The hidden trap of mortgage penalties

It's easy to get caught in the posted mortgage rate trap at the big banks.
No, you won't have to pay the posted rate on your next mortgage. Pretty much nobody does that any more, according to mortgage planner Robert McLister. The real danger is that posted rates will be used to calculate the penalty if you ever have to break your mortgage, probably costing you thousands of extra dollars.

A mortgage penalty compensates a lender for the interest payments it loses out on when you break a mortgage contract. "That's the intention," said Mr. McLister, who is also former editor of Canadian Mortgage Trends. "But in many cases, it overcompensates. It's punitive in many cases."

As we head into another round of quarterly bank earnings reports, it's worth thinking for a moment about how those wonderful profits and dividends for investors are generated. One way is by using posted instead of lower discounted rates when calculating how much to penalize a client breaking a mortgage.

With houses as expensive as they are today, it's crucial to get the lowest mortgage rate you can. Keep the same level of focus when inquiring about mortgage penalties. Although it's hard to imagine the need to break a mortgage on a house you're just buying or living in happily, it can happen. Mr. McLister said roughly 70 per cent of people adjust their five-year fixed rate mortgage before maturity, although many do it to refinance or move to a bigger house rather than to break the mortgage outright.

Mortgage penalties are straightforward if you have a variable-rate mortgage – expect to pay the equivalent of three months' interest in most cases. With a fixed-rate mortgage, the penalty is set at the higher of three months' interest or a calculation called the interest rate differential, or IRD. The must-ask question when negotiating a fixed-rate mortgage: Do you use discounted or posted rates to calculate these penalties?
This is important because using posted rates can result in a much higher penalty. For some real world numbers, let's use the mortgage prepayment calculators all lenders now provide on their websites. They show penalties for paying all or a portion of your remaining mortgage balance (to find them, Google your lender's name and "mortgage prepayment calculator").

Let's use an example of someone who, three years ago, set up a $250,000 five-year mortgage and has a balance owning of $200,000. Assuming an original mortgage rate of 3.64 per cent with a discount of 1.5 percentage points, the mortgage prepayment calculators at several big banks showed penalties ranging from $5,000 to $7,600 or so.
A check with some alternative lenders found penalties ranging from $1,800 to $2,800. These are very rough comparisons because lenders differ a fair bit in what information they ask you to supply. But you get the picture – the big banks apply penalties with a sledgehammer.

As well as producing revenue for lenders, inflated mortgage penalties also help trap clients who might otherwise move their business to another lender. Imagine you want to refinance your mortgage or buy a bigger home and your bank won't come across with a competitive rate. You say you'll change banks, only to find out how prohibitively expensive it is to break your mortgage.

Mr. McLister said some banks have a stated policy of offering clients only a small discount off the posted rate if they want to add on to their mortgage to buy a more expensive house. You may be able to negotiate something better than a trivial discount, but your bank knows your leverage is limited because of the penalty you face if you go.
Alternative lenders often have better rates than the big banks, and they typically have cheaper penalty fees. Why do so many people use their banks for mortgages, then?
Mr. McLister speculated that some borrowers like the convenience of having their mortgage where they bank, and of being able to go into a branch to talk about their mortgage. If you prefer transacting online, some alternative lenders don't have great websites.

One thing you do not need to worry about if you borrow from an alternative financial institution is that your lender will go bankrupt. "It's funny that people look at mortgages and think, I need a safe lender." Mr. McLister said. "If a lender goes out of business, pretty much nothing is going to change except for the name of your new lender."

By Rob Carrick – Globe and Mail


Posted by Steven Porter. Steven is a licensed Mortgage Agent with Mortgage Architects, Certified Reverse Mortgage Specialist (CRMS); Seniors Real Estate Specialist (SRES) and Accredited Buyer Representative (ABR) and real estate broker/consultant with 30 years experience in residential real estate. Steven can be reached at 1-905-875-2582; steven@1800Mortages.ca or online at 1800Mortgages.ca

Effective March 17, 2017…Higher CMHC premiums

CMHC is increasing their premiums on mortgage default Insurance for the 3rd time in 4 years. Here’s what it will look like.

Loan-to-Value Ratio Standard Premium (Current Standard Premium (Effective March 17, 2017)
Up to and including 65% 0.60% 0.60%
Up to and including 75% 0.75% 1.70%
Up to and including 80% 1.25% 2.40%
Up to and including 85% 1.80% 2.80%
Up to and including 90% 2.40% 3.10%
Up to and including 95% 3.60% 4.00%
90.01% to 95% – Non-Traditional Down Payment 3.85% 4.50%


Wondering why they need to increase the premiums? It’s not about trying to discourage homebuyers. It’s to “preserve the returns on capital”, according to Steven Mennill, SVP CMHC. Yup, the Crown corporation wants to focus on profit. (show me the money). At least they’re being honest about it. The overall amount of mortgages insured by CMHC has dropped in the past 4 years. Down from $576billion to around $512billion. So, it’s about maintaining profits while their book of business is shrinking.

Having said that, CMHC has lowered, increased and lowered their insurance premiums before. We can expect them to change and adjust again.

In case you are wondering why the overall volume is going down when house prices are going up, it’s because the Fed govt has changed the mortgage rules so that it becomes more difficult to qualify for a mortgage. Therefore, the amount of mortgages CMHC can insure is going down.

Now for some good news..

The overall cost to your mortgage is minimal. Oh yeah, one more thing…without CMHC, we would all be digging deeper into our pockets to come up with 20% or 25% down, like the old days. And while some may think that is how it should be, those days are long gone. First time homebuyers don’t have $100k, or $200k sitting around to buy a home. They need help.. And what’s wrong with helping our youth that are ambitious enough to want to own a home?

CMHC is a necessary evil.

By Steve Garganis

- Posted by Steven Porter, Mortgage Agent - Mortgage Architects
Steven can be reached through his website at www.1800Mortgages.ca

Ontario helping first-time homebuyers

Ontario is doubling the rebate on the land-transfer tax for first-time homebuyers to $4,000, but is increasing the same tax on homes that sell for over $2 million.
The government says half of first-time buyers won't pay any land-transfer tax to the province, while the half-percentage point increase on homes over $2 million will affect less than one per cent of the population.
The province takes in over $2.1 billion a year in the land-transfer tax, and the government says any increase in revenues from the increase on luxury homes will help pay for the doubled rebates for first-time buyers.
Premier Kathleen Wynne had said the government was worried about the difficulty faced by first-time buyers trying to get into the housing market, especially in the Greater Toronto Area where the average price is $762,975.
The government also announced it is freezing the property tax on apartment buildings while it reviews how it affects rental market affordability.
The changes to the land-transfer tax are outlined in the Ontario government's fall economic statement, which says that home ownership has become a key factor in many people's long term financial security.
The Ontario Real Estate Association had asked the government to expand the land-transfer tax rebate program for first-time buyers as one way to help more of them get into the housing market.
The city of Toronto has its own land transfer tax, which offers rebates of up to $3,725 for first time buyers.
Ontario's land-transfer tax rises from half-a-per cent on the first $55,000 of a purchase price to two per cent for everything above $400,000. Toronto's land-transfer tax is one per cent on the first $55,000 and two per cent on the rest.
The Canadian Press

The lesson home buyers should take from RBC’s mortgage rate hike

The Globe and Mail
Published Wednesday, Jan. 06, 2016

There’s just one reason for the strength of Canada’s housing market – low, stable mortgage rates.

Rates are still low, but the stable part is in question after Royal Bank of Canada announced a small but still significant round of mortgage rate increases that will take effect Friday. Other banks will likely adjust rates as well, after a brief period of letting RBC draw fire as the first to move.

RBC will increase borrowing costs on special offers for fixed-rate mortgages with terms of two to five years by 0.1 of a percentage point. For example, the five-year fixed rate will rise to 3.04 per cent from 2.94 per cent, enough to increase monthly payments on a $400,000 mortgage amortized over 25 years to $1,901 a month from $1,881.

Higher payments aren’t much of an issue – for now. Despite economic weakness that argues for stable or possibly even lower borrowing costs, mortgage rates appear to be facing upward pressure. Nothing startling, mind you. But the days of stable five-year fixed rates tucked nicely under the 3-per-cent threshold may be coming to an end at your neighbourhood bank branch.

Lenders are facing higher costs for financing mortgages as a result of new mortgage market rules introduced last year by federal regulators. As well, unsettled financial market conditions are forcing lenders to pay higher rates on the money they raise to lend out as mortgages. Canadian consumers are used to mortgage rates that closely track the state of the economy. But today’s mortgage market is more complex than that.

Fortunately, competition in the mortgage business is intense. If there’s one lesson home buyers and owners should take from RBC’s rate increase, it’s to never get a mortgage without cross-checking rates with at least one other source, preferably a mortgage broker with access to multiple lenders. A quick survey of mortgage brokerage firms Wednesday found five-year fixed rates as low as 2.44 per cent, which handily beats RBC’s special prerate increase offer of 2.94 per cent.

A tip for people who plan to buy a house in the busy spring period: Lock in a mortgage rate now to eliminate the risk you’ll be caught by any rate increases ahead. On the Ratespy.com website, some lenders are holding their comparatively low current rates through early April or May.

There are lots of alternative mortgage lenders that beat the banks not just on rates, but also with much less onerous penalties if you have to break a mortgage before it matures. Also, you don’t have to negotiate with these lenders. There’s no need to get a line of credit or bring your investments over to get the best rate on a mortgage.

Another message to take from RBC’s rate increase is that variable-rate mortgages are losing some of their appeal. In addition to raising costs on fixed-rate mortgages, RBC announced that the special offer on its five-year variable-rate mortgage will move to prime minus 0.1 of a percentage point from prime minus 0.25.

Fixed-rate mortgages have been the most popular lately, but there has until now been a case for going with the variable-rate option. Variable-rate mortgages are priced off the prime rate, which is influenced by the Bank of Canada’s benchmark overnight rate. The central bank is nowhere close to raising rates, which means variable rate mortgages appeared to be safe from increases in the short term. Now, we see that this isn’t the case. Both fixed and variable rates are still low in today’s mortgage market, but maybe not stable.


by ROB CARRICK

What you can expect for closing costs in a typical, residential real estate purchase.

It is important to be aware of all the costs involved in buying a home. It is prudent for a home buyer to know these costs before you go house hunting. Knowing what additional “closing costs” are, over and above the down payment will help you plan for a smooth purchase and help you avoid unpleasant surprises. Most lenders recommend you should allow at least 1.5%  to 2% of the purchase to be on the safe side.
 
The list below is a good guideline of closings costs that you might incur but always verify these for your particular situation.

Legal Fee and Disbursements

A lawyer will charge a fee for their professional services involved in drafting the title deed, preparing the mortgage, and conducting the various searches. The disbursements, on the other hand, are out-of-pocket expenses incurred, such as registrations, searches, supplies, etc., plus H.S.T. The actual fee that the lawyer will charge will depend entirely upon the deal between you and your lawyer. Be sure to ascertain exactly what this will amount to in a worst-case situation. Typical legal fees for a purchase with a mortgage  range between $1,000 to $1,500 including disbursements. We recommend you call one or two lawyers and obtain a quote directly from them including both their fee and estimates of disbursements.

Ontario Land Transfer Tax (LTT)

The Province of Ontario levees land transfer tax that is charged on closing when the property is transferred to your name. The amount varies on the price of the home, whether or not you are a first time home buyer and which city you live in Ontario, Canada.

Mortgage Insurance

Budget for insurance on your new home. Insurance costs may include Mortgage Default insurance, homeowners insurance, mortgage life and disability insurance and title insurance.

Property Tax and Prepaid Utilities Adjustments

At the time of a sale, the lawyer for the buyer will confirm that property taxes are paid up to date. If they are, a Tax Certificate is issued, from which any adjustments are made - usually requiring the buyer to compensate the seller for any prepaid taxes. If they are not up to date, the municipality requires that the seller pay them off from the proceeds of the sale. If the current owner has prepaid property taxes or other utilities for the year, they will be credited the prepaid portion on closing by the purchaser. Your lawyer will confirm this for you.

Property Appraisal

If your lender requires an appraisal report to be completed, it will be done before advancing any mortgage funds. Lenders want to be assured that the property is worth what you are either paying for it, or valuing it for. The cost for an appraisal normally ranges between $250 and $450 depending upon the property, location and type of appraisal.

Home Inspection

A home inspection report is commissioned by the purchaser to evaluate the physical condition of a property and it's mechanical components prior to the "firming up" of a Real Estate transaction. The scope and detail may vary, but most reports indicate specific issues and cost to repair. Depending on the size and location of the property, a home inspection is around $500.

Interest Adjustment (IA)

Depending on what day of the month you arrange to make your mortgage payments and when your transaction closes, your lender may charge you interest on closing up to the first payment date. This is called the Interest Adjustment Date (IAD). Your mortgage agent will calculate this for you. Remember, that all mortgages are paid in arrears so if your possession date is June 1st, and you choose to pay monthly, then your first payment will be July 1st.

Always consult a professional in your initial planning and before committing yourself to one of the largest purchase transactions you'll make. I'm always available to answer your questions. - Steven Porter, Mortgage Agent - Mortgage Architects steven.poretr@mtgarc.ca or 1-905-875-2582

Should you boost your income or build your assets?

When it comes to money decisions, it can be hard to figure out the right thing to do. Money is about power, emotion, morality and security, among other things. So in this space, we gather a few experts to weigh in on a financial quandary.

The question: Should you focus more on boosting your income or building your assets?

Robert Kiyosaki, author of Rich Dad Poor Dad and Second Chance: “When you work for income via a paycheque — even high and/or steady income — that income stops when you stop working. It’s you working hard for money for a lifetime. When your income — or a part of your income — comes from assets, it’s like having your money work for you 24/7 instead of you working for money and typically paying higher and higher taxes as your paycheques increase in size.

“While there isn’t anything wrong with working for a paycheque, it probably isn’t the best road to creating the wealth and peace of mind that so many overworked, super-stressed and stretched-to-the-max [people] sorely need. Investing in assets, even in small ways, can build wealth and deliver a lifetime of income even if or when you stop working.”

Sheila Walkington, co-founder of Money Coaches Canada: “Your ability to earn an income is your biggest asset, so focusing on boosting your income or at least maintaining your ability to earn a good income and keeping yourself employable is very important. Increasing your income will open up more opportunities to save, pay down debt and to build the life you want.

“But earning more money is not always the answer. Often the more people make, the more they spend, and this can get people in trouble. So the key is to live within your means while also building a financial foundation for a comfortable future/retirement.”

Preet Banerjee, author of Stop Over-Thinking Your Money!: “If financial success was all about increasing income, then celebrities, athletes, doctors, and other high earners wouldn’t have any money problems. Of course you should try to boost your earnings, but the truth is we don’t have as much control over that as we do on what we do with what money we earn.

“Focus on the fundamentals. Whatever you earn, spend less than that. Building assets like investment portfolios and home ownership gives you a base to work from in case any risky pursuit of a higher-income-at-all-costs strategy doesn’t pan out. Once you’ve laid the foundation, then you can focus on expanding your income through less traditional methods. Getting rich slowly tends to work better than always swinging for the fences, with the possibility of striking out.”

by MW Leong Financial Post