transfer/deed. The primary borrower will also require the permission of the co-borrower to refinance or sell, since it will require them to execute legal documents for any real estate transactions. Guarantors work differently. If a cosigner acts as a guarantor, he or she simply vouches for the loan payments should the primary borrower default but does not keep any interest in title to the property and is therefore not an owner of the home. Primary borrowers do not require permission of the guarantor to sell or refinance or engage in real estate transactions pertaining to the subject property. Again, a guarantor has no interest in the title of the home. Cosigners do not have to be a permanent fixture of a mortgage. If the primary borrower’s income situation changes or if their credit score improves, for example, and the cosigner is on title, they can apply to have the cosigner removed from his or her obligations. The bank would complete this process through a “Release of Covenant.” Do you require more information about cosigners? A Mortgage Broker can help walk you through the process. Please call or write today. Sarah A. Colucci Mortgage Agent, Lic. M14000929 Mortgage Edge, Broker 10680 Direct: (647) 773-4849 Email: sarah.colucci@mortgageedge.ca If you’re self-employed, and have a fair amount of equity in your home, there is a loan product I would like to bring to your attention.
Self-employed borrowers, also known as “Business For Self, '' usually claim less than their gross income on their income taxes. BFS individuals use write-offs associated with business expenses to reduce their annual income, which usually results in paying fewer taxes. With mortgage financing, however, the lower income claimed presents an issue with qualifying since major banks use the two year-average of net income to qualify or require a person to be incorporated to use the business income under specific Business For Self Programs usually tailored to professionals like doctors, lawyers and dentists. Basically, this limitation on financing amounts to some self-employed borrowers not being able to qualify for mortgage financing with major lending institutions. And as a result, it often pushes BFS borrowers into alternative lending spaces, which results in higher interest rates and more fees. As a mortgage professional, I always look at the programs and products available to service these types of mortgage borrowers since the name of the game is to save people the most money on their mortgage. So, if there is an opportunity to avoid paying higher interest and fees, I like to present these options to my clients as the best products available for their situation first. In the last year, property prices have unexpectedly skyrocketed due to record-low interest rates and a shortage of housing, which has resulted in the equity programs being the most favoured for borrowers who need to renew, refinance and purchase homes. Not everyone knows about equity programs and mortgage products in Canada so it’s best to consult with a mortgage broker who has direct access to the lenders offering them. The “Equity 50” program is by far the best program being offered to self-employed individuals right now. To qualify under this program, a borrower must have at least 50% down. This means that a borrower has either a 50% down payment OR at least 50% in equity after the mortgage loan. Unlike major banks and other conventional lenders, the “Equity 50” does not have any GDS or TDS requirements. GDS stands for Gross Debt Servicing and TDS stands for Total Debt Servicing. Lenders use these requirements to determine the amount of gross income that is already being spent on housing payments and unsecured debt payments on a monthly basis. The “Equity 50” program can also use Canada Child Benefit to qualify along with Government and private pensions. The only true requirements are active business income, salaried income, hourly income and a credit score over 680 with at least 50% equity available after the mortgage loan. Borrowers must be able to show they can pay the loan which should get reflected by at least two years of BFS income claimed on personal taxes (if they are self-employed) or a letter of employment with a recent pay stub if they are salaried or two years of T4s if they are hourly. The "Equity 50" program offers a competitive fixed or variable rate and does not charge a lender or commitment fee. What if you don’t have a 50% down payment? If you don’t qualify under this program, then the next route would be to approach an alternative lender also known as a “B” lender. Alternative lenders offer different loan types, but the difference is they don’t need a minimum credit score. Alternative lenders can consider those borrowers with bruised credit who have at least a 20% down payment available whether through a down payment of personal savings OR available equity. Alternative lenders can also consider gross income either reported on personal taxes or reflected by recent bank statements. If you would like to compare mortgage rates, please call or write today. We can help you find the best mortgage for your situation. Sarah A. Colucci, Mortgage Agent Lic. M14000929 Mortgage Edge, Broker 10680 Direct: (647) 773-4849 Email: sarah.colucci@mortgageedge.ca Mortgage borrowers may wonder about paying their mortgage with a credit card––maybe once in a while.
Sometimes, if you find yourself in financial trouble or just need some extra cash, you may find a credit card the best option to use for a short-term fix. But besides taking out a cash advance or using a credit card to cover a mortgage payment in financially stressful times, a credit card can help you gain rewards, points or cash back incentives. You can also take advantage of sign-up bonuses. What are some limitations? First, mortgage lenders will not accept credit card payments directly, so you’ll have to find another way to make the payment with your card. It’s also important to note, I do not recommend paying your mortgage with your credit card regularly if you are in a negative financial situation. Credit cards charge higher interest rates and therefore can be expensive to use so it would NOT make any financial sense to make mortgage payments simply to stay on top of your finances. Here, a debt consolidation home loan would make more sense and would be a cheaper option. When it makes sense to make your mortgage payments with a credit card. It definitely makes sense to pay your mortgage with your credit card if it helps you gain points, cash back incentives and air miles, for example. Some newer credit cards offer triple the amount of points for fresh charges, so you could take advantage of this by using your mortgage payments to collect the points. For this strategy to work, you would also need to pay your credit card before the due date or even right away to avoid any extra interest charges or unnecessarily paying high interest. Ensure you also pay the balance in full. Also, if your mortgage rate is low and your credit card company is offering a higher rate of rewards, it would absolutely make sense to take advantage of this offer. For example, if your mortgage is 1.5% and your credit card company is offering 4% cash back, then it’s helpful to pay your mortgage with your credit card to gain the cash back reward. How to Pay Your Mortgage with a Credit Card Convert Gift Cards into Money Orders One way you can use your credit card to make mortgage payments is by converting gift cards into money orders. You can then use the money order to pay or prepay your mortgage at your closest branch directly through the teller or through your bank account. Use a cash-advance You can also speak to your credit card company about using cash-advances to pay your mortgage. From your online banking, you can transfer money from your credit to card to your personal account to pay your mortgage. You must first check with your financial institution and verify the points, rewards and cash-back incentives would still get offered. In conclusion, paying your mortgage with your credit card is not always the best option and is not recommended if you are trying to make the payments to avoid delinquency. Here, the best option is debt consolidation through refinancing. However, if you want to take advantage of points, welcome offers, and cash backs, you may find using a credit card to pay your mortgage is a good option. Do you have mortgage questions? Please call or write. Sarah A. Colucci, Mortgage Agent Lic. M14000929 Mortgage Edge, Broker 10680 Direct: (647) 773-4849 Email: sarah.colucci@mortgageedge.ca If you break your mortgage early and are in a closed mortgage, you may have to pay a prepayment penalty. Depending on the financial institution your mortgage is with, the penalty may be quite substantial.
Variable rate mortgages cost 3 months of interest to break. Fixed-rate mortgage penalties get calculated differently. “Fixed rate” prepayment penalties are based on the IRD, which stands for Interest Rate Differential. IRD is basically the difference between two interest rates. When calculating your mortgage penalty on a fixed-rate mortgage, the bank will basically subtract the discount you received on the original interest rate from the current posted rate for the term left in your mortgage. For example, let’s assume you have a $300,000 mortgage balance. Your interest rate is 5.49%. Let’s also assume you have approximately 3 years left in your mortgage term or about 35 months. Now, we will look at the lender’s three year posted rate as of today. It’s 3.89%. The interest rate differential is calculated by taking your interest rate of 5.49% and subtracting the current posted rate, which is 1.60%. Next, we would multiply the difference in interest rates (1.60%) by the principal balance left ($300,000) and divide by 12 months. This gives us $400. Next, we would multiply $400 by the 35 months remaining, which gives us $14,000 in penalties. Major banks use an inflated posted rate (the Bank of Canada’s posted rates), which make their penalties when exiting fixed-rate mortgages higher. Remember, penalties get charged to compensate the lender for the unexpected loss in profits that it would have received should you have stayed the entire term. So, it’s important to understand the risks associated with prepayment penalties before you sign a mortgage contract. How to get out of paying a mortgage penalty? First, before you sell or refinance, find out what your penalty will be. You can call your mortgage holder and ask about the approximate penalty and whether you can use any prepayment privileges to lower the prepayment charge. By doing this, you can determine the total costs of breaking your mortgage and weigh out whether it makes financial sense. Second, you can ask your mortgage holder about porting your mortgage over to the new property if you are selling or blending and extending if you are refinancing. Blending and extending basically means blending the current rate with the rate you have, and increasing the mortgage balance. If you “blend and extend”, you won’t have to pay a penalty. Not all mortgage lenders offer this option but it’s best to inquire. The other option is to wait until the IRD is less and the posted rates change so that you won’t have to pay a substantial penalty. Do you have questions about avoiding a mortgage penalty? Please call or write. Sarah A. Colucci, Mortgage Agent Lic. M14000929 Mortgage Edge, Broker 10680 Direct: (647) 773-4849 Email: sarah.colucci@mortgageedge.ca |
By: Sarah ColucciSenior Mortgage Agent, Lic. M14000929 Archives
April 2023
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