Your buyer cannot sell their existing home, now what?

This scenario is becoming common place. As a Buyer of a Seller, if you find yourself in this position talk to a #MortgageBroker, we have #MortgageSolutions that can help.   I am now being consulted by buyers who have purchased homes without any conditions and cannot sell their existing homes. This could be as a result of the recent government housing policy announcements, increased number of listings, uncertain lending conditions and fewer bidding wars. As such, you need to understand all the issues and consequences to provide timely advice and do what is necessary to protect your clients and your deals. Here are 5 things to understand: What if the buyer cannot close? If the buyer cannot close, they will likely forfeit their deposit and be subject to a lawsuit from the seller, for the difference in the sale price if the seller now sells the property for a lower price than the buyer agreed to pay. What are some options available to the buyer? One option is to approach the seller and request an extension of their own purchase agreement, so that they have more time to sell their existing home without panicking. Another option is to sell or assign their agreement to a third party buyer, to have another buyer take over their agreement, pay them back their deposit, and close directly with the seller. Do you need the seller permission to assign this agreement to another buyer? Under the terms of the OREA re-sale agreement, no permission is required. However, it is best to be up front and work with the seller for a number of reasons. The seller salesperson could have a list of buyers who have already seen the property who may be willing to take over this deal. In addition, any new buyer would want to see the home and since your client does not yet own it, they have no right to show the home. By obtaining the assistance of the seller, you can show the home and hopefully arrange for a new potential buyer to take over. Who will pay the real estate commission? The real estate commission will still have to be paid on both transactions. Therefore, the original buyer will likely have to sell for more than they paid, just to break even. In my experience, this should be made clear when trying to arrange this with the original seller, that the buyer will not be making any profit on this re-sale, and is just looking for someone to take over their purchase obligation. Who pays land transfer tax? Land Transfer tax will only be paid once in this scenario, by the new buyer who finally closes the transaction with the seller. In my experience, it is best to deal with all these issues early in the process, by being up-front and honest with your seller and finding a solution that works for everyone. By working together, you can likely reduce the potential losses on all sides and in most cases, complete the transaction to the satisfaction of everyone. By Mark Weisleder. Mark Weisleder is a Partner, author and speaker at the law firm Real Estate Lawyers.ca LLP.

6 Easy Steps to Buy Your First Home

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Mortgage Architects	Steven Porter CRMS ABR SRES Broker Lic. No. M15001919 Mortgage Agent P 905-878-7213 C 905.875.2582 Brokerage #12728 14 Martin Street, Milton, ON, L9T 2P9
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Panic buying? When will the housing market slow down?

Houses selling over asking price is becoming the norm, these days. Kinda crazy. Sometimes a house is just listed under market value to attract a frenzy of buyers. An old tactic that has worked well in larger urban markets. Today, that tactic is being used in smaller communities, too.

What’s unclear is if this selling tactic is contributing to houses selling for more than they’re worth. And what is a home worth, anyway? I always thought a house was worth what someone was willing to pay in the open market. That’s still true in most cases, today.

When I see reports of houses selling for $100k, $200k and $300k over asking, it makes me wonder. How long will this market last? Will it crash? And if so, when? It’s hard to make forecasts and I can’t see into the future, but let’s examine this a little.

WHEN WILL THE HOUSING MARKET CRASH?

I spoke with some experienced realtors and senior management of reputable financial institutions. They tell me the end doesn’t appear to be in sight. The lack of houses for sale is driving the market. The lack of new homes being built in major urban centres, like Toronto (and GTA), Hamilton, Vancouver, is fueling this increase. And with immigration of between 100,000 to 150,000 new residents in the GTA expected each year, this will also drive up demand. People want to own their homes.

In 2016, house prices were reported to increase by 22% in Greater Toronto and 15% in Greater Vancouver. Consumers are reading this and thinking they will never get in if they wait, so they buy…some of them will “panic buy”. I’m not one to promote ‘panic buying’. A real estate purchase should be made for the long term. Plan on owning for 7 years. This is how long it will take to amortization the acquisition and disposal costs of real estate. It’s simple math. And mortgage rates are still near all-time lows. Making it more affordable.

ANOTHER REASON HOUSE PRICES WILL CONTINUE TO RISE

Perhaps there is something else going on.. Are builders shying away from building due to the fact house prices have gone up so much? Are they worried they won’t be able to sell and make a profit at these levels? And if this trend of low supply and higher demand continues, when will it end?

I don’t have the answers, but one thing I will say is that you shouldn’t treat real estate like a penny stock gamble or a day at the horse races. Don’t speculate. This is a large amount of money to gamble with. I love real estate as a long term investment. It’s a proven winner over the long term. Be sure you can hang in there if there is a correction. In any down market, the pessimists will always come out of the woodwork to say, “I told you so”. If you can stick it out for those 7 years, chances are, you will be happy you did. History supports this.

FOR THOSE THAT BOUGHT IN THE LAST 10 YEARS

Speaking of pessimists…. what happened to all those negative forecasters that were telling us not to buy a house, 3, 4, 5 6, 7, 8 and 9 years ago? Haven’t seen them for a while. If you listened to the housing bears, how much would you have lost? House prices have doubled and some causes, tripled over the last 10 years.. Where are those housing bears today?

For this reason, please don’t rely solely on flash reports from the loudest mouth in the media. Get some expert advice to find out if buying a house is right for you. Speak with an experienced Mortgage Broker and Realtor. Yes, a good realtor or mortgage broker won’t push you into something you aren’t ready for. Speak with a trusted advisor. Get guidance from someone you trust or ask them who they would recommend. - Steve Garnganis

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

Buy now and pack up your mortgage with you.

One of the biggest hurdles for most move-up home buyers is having to pay huge mortgage discharge fees and penalties for breaking an existing home mortgage early and taking out a new one. So what happens to most home buyers, is they delay purchasing that dream home, sometimes for years, until the end of the term of their mortgage.

The good news is you don’t have to wait. It is possible to transfer your mortgage from one home to another. This practice is known as a mortgage “Port”. Porting your mortgage is when a homeowner transfers their mortgage from one property to another. An example of this option would be when you have sold your current home and purchased a new home. 

Porting can be a valuable tool if the interest rate on your current mortgage is no longer offered on the market.  Conversely, if the current mortgage rates are lower than the rate that you have, you may not want to port your mortgage. However, you will also need to consider if there are  penalties for breaking your mortgage early if you choose not to port it.
 
On a cautionary note, some lender mortgages allow Ports and some do not.  So if you plan on using this feature and moving during the term of the mortgage, then is important to know if this is a feature of your current mortgage. 

Even if you are not planning on moving in the short term mortgage "Portability" can still be an important feature.  Circumstances change: from careers to kids to the relationship with the co-owner, we never know what the future may hold.  More often than not, many buyers who port their mortgage did not plan on porting it when they first got their mortgage, but the feature ends up saving them thousands in penalty costs.  The next time you get a mortgage make sure to ask your mortgage broker if the mortgage he is recommending is portable. A good mortgage broker should tell you which mortgage products allow porting, and which do not. 

So what happens if you need a bigger mortgage on your new home? When a mortgage is ported, it is very common that you will require a larger loan than exists on your current residence.  This is not an issue.  Your Broker can offer what is referred to as a “blend and extend” or “blend to term” depending what works best for you. This is essentially a weighted average between the existing mortgage amount and interest rate and the additional funds you require at the current mortgage rate.

Example:
Existing Mortgage:  $100,000
Interest rate: 2.5%
Require: $150,000 (so $100,000 will be ported and $50,000 will be ‘new money’)
Current Interest rate: 3.0%
Therefore, the new mortgage will result as a $150,000 mortgage with a blended rate of at 2.9%.

In conclusion, portability is a feature offered on many mortgage loans and allows you to move your current mortgage from your existing home, which has sold, to a new property you have purchased.
 
The pros of mortgage portability are:

1. If your current mortgage rates are better than mortgage rates currently offered, you can keep your better rate.
2. Breaking a mortgage early can result in penalties. It is sometimes better to “Port” your existing mortgage to your new home instead.
3. It is also possible to increase the amount of your mortgage when you port it.

Mortgage portability is not for everyone. Some lenders do not allow mortgage portability or in some cases porting your mortgage would not be financially beneficial. Each lender has their own conditions for mortgage portability. To see if porting is right for you, contact Steven Porter, Mortgage Agent with Mortgage Architects. There is no obligation, so call today.

Steven Porter, Mortgage Agent – Mortgage Architects | 905-875-2582 | steven.porter@mtgarc.ca | www.1800Mortgages.ca

How To Avoid Huge Mortgage Penalties

You bought an investment property with the plan to hold it for 5 years.  The cheapest rate you found was on a closed mortgage, so you selected a 5-year term.  Three years later, you need to sell.  You call your bank and ask them “How much?”
That’s when your jaw hits the floor.

Early payment or pre-payment penalties charged by banks can be huge — thousands of dollars, or even TENS of thousands.  Basically, with a closed mortgage, you have agreed to be bound by the terms and conditions of your mortgage until the mortgage term is complete.  And that includes paying the bank a lot of interest.

Banks are not happy about losing all those interest payments just because you found a cheaper rate somewhere else.  So most mortgages include specific language that restricts what you can and can’t do, as well as any penalties they charge to let you out of the contract (if they allow you to at all!).

Do You Know What You’re Signing?

Some of you may have heard me talk or write before about how everyone should learn to read legal agreements.  Although most people want to defer that task completely to their lawyer, I highly recommend everyone make the effort.  Why?  Not so that you can replace your lawyer, but because they may not realize that a small detail is important to you.
You should always know EXACTLY what you’re signing and agreeing to,
especially it comes to banks and other lenders.

How Penalties Are Calculated?

Now a few of you may be thinking… aren’t mortgage pre-payment penalties standardized for all mortgages?  No they are not.  In fact, over the past few years, some lenders have become more ‘liberal’ with the interpretation of their vague penalty clauses in their contracts.

Traditionally, there is a very common method used to calculate any penalties you will owe if you decide to break your mortgage.  You will pay the GREATER of the following:

• 3 Months Interest – Basically you take your next 3 mortgage payments, break out the interest portion, add them up, and that is your mortgage penalty,    OR 
• The Interest Rate Differential (IRD) – This one sounds complicated, but it’s actually quite easy (or should be).  If you have 2 years left on a 5 year mortgage, find out what the lender’s current posted 2-year rate is, subtract that from your original rate, and multiply that by your mortgage balance.
  

Banks Get Greedy and Play Games

The problem is that over the last few years, mortgage lenders have begun playing a few tricks with the IRD calculation to increase their profits:

• Some use posted rates for IRD calculations, while others use discounted rates (which increases the penalty) 
• Some round up to the next longest mortgage term when determining how much time is left, others round down (which increases the rate difference and thereby the penalty). 
• Some have very vague penalty calculation language, which leaves it open to abuse 
• I’ve even seen one lender base the penalty a complicated formula involving bond rates!
  

Here is one example I posted to my social media accounts awhile back: 

• Customer fee to payout mortgage doubles 
• And there's a lawyer that is launching a class action lawsuit against CIBC because of unfair penalty calculation practices.
  

The average person has little to no chance of calculating the penalty themselves because often the formulas are not clear or they are very cryptic.  Often times, even when you phone their call centre, their telephone agents won’t be able to explain it to you.  That’s because someone at the head office is calculating it, often times in their favour.
In other words, their calculation methods are not transparent.

Now I’m not saying that all lenders do this.  Large banks are very customer-service oriented, and even if a penalty ends up being very large, they may reduce it to avoid ‘bad publicity’. But B and C level lenders are less likely to do this, as they do not advertise to the public (they are only available through brokers) and obviously it’s more profitable for them.

The Game Playing Gets Personal

Recently, my sister wanted some help with reducing her mortgage costs.  She was 4 years into a 5 year mortgage, and after a bit of research, I discovered rates had dropped almost 3% from what her original mortgage was locked in for.

She called the mortgage lender and asked them what the penalty would be to break the mortgage. But for some reason the amount didn’t add up to my calculation — it was over $1,000 more than what either 3 months interest, or the IRD would be.

We’re currently following up with the lender and will press them for exactly how they calculated it.  The mortgage contract language is in plain English and fairly clear, but it doesn’t specify certain things (like posted vs. discounted rates).  Even the call center rep couldn’t explain the formula.

Fortunately, her mortgage has a 20% pre-payment clause in it, so there is some leeway to reduce the penalty through some creative timing of payments.  I’ll explain how below…

How do you protect yourself?

If you’ve already got a mortgage, it’s not too late to reduce the penalties you have to pay. Here are a few tips to follow whether you are finding a new mortgage, or are trying to get out of your current one…

Read your mortgage contract – Find out how much you can pre-pay every year, and how much you can increase your mortgage payments. Find out EXACTLY how the penalty is calculated if you have to break your mortgage. Don’t accept vague language or you’ll end up paying for it.

Determine when you can break your mortgage – Some mortgage lenders do not allow you to break the mortgage at all, unless you are selling the property.  In other words, you are stuck making payments until the end of the mortgage term and you can’t refinance… even if you offer to pay a penalty!  This happened to me a few years ago, but fortunately I didn’t have much time left on the original mortgage term.

Calculate what your penalty should be – You can use the simple formula I gave above to calculate what your penalty should be.  But if you want to calculate it while playing the banks’ games.

Take advantage of any pre-payment clauses – Many mortgages include a clause that allows you to pre-pay your mortgage balance up to 20% per calendar year, without a penalty.  If you are facing a huge penalty, you may want to consider pulling funds temporarily from another source (e.g. family members or friends), paying down your mortgage by 20%, and THEN refinancing your property and paying the now reduced penalty.

It’s even better if you are close to a calendar year end because you can do it TWICE within a very short period of time. This is exactly what I will be helping my sister to do — pre-pay 20% before December 31, 2011, and then pre-pay another 20% in the New Year.  Then she’ll proceed with the refinance and save hundreds if not thousands. Yes, there may be interest costs on the temporarily borrowed funds, but those will likely be much less than the savings on the penalty.

I learned this trick years ago when I went to my TD Bank branch and wanted to refinance.  The teller was kind enough to show me how to do this. Unfortunately, many lenders will not because they receive a higher penalty. In fact, my sister’s current mortgage lender has said nothing about how to do this…

Check if your mortgage is CMHC insured – There’s a little known rule I discovered that states if you have a CMHC insured mortgage that has a term of longer than 5 years, you can pay off your mortgage, at any time after 5 years has passed, with only a 3-months interest penalty — no IRD!

Ask to speak to the bank manager – It’s amazing what can be accomplished when you go above somebody’s head.  Even if the bank manager can’t help you, go above them, and so on.  Many banks have complaint departments and you can contact them.  If none of these work, consider the next step…

Contact the Ombudsman for Banking Services and Investments – I didn’t even know this organization existed until I was researching this article.  What a great resource!  This organization works for FREE for consumers, and they help mediate complaints.  I found more than one blog post where the person went to the OBSI and was able to successfully negotiate reimbursement of a portion of their mortgage penalties, even after dealing with the bank directly had failed.

Go public – Most big lenders spend a fortune on advertising, but nothing spreads faster by worth of mouth than a bad experience.  If you go public (or threaten to), they may re-consider and adjust your final penalty. Many local newspapers across the country have ‘consumer advocate’ type columns that fight battles for consumers on a variety of topics.  While writing this blog post, I also did some research and discovered this problem has existed for over a decade, and the federal government has been very slow with enacting any sort of change. 

Conclusion

As with anything in the financial world, if you want to protect yourself , your best defense is to educate yourself and know what you’re signing. And don’t forget to read your mortgage documents!
Author Unknown

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

Prequalified or Pre-Approved for a Mortgage? The Shocking Facts

The first words of advice you'll hear when beginning your search as a homebuyer are "get prequalified or pre-approved  for a mortgage." The misleading fact about these two terms is that they are not interchangeable. 

When I actively practiced real estate brokerage, many times the terms Prequalify and Pre-Approval were brought up in the same breath by many lenders and so-called real estate industry experts. That meant they were the same thing to many real estate agents who in-turn advised their clients accordingly. 

After leaving real estate sales and entering a career in mortgage lending with one of the major banks, I LEARNED A SHOCKING TRUTH. Although Banks typically tell consumers and Realtors that they do mortgage Pre-Approvals, the fact of the matter is THEY DO NOT! At the very most, the bank will prequalify a potential borrower (depending who you're face to face with) and provide a rate hold certificate. Unfortunately, it's not worth more than the paper it's printed on. 

What does that certificate mean to you, the homebuyer? "Absolutely nothing." Buying a house armed with your new certificate and falsely thinking to yourself you have the mortgage in your back pocket is truly nothing short of betting on a craps shoot. 

"So what is the difference between a Prequalification and a proper mortgage Pre-Approval?" First, it depends on whose doing a prequalification for you. My experience with the bank was if you've got a down payment, a job and a pulse you're prequalified. Here's you guaranteed rate certificate. "What are your really getting?" The bank's current mortgage rate for the next "X" number of days, subject to: "read the fine print below", income and employment verification, down payment confirmation, credit history, etc. etc. Remember banks work for the banks. So, if you come back a month later with your Agreement of Purchase and Sale in hand (by the way this is only when most banks will run the numbers for you) and you don't qualify, you don't get the mortgage. "Next".

Admittedly, very few lenders provide mortgage Pre-Approvals. The process actually involves the lenders underwriter going through the same motions as if you had actually bought a home and applied for a mortgage. Income and employment are confirmed, downpayment, credit history and debt service ratios reviewed, etc. If everything meets the lender's approval. Then, essentially the lender ear-marks the mortgage funds for the prospective borrower to be advanced upon the purchase and closing of a home. With this type of mortgage Pre-Approval, the borrower is pretty much assured he is going to get a mortgage usually subject an appraisal. There is a cost to lenders preforming a mortgage pre-approval. The lender absorbs these costs on the expectation of receiving the future business. However, like many things, due to abuse lenders limit the use of this service typically to preferred brokers. 

There is a common misconception among homebuyers and real estate salespeople that once you're pre-approved for a mortgage, you don't need a "Condition of Mortgage Financing Approval" in your Offer to Purchase. A Pre-Approval does not guarantee you're going to get a mortgage, especially if you've only been prequalified without the benefit of supporting information. There are many variables the lender needs to consider approving you for a mortgage after you've made an offer. Things like the house itself, location, appraised value, etc. 

Congratulations! You were in a multiple offer on a property and you won the bidding. You only paid $10,000. over asking and that's still in the range you were Pre-Approved for. SURPRISE! The appraiser estimates the property is valued $10,000. under what you offered and the lender will only lend against the appraised value. So unless you've got the extra money under you mattress, you're not going to be able to close the deal. My advice to you is include a condition in your offer to purchase subject to you obtaining a mortgage. 

"How long do I need for a condition of finance in my offer?" Good question. This period can vary and is reflective of how well you've completed your mortgage shopping due diligence prior to shopping for a home. For example, the time typically allotted for satisfying a condition of financing approval in an offer is 5 banking days. As a homebuyer, if you have not met with a mortgage planner before to making an offer on a home, that means the broker and the lender only have five days in which to obtain all your necessary supporting documents from you including employment letters, pay statements, tax documents, contracts, appraisal, etc. If you happen to be self-employed the list is even larger and five days may not be enough time to obtain and review everything. Not to mention, if you didn't do your proper due diligence and  your financing is not approved, the seller and the sellers agent won't be impressed and will most likely loose confidence in your real estate agent for not ensuring you did your homework. Compare this scenario if you had gone the Pre-Approval route. You would have already submitted all your documents to the lender through your mortgage broker. Therefore the lenders conditions of mortgage approval would typically be limited to the review of the Agreement of Purchase and Sale, an appraisal of the property if required and approval by the mortgage insurer if it is an insured mortgage. The turn-around for approval in this case could be as quick as 24 hours.

The take-away here is "Buyer Beware". Do your due diligence and plan your home purchase. Start first by sitting with a licensed mortgage broker/agent. They work for you. Ask about the benefits of a proper Mortgage Pre-Approval. At the very least, provide all the necessary documents to your Broker/Agent and have him properly prequalify you. Ask him whether or not you need to include and condition of financing approval in an offer to purchase a home. Ask Why or Why Not? 

Armed with your Pre-Approval Certificate or at least, the confidence of being properly prequalified for a mortgage, find a good real estate agent that actively works in the area you wish to buy in. Better still, if you don't know a good Realtor, ask your mortgage broker/agent for a recommendation. Mortgage Brokers/Agents regularly work together with Realtors and are more than happy to refer you to two or three good Realtors they have successfully done business with in the past.

Visit http://www.stevenporter.ca/solutions/ShoppingAids and download my easy Mortgage Checklist to begin your home search. Or email me, I'm always available to answer your questions. 

Steven Porter, CRMS ABR SRES CNE is a licensed Mortgage Agent with the Mortgage Architects. Steven is also a licensed, non-selling real estate broker, Accredited Buyer Representative and Seniors Real Estate Specialist with 30 years residential, commercial and investment  real estate experience. Steven works with together with Realtors across the west GTA in a noncompeting capacity, assisting customers and clients achieve financial independence through home ownership. Steven can be reached at 1-905-875-2582 or EMail at steven.porter@mtgarc.ca

Rate shopping sites…tested again.. and failed again.

A few years ago, I published a study on Rate shopping sites.   These sites were gaining popularity with consumers as a  place to go if you wanted to get the best rates.  And they attracted a lot of attention.

You know the sites… they have catchy ads like ‘shopping for the Best Mortgage rates in Canada’ or ‘comparing Canada’s mortgage brokers for the best rates’.
Hey, who doesn’t want the best rate?  These ads work. Canadians were clicking these links to get more info. 

Sounds great, right? Yet, it’s not.

LOWEST RATE OR PAY THE LEAST AMOUNT OF MONEY TO OWN YOUR HOME?

The original study found that consumers wouldn’t ask too many questions. They were too rate focused and didn’t focus on the terms of the mortgage.  Most consumers don’t bother asking any further questions or spend the time required to read the 30 or 40 pages of legal jargon in their mortgage.  And this where it can become a costly experience.

The original study showed that if you asked a borrower whether they wanted the ‘lowest rate’ or ‘to pay the least of money on their mortgage’ , the average person would choose the latter.   And make no mistake, these are two very different things.

My original study revealed that these sites didn’t shop all mortgage brokers or lenders.   The sites listed only a small handful of brokers.  Only brokers that got in early, would be compared….and only brokers that were willing to pay a fee per lead, can participate.   The ‘low rates’ were NO FRILLS products, in most cases…products that carried restrictions, limitations and inflated prepayment penalties.   Hardly a true comparison of ‘All mortgages and All mortgage brokers’.  And hardly unbiased.

Today, not much has changed..  well, that’s not true.   They’ve become worse.  Here’s an update:

• One of these large sites was purchased by another online rate site.  A quick review of their current rate offerings revealed they no longer had competitive rates.  It’s advertising rates well above the best in today’s market.  They seem to just be promoting Banks rates… which are higher than broker rates.
• Another popular site has a BIG conflict of interest, in my opinion.  They decided to start their own mortgage brokerage but are still running and operating their Rate shopping site.  Seriously, it’s true!  This raises the obvious question, ‘how can they remain unbiased and neutral when they own one of the brokerages they are comparing?’  It’s like asking TD Waterhouse or Investor’s Group who has the best Investment Advisors?   Or like asking Burger King or McDonald’s, ‘who makes the best burgers?’.   If I ask Rogers who has the best cell service, I wonder if they will say ?  
• And yet, you’ve see these sites advertised and promoted in our country’s largest newspapers, as unbiased and independent!!   Anyone else see a problem with this.

HOW TO PAY THE LEAST OF AMOUNT OF MONEY TO OWN OUR HOMES

Hey, if you want to compare rates, it’s easier today. Just contact an experienced mortgage specialist.   Ask a friend, your real estate lawyer, your real estate agent or financial advisor for a referral.  

by Steve Garganis

When does a mortgage prepayment charge apply?

 

• Renewing your mortgage before the maturity date
• Prepaying more than the amount of your annual prepayment privilege
• Refinancing your mortgage and selecting a new term
• Transferring your mortgage to another lender
• Paying off your mortgage before the maturity date

In all of the above scenarios, the mortgage balance is being prepaid before the maturity date, which may result in a prepayment charge.

How are prepayment charges calculated for a fixed rate closed mortgage?

If you have a fixed rate closed mortgage, your prepayment charge will be the greater of the following:

• three months' interest on the amount you are prepaying. Interest will be calculated at your annual mortgage interest rate, plus any discount you received
• the Interest Rate Differential on the amount you are prepaying

What is interest rate differential (IRD)?

If you prepay your mortgage, you may be charged a prepayment charge. There are different methods for calculating prepayment charges. In some cases, the amount charged is the Interest Rate Differential amount. At CIBC, the Interest Rate Differential amount is the difference between the following two amounts:

• interest over the remaining term of your mortgage, calculated at your current mortgage interest rate, plus any interest rate discount you received.
• interest over the remaining term of your mortgage, calculated at CIBC's current posted interest rate for the comparison mortgage identified in your mortgage documents.

For a full prepayment, the prepayment charge is calculated on the full amount of the prepayment. For a partial prepayment, the prepayment charge is calculated on the amount of the prepayment that is more than your annual prepayment privilege amount.

How are prepayment charges calculated for variable rate closed mortgages?

If you have a variable rate closed mortgage, your prepayment charge will be three months interest on the amount you are prepaying. Interest will be calculated at CIBC Prime Rate.

Examples of prepayment charge calculations

The following illustrates how prepayment charges are calculated. To estimate your prepayment charge, use the CIBC Mortgage Prepayment Charge Calculator.
Example of estimating the prepayment charge for a variable-rate closed mortgage
Martin has a variable rate mortgage. If Martin wanted to pay off the entire principal amount, the prepayment charge would be equal to three months' interest on the entire amount he is prepaying, calculated at the CIBC Prime Rate in effect on the date the mortgage payout statement is prepared.
Martin still owes $60,000.00 on his mortgage. If the mortgage payout statement were prepared today, and if the current CIBC Prime Rate is 5.000%, here is how Martin estimates the prepayment charge to pay off the entire mortgage.

Step 1:

The total amount of the prepayment.

$60,000.00

Step 2:

The CIBC Prime Rate in effect on the date of the mortgage payout statement is prepared (written as a decimal). Thus, 5.000% becomes .050.

0.050

Step 3:

He multiples the total amount of the prepayment by the interest rate. This is equal to an estimate of one year's interest.

$3,000.00

Step 4:

He divides the annual interest cost by twelve to get an estimate of one month's interest.

$250.00

Step 5:

He multiplies one month's interest by three to get an estimate of three months' interest. This is an estimate of the prepayment charge.

$750.00

When Martin pays off his mortgage, he will need to pay an estimated additional amount of $750.00 to pay for the prepayment charge. This is only an estimate. Martin should call CIBC Mortgages or his current lender to find out the exact amount of her prepayment charge.

Example of estimating the prepayment charge for a fixed-rate closed mortgage
Maria has a 5-year fixed-rate closed mortgage. When she arranged the mortgage, she received an interest rate discount of .500%. Her existing annual interest rate on her mortgage is 6.500%.
The principal amount she still owes is $100,000. She has two years (or 24 months) left in the term of this mortgage. However, Maria has just inherited some money and wants to pay off the mortgage.
In Maria's case, the prepayment charge will be the higher of the following two amounts:

• three months' interest at her interest rate of 6.500% plus the discount she received of .500%, which is equal to 7.000%; or
• the interest rate differential amount

The following shows an estimated prepayment charge for prepaying the full amount of Maria's mortgage:

Estimate of 3 Months' Interest

Step 1:

The amount Maria wishes to pay off is $100,000.00.

$100,000.00

Step 2:

Maria’s current interest rate plus the discount she received equals 7.000%. Written as a decimal, this becomes 0.070.

0.070

Step 3:

The amount Maria wishes to prepay multiplied by her interest rate plus the discount ($100,000.00 x 0.070) equals the estimated annual interest costs.

$7,000.00

Step 4:

The estimated annual interest costs divided by 12 equals an estimate of one month's interest.

$583.33

Step 5:

1 month’s interest costs multiplied by 3 equals an estimate of 3 months’ interest.

$1,749.99

So, an estimate of 3 months’ interest would be $1,749.99.

Estimate of the Interest Rate Differential Amount

Step 1:

The interest costs over the term of a mortgage with Maria’s current principal balance of $100,000.00, with her monthly payment amount of $693.47, a term of 2 years (which is the remaining term of Maria’s mortgage) and her interest rate plus the discount that she received, which is 7.000%, would be $13,603.92.

$13,603.92

Step 2:

In Maria’s case, we determine that the comparison mortgage is the CIBC 2-year fixed-rate closed mortgage. On the date we prepare the mortgage payout statement, the posted rate for this product is 5.000%.

0.050

Step 3:

The interest costs over the term of a CIBC 2-year fixed-rate closed mortgage, with the same principal amount as Maria's remaining balance of $100,000.00, the same monthly payment amount of $693.47 and our current posted rate of 5.000%, would be $9,567.59.

$9,567.59

Step 4:

The interest costs calculated in Step 3 is subtracted from the interest costs set out in Step 1. This is the interest rate differential amount.

$4,036.33

So, an estimate of the interest differential amount would be $4,036.33.

The Estimated Prepayment Charge

Maria's prepayment charge is the higher of the estimated three months' interest costs of $1,749.99 and the estimated interest rate differential amount of $4,036.33.
So, if Maria's mortgage payout statement was prepared today, an estimate of her prepayment charge would be $4,036.33.
Maria should call CIBC Mortgages or her current lender to find out the exact amount of her prepayment charge. The amount above is only an estimate.
 The timing of your prepayment, changes in the interest rate and changes in your payment amount can have an impact on the IRD calculation. You can use the CIBC Prepayment Charge Calculator to see how these changes affect your prepayment costs.

What additional charges may apply when prepaying a mortgage?

There are sometimes additional charges that may apply when prepaying a mortgage in full before the maturity date:

Cash Back Repayment:
• If you received a cash back amount, when you entered or renewed your mortgage, you may be required to repay the cash back. Below are examples of situations where cash back repayment may be required. When you:
• Prepay the mortgage in full
• Ask us to transfer the mortgage to another lender (a "switch")
• Renew the mortgage with an effective date that is before your current mortgage matures
• Refinance the mortgage
• Transfer title to the property and arrange for the mortgage to be assumed by the new owner
• Port the mortgage

Mortgage Discharge Fee/Assignment Fee
• A discharge fee and/or assignment fee for document preparation and registration when the mortgage is prepaid in full.
• If you ask us to transfer your mortgage to another lender, an assignment fee will apply.

How can prepayment charges be avoided? Call me to find out, Steven Porter -1-888-885-8962

Steven Porter, Mortgage Advisor  CIBC, 1-888-885-8962, steven@stevenporter.ca
www.FreeMortgageInfo.ca