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You’ve bought a new house, and you’re sitting with the bank’s loans officer ready to sign for that mortgage. Then she casually asks, “Would you like mortgage life insurance with that?”—almost like your waiter asking whether you’d like fries or salad with your burger.
First, what is mortgage life insurance? It seems pretty straightforward. It’s insurance that pays off your mortgage if something prevents you from doing so. After all, you want your family to be protected against foreclosure should you die or become disabled or suffer from a critical illness.
The horror stories can multiply before your eyes. But your friendly loans officer assures you that the premium only adds up to a few extra bucks a month tacked on to your monthly mortgage payment, so it’s hardly noticeable. If you decline, the loans officer might even ask you to sign a waiver, declaring that you’ve turned down this golden opportunity.
So, why not?
First and foremost, you probably don’t need it. If you already have life insurance, whether term, universal, or whole life, and it’s at least for the amount of your mortgage, you’re already covered.
Add a properly designed extended health, long-term disability, and critical care insurance package that many people already get through their employee benefits program, and you’re pretty much covered in case illness prevents you from covering mortgage payments.
If you need more, you can increase the size of your term life insurance at very low cost, especially if you’re young and in good health.
Next in the reasons for “why not mortgage insurance” is the product itself. It just doesn’t give value for money. Mortgage insurance pays only to the amount of the outstanding balance of the mortgage, whatever that balance is.
The maximum insured amount is typically $500,000, which may not be enough anyway. But even if the principal amount of your mortgage is paid down, the premiums on your mortgage insurance won’t change. So you’re actually paying more and more for less and less as time goes on.
And the mortgagee gets the funds in the event of your death. If you were hoping for an additional sum to provide living expenses and so on, forget it. The mortgagee is the one and only beneficiary. To provide for your family, you’ll need to buy ordinary term life insurance where beneficiaries receive the entire proceeds, no strings attached.
So again, why bother with mortgage insurance to begin with? Just buy additional—and cheaper—term life to cover the mortgage.
There are also other restrictions on mortgage life insurance that make it poor value for the money. Coverage is tied to the lender and the property—it isn’t portable. If you sell your home or transfer your mortgage business to another bank, your policy is cancelled and coverage stops. Premiums are not refundable.
There is one last, really big reason for not forking out the big bucks for mortgage insurance: claim denial. Typically, you’ll be asked to buy mortgage life insurance when you’re actually signing the mortgage document.
You’re under a lot of pressure, and you’ve already agreed to borrow a huge sum of money. Okay, you’ve caved. Another few bucks, another quick application form. You fill out the application, and check off a few boxes on an innocuous-looking medical questionnaire, and you’re done.
Actually, you’re done like toast.
That’s because mortgage life insurance is sold without qualifying you. It’s a form of underwriting called post-claim underwriting. Your application is filed with the underwriting insurance company (not the bank, unless it’s the bank’s insurance company, of course) but not reviewed to see if you qualify for coverage until a claim is actually made.
What could possibly go wrong? Plenty, it turns out.
If you did not read the questions on your application thoroughly and answered a yes-no question incorrectly, a future claim could be denied. The trouble is that the medical questions on mortgage-insurance applications are so wide-ranging that it’s very easy to inadvertently provide an incorrect answer.
They may include something like this: “Have you ever consulted a medical practitioner, physician, specialist, or attended a hospital or other medical facility, or taken any medications or received treatment for a cardiovascular, respiratory, digestive, or nervous systems complaint?”
The key word is “ever.” Well, who hasn’t ever gone to the doctor with a tummy ache (digestive), a bad cold or the flu (respiratory), or a migraine (neurological) at least once?
But if you answered “no” on your application, as most people are tempted to do (thinking that the question relates only to recent serious illnesses and heavy-duty prescription drugs), then the insurance company can (and often will) claim that you “lied” on your application and did not disclose pre-existing conditions.
Because you did go. It’s right there in your doctor’s medical file. Claim denied! Start looking for new accommodations. (But you might get your premiums back.)
And finally, unless you’re applying for a high-ratio mortgage or considering an arm’s-length mortgage for your RRSP, mortgage insurance is not a requirement for getting a mortgage.
Mortgage insurance comes with high costs, tight restrictions, and the dodgy post-claim underwriting. For those reasons, it’s poor value for your premium dollar.
Instead, if you wish to protect your family against default on your mortgage, consider a much cheaper term life policy, which is reviewed at application to ensure you qualify, and that you can renew every five years, adjusting the insured amount to match the declining principal balance owing on your mortgage.
Your best bet is to consult a knowledgeable financial planner or licensed insurance agent, who will make sure you get the proper sides of insurance to go with your main course
If you are looking to find the Current Calgary Real Estate Statistics Click the following Link below. It is a direct link to the Calgary Real Estate Board Website.
If you are looking to watch the Currently Industry Updates About Calgary Real Estate Stasticts provided by the President of the Calgary Real Estate BBoard Folow this Link
The most Recent Industry Update CREB March 2014
There will come a time when most real estate investors will be looking for secondary sources of cash to build their portfolios. Some will use additional leveraged monies, such as Lines of Credit, or equity in the rest of their portfolio, or even private money. However, one of the most common solutions is bringing a ‘Money Partner’ into the mix – someone who can provide working capital to fund the portfolio growth and who is looking to get a return on their available cash.
Although this type of relationship is commonly called a Real Estate Joint Venture, in many cases it is not technically such. Many times it could be a shareholder relationship, where the investor and the cash provider own shares of a corporation which they use to invest. In other cases, the money investor just wants a simple, annual percentage return on their investment – this would be a lender relationship.
A true real estate joint venture occurs when two or more parties get together, pool their money, knowledge, and leverage to build a portfolio. No shares are owned, it is just two or more parties deciding that the best course of action for both is to work together. They agree to terms on money, dividing of duties, and setting of goals. From that comes a Joint Venture Agreement (or as some people call it a Business Prenup agreement). This agreement must be detailed and must be completed before any money passes hands because once real money enters the equation, new emotions enter, making the written agreement much more volatile to create. When an agreement such as this is created, it becomes the basis of the relationship moving forward and deals with all potentialities (taxes, income, expenses, death, divorce, duties and disputes).
The majority of these Real Estate Joint Venture deals are structured where one partner finds and negotiates the real estate deal to the absolute best of their ability, while the other partner or partners puts up all or part of the cash in return for participating in the ultimate profits or losses in the deal. They are full partners, each with their own risks in the deal. One is contributing their vast expertise, experience and contacts to maximize the profits in the deal by choosing the property wisely, arranging a good price, and then managing the day-to-day operations of the property. The other is often a silent partner providing just the initial investment capital. Risks are shared, as are the rewards, mostly on a 50% each party basis (after the money partner is paid back their capital first.).
As a very simplified example (that does not take taxes into the equation):
PURCHASE & OPERATION:
SALE & PROFIT SPLIT
A few years later, the property is sold for $420,000. Here’s what happens:
This simplified math scenario above is very typical where the money partner, with very little effort, receives a strong return on their initial investment. The real estate expert puts in all of the effort of maximizing the profit for the partnership, spending countless hours so the money partner does not need to.
There is one component that is missing from this equation and that is the positive cash flow that is created from the property (usually beginning in year 2 of ownership). This cash flow, in most cases, is split 50/50 on an annual basis, not monthly or quarterly due to the fluctuating and seasonal operating expense waves.
Bringing other people’s money into your real estate Joint Venture deals can be a huge win for both parties involved, but I must warn you, it is critical that you look after the other partner’s money better than you would even protect your own. In order to make this structure successful and repeatable, you must give extra attention to your due diligence, making sure you’re buying into the “right deal.” Never, ever put someone else’s money into a deal that you wouldn’t put your own (or your grandmother’s) money into.
Never tolerate risks that you or your investor wouldn’t normally accept. Explain the risks to the money partner in advance and keep in close contact with them. If there is bad news, don’t hide it. If there is great news, tell them early and often. This is critical because a successful deal is the best way to attract even more funds to your investment business!
Leverage in real estate comes in many forms including leveraging of money, leveraging of time, leveraging of knowledge, as well as leveraging of expertise. All four take time to create, all four are equally as important in a deal and all four must be in balance for the deal to be profitable. That is why business relationships between people with different assets and skill-sets work much better than those with matching skills.
Never, ever put someone else’s money into a deal that you would not be willing to put your own or your favorite friend or family’s money into.
A colleague of mine, Peter Kinch, has written a book titled “The Canadian Real Estate Action Plan”. In it he shares the story of a couple who is building their portfolio and need to attract Joint Venture Capital in order to achieve their financial goals. He has a unique way of sharing the importance of planning for inevitable Joint Venture attraction. He uses a car as an analogy:
“I want you to picture your real estate goal as a thousand-mile automobile journey and your biggest obstacle is simply a lack of gas. All you need to do to reach your goal is to plot out how and where to find the gas stations along the road map. Now the problem is, if you don’t have a map and you’re simply looking out the front window hoping you’ll stumble across a gas station along the way, the odds of you running across a gas station at the exact same time you are about to hit empty, is remote.”
“…this is exactly how most real estate investors approach using JV partners. They wait until they run out of money or options and then turn to it as a “last resort,” with little or no preparation.”
Put this way, it becomes quite obvious that from the very beginning of your real estate investing journey, you should be positioning yourself to be a good ‘stopping place’ for other people’s cash so you can fill up your tank and keep moving. The best way to do this is really rather simple when you think about it. Peter continues:
“What if instead of focusing only on what kind of real estate you are going to buy over the next 18 months, you shifted your focus to thinking about what a potential JV partner would want to see in you? Who would I need to be in order for someone to believe enough in me to trust me with their money? Are you that person today? Is there anything you need to change in order to become that person? What if, in the process of spending your seed capital, instead of concentrating on what you are buying, you focus on becoming the person you need to be in order to attract JV capital in the future?
It is important to understand that you don’t need to be that person today—you need to become that person. When you start thinking this way, it will change the role and purpose of your seed capital. Seed capital is now no longer simply cash for a down payment. It’s the tuition fee that allows you to develop into a sophisticated real estate investor who is well positioned to be able to attract JV capital in the future. In order to understand this, they, and you, need to learn about CCI—confidence, credibility and integrity.
CCI—THE SECRET TO ATTRACTING JV CAPITAL
The key points of Peter’s CCI philosophy:
Peter asks a very powerful question that we all need to keep asking ourselves as we progress as investors “What can you do over the next 18 months, with your current knowledge and capital, to develop CCI and position yourself to make it easy to attract Joint Venture capital?”
In other words, when thinking honestly, are you the type of investor that others should and will feel comfortable in as an investment partner? Or do you have some obvious work to do to become that person who others gladly, and safely, write $50,000 cheques to knowing it will be well taken care of.
Once you are ready to accept investment capital, and you have all of the appropriate paperwork ready, then the next obvious question is:
But Where Do I Find Willing Investors?
First step is to begin with people you know. First and foremost, never underestimate those around you when it comes to available investment capital. Many will surprise you if you approach with the right deal that fits their needs and risk tolerances.
These potential investors can be anyone from parents, friends, relatives, professionals (doctors & dentists) right to those who hang out at the same club or gym as you. The biggest mistake that can be made is pre-judging someone as ‘not having any money.’ I have seen this back-fire on many beginners, only for them to discover a year later that the person they dismissed ended up investing in something else with someone else.
This is a business and you must prospect for potential partners. It all starts with basic conversation – making sure that everyone knows you are a real estate investor and that you work with others as partners. Once you have casually started this conversation you will quickly be able to determine whether they are interested or not by their body language and the direction they take the conversation. If they are obviously not interested, DO NOT PUSH IT! There is a whole system that we have designed just for this critical piece and it is outlined in the Joint Venture Secrets Program you can find at www.reincanada.com .
Once you find someone who wants to work with you, the next step is to immediately begin treating it like the business that it is. This is especially important for friends and family, as these relationships are often taken more casually when they in fact should be taken even more seriously.
Your job is to make sure that the deal is a winner for them first, then you second.
Whether you are attracting a money partner or you are providing the money for the partnership, it is critical that you complete a background check on the other party. Yes, this can be a bit uncomfortable at first, especially with family or friends. However, it is MUCH MORE uncomfortable later on down the road if something goes wrong. Whether family, friends or business associates, it is very important to him to know who he is really going into business with.
Once again it goes back to treating the partnership like a business. You must ensure that legal agreements are written and you have designed the divorce in advance. The Real Estate Joint Venture agreement is like a pre-nuptial agreement for your real estate business and is MUCH easier to discuss and agree to during the early honeymoon phase of the relationship. Along the way, you should hold regular meetings to discuss the money and the property, but not on family or friend time – keep these separate.
Last but not least, before you buy your first property with your new partner, create an agreed-upon spreadsheet that will be used to divide the profits. Use your accountant to ensure that all of the tax, dividend, and expenses are included in the calculation. Both partners agree that this will be the template so there are no disputes in the future. This spreadsheet becomes an integral part of your Joint Venture Agreement.
Keep Your Advisors Informed
In all cases, structure your deals in advance. Have the detailed conversations before the deal is signed and then work very, very hard to ensure the other party wins, because when they win, so do you.
For a much more detailed look at the potential of Real Estate Joint Venture s in real estate, visit
http://www.realestateinvestingincanada.com/product/tabid/59/p-114-jv-secrets-e-book.aspx for a special e-book and audio.
By Don R. Campbell
Cutting Edge Research Inc.
A new-to-Canada applicant is someone who has obtained permanent resident status or landed immigrant status within the last 36 months. Employment, income and taxes are all earned & declared in Canada.
A non-permanent resident is someone who is living, working and filing taxes in Canada with all the appropriate & necessary work visa documentation in place. These applicants may be here with an intention to apply for permanent resident or landed immigrant status in the future, or they are temporarily re-located to Canada for a specific period of time for work purposes.
A non-resident is someone who is earning their income and filing their
taxes outside of Canada. As long as the income is being declared outside of Canada, applicants are viewed as non-resident without exception.
Up to 95% financing is available for new-to-Canada applicants with CMHC insurance on Non Permanent Resident Mortgage.
Confirmation of permanent resident or landed immigrant status.
Other documents as outlined below.
Download all the CMHC rules by completing the form below
Speaking to my Mortgage Broker Marvis Olson She has summarized the important Facts:
1). Buyers need to have an International Credit bureau –except for the US as I’m able to obtain direct from that country.
2). Buyers qualify using stand guidelines except even with salaried —I have to have the last tax return filed-we have to prove they are up to date & have no taxes owing in whatever country they are obligated to file in.
3). Rigorous confirmation of down payment—they need to pass the anti-money laundering & terrorism test—–90 day history of funds in their bank accounts.
4). They will need to come here to sign at lawyers-no power of attorney deals.
5). They will need a Canadian bank account where the down payment gets transferred into ——& then payments are taken.
6). Full appraisal——but that is standard on any revenue properties-or second homes.
If I can help your clients have them contact me directly:
P 403-620-8200 F 403-451-1697
For the CMHC information sheet for Newcomers & Non-Permanent Residents, Click Here.
Non residence lending is a program for Canadians living abroad and non Canadian Citizens that wish to purchase a property in Canada.
Do note that various lenders have restricted lending areas, and in some cases, certain lenders will not lend under this program.
This is a surprise announcement from CMHC, although it appears to be consistent with their stated objectives about reeling in debt loads of Canadians.
The other two insurers (Genworth and Canada Guarantee) have not yet announced their intentions, but they normally follow with what CMHC does. The exception might be when they see this as a way to grow their business in an area they covet (and I don’t think this fits that bill).
Here is the Globe and Mail article just published: http://www.theglobeandmail.com/report-on-business/economy/housing/cmhc-tightens-mortgage-insurance-offerings/article18224612/
The upshot is, if you have clients who are self-employed and need to apply using ‘Stated Income’, or clients who are considering buying a 2nd home with a down-payment under 20%, CMHC must commit to the mortgage prior to May 30th to be eligible under the current program.
And here is the official CMHC announcement:
CMHC Changes Its Mortgage Insurance Product Offering
OTTAWA, April 25, 2014 – As part of the review of its mortgage loan insurance business, CMHC is discontinuing its Second Home and Self-Employed Without 3rd Party Income Validation mortgage insurance products effective May 30, 2014. Self-employed Canadians can still qualify for CMHC insured financing through CMHC homeowner products with a validation of their income using traditional methods.
“CMHC helps Canadians meet their housing needs and contributes to the stability of the housing market and finance system” said Steven Mennill, Senior Vice-President, Insurance. “As part of the review of its mortgage loan insurance business, CMHC is evaluating its products and services to ensure they are aligned with these objectives.”
As a result of changes to CMHC’s mandate to contribute to the stability of the housing market, benefitting all Canadians, while effectively managing and reducing taxpayers’ exposure to risk, CMHC is undertaking a review of its mortgage loan insurance business. This is the first set of changes resulting from this review.
CMHC Second Home and Self-Employed Without 3rd Party Income Validation will remain available for new mortgage loan insurance requests submitted to CMHC before May 30, 2014, regardless of the closing date of the home purchase. As is normal practice, complete borrower and property details must be submitted by a lender to CMHC when requesting mortgage loan insurance.
Combined, CMHC Second Home and Self-Employed Without 3rd Party Income Validation account for less than 3% of CMHC’s insured business volumes in units. Given the limited use of these products, their discontinuation is not expected to have a material impact on the housing market.
As Canada’s national housing agency, CMHC draws on more than 65 years of experience to help Canadians access a variety of quality, environmentally sustainable, and affordable housing solutions that will continue to create vibrant and healthy communities and cities across the country.
How to become the most desirable home buyer you can be – and create an offer that wins the multiple offer war.
When starting the house hunting process, most buyers are starry-eyed optimists convinced they’ll find the perfect home for their family at a reasonable price. With any luck, it’ll even come with a self-cleaning pool, a two-story walk-in closet, and a magical mirror that erases inches from their waistline. Then reality hits.
Compromises are as much a part of the home buying journey as getting the keys. Here at Trulia HQ, we’ve heard stories from hundreds of users about every difficult real estate decision you can imagine. We’ve compiled a few of the most common home buying hang-ups, the trade-offs they often entail, and some tactics for how to get through them:
The Trade-Off: Modern design or good bones?
The Tactic: This piece of advice is so often repeated that it’s almost cliché, but it’s really important, so we’ll say it again: Focus on the aspects of the home that are permanent – the layout, the location, the exposure to natural light – and ignore the cosmetic issues that are easily swapped out – the carpet, the wallpaper, and that strange smell. These problems are only skin deep, and if you’re being too superficial, you’re likely to miss out on ‘the one.’
The Trade-Off: Tricked-out house or safe, convenient neighborhood?
The Tactic: Do your homework. Calculate how much time (and money) you’d lose to a daily commute, look into the actual crime rate for the area, and think about how the neighborhood will affect your home’s resale value—is this area undergoing a renaissance, or are you likely to continue to be the nicest house on the block? Location is a huge deal worthy of your attention because you don’t just marry the house, you marry the neighborhood.
The Trade-Off: Bigger space or smaller mortgage?
The Tactic: Ask yourself the hard questions. That formal dining room is divine and it would be great to have an extra bedroom, but how many dinner and house guests did you really have last year? What could you do with that extra money? What would you miss out on if you went over budget? You may decide that your family could legitimately use the extra square footage—you can’t put the new baby in the pantry, after all. But remember folks, bigger is not always better.
The gap between Fixed vs Variable Rate Mortgage products has narrowed in recent years. And while fixed rates are starting to rise they offer certainty in a monthly payment. On the flip-side, variable rates remain low, but are the riskier of the two choices – so how do you choose?
Your income, lifestyle and risk tolerance will weigh heavily on your decision and will inevitably determine which product suits your circumstance.
The appeal of variable-rate mortgages is that the interest rate is typically lower than that of fixed-rate products. However, the main drawback is the risk involved. Without warning, rates could increase or decrease.
One of the quickest ways to determine if a variable-rate mortgage product is right for you is whether or not you can afford rate increases, says Michael Cameron, a broker with Axiom Mortgage Partners in Edmonton.
The first thing you should assess is your current income, earnings and potential for increase of earnings, says Gerri Vaughan, a broker with Invis in Edmonton. “Can they weather any storms – rate increases or decreases?”
If you can comfortably afford mortgage rates that are two per cent higher than what you’d pay on your variable, then you may be OK, says Cameron. But proceed with caution. “Rates right now are at historic lows. So low that it’s quite conceivable you could see rates double in the next little while,” he says.
If you’ve decided you can afford a variable-rate mortgage, the next thing you will want to determine is if a variable-rate mortgage fits your personality. If you’re the type of person who can’t sleep at night knowing your rate may go up, even slightly, a variable-rate mortgage may not be the best option for you, says Cameron.
One thing you can do to mitigate risk and reap some rewards of choosing a variable-rate product is to fix your payment at a set amount higher than the minimum requirement, says Cameron.
Michelle Brienza of Michelle Mortgages is a strong proponent of variable-rate products. She says 70 per cent of her clients choose variable.
“If you pick a variable-rate product and make the minimum monthly payment, it doesn’t work,” Brienza says.
Vaughan suggests setting your variable-rate mortgage payment at the current five-year fixed rate. Not only will you have a buffer if rates rise, but it will allow you take advantage of the lower variable rate by allocating more of your payment to pay down the principal.
“You’ll be ahead in terms of amortization, you’ll be using your prepayment privileges (many Canadians don’t because they can’t afford to) and if rates begin to rise, you can lock in for at least the length of the remainder of your mortgage term, so you’ll be getting the best of both worlds,” says Brienza.
While it may seem like a good idea to take advantage of a variable-rate product while rates are low and switch to fixed when rates begin to rise, some mortgage specialists caution against it.
“I don’t suggest anyone’s going to have a whole lot of luck in timing the market. In my opinion, you take a variable-rate product because you believe over time, the variable rate is going to average lower than your longer-term fixed,” says Cameron. “You can have 10 phDs in economics and you’re still not going to know what rates are going to do and when.”
However, some people will still take variable with plans to watch the rate and convert it when rates start to rise. But remember, when you convert it, you convert it at the rate at the time of conversion, says Vaughan. “If rates turn around and start going up, they’ll go up a lot faster than they came down so you may miss the boat,” she says.
Moreover, conversion rates are something to ask about with variable products. If you have an open variable product that you can convert at any time, ensure you know what rate you’ll receive if you switch to a fixed-rate product. Is it the best fixed rate available, or a posted fixed rate? The posted rate may be 5.79 per cent but there may be a 3.79 per cent fixed rate available, says Cameron.
“Anyone who would have selected a variable-rate product over the last 10 years will have done very well,” says John Turner, director of mortgages at Bank of Montreal in Toronto.
“Considering a variable-rate mortgage is still a good thing given the rate difference. But we’re likely at the bottom end of the interest rate environment.”
While there might be a little more downward movement in the future, it becomes a waiting game, he says.
In the past, variable rates used to be calculated prime minus, while today they’re prime plus, narrowing the spread, which is the difference between the interest rate on a fixed-rate mortgage or a variable-rate mortgage. In May, the spread between a current variable rate and a fixed rate was negligible.
Five-year fixed products have historically been popular in Canada. But because of this narrowing and drop in rates, for some, the decision to choose a fixed-rate product is a no-brainer.
For instance, at the time of publication, variable rates were hovering around three per cent, while fixed-rate products could be found for just under four per cent.
“The risk (of variable-rate products) versus the reward is not substantial enough, in my opinion, to take the risk,” says Cameron, who in May told Buying Your First Home that when fixed rates are within a percentage point of variable rates, fixed is the way to go.
While most people are risk-averse, first-time buyers nearing the beginning or growth of their families are more likely to choose a fixed mortgage because it means they can budget for the length of their mortgage term, says Turner.
In addition, the costs of purchasing a new home and maintaining it can swallow a large portion of their income, not leaving a lot for possible rate increases, he says.
If there’s a particular rate and payment you feel good with and know you can afford, then most people will prefer the peace of mind, says Turner.
“I always tell people that if you’re the type of person that always buys the extended warranty, then a variable-rate product is probably not for you,” says Cameron.
Consider this analogy from Cameron: Look at the difference between the fixed rate and the variable rate as your insurance premium. Assuming your variable is three per cent and your fixed is 3.75 per cent, you’re paying a 0.75 per cent insurance premium. If that works out to a $75 a month difference in payment, you’re paying $75 a month to have the peace of mind and security to know that for the next number of years your payments aren’t going to change.
“Of course, the variable rate today doesn’t necessarily mean it’s going to be the variable rate tomorrow,” he says. “If you can boil it down to a dollar per month cost, it makes it a lot easier for people to make a decision.”
Once you’ve made a decision about rates, you’ll need to decide on the length of the mortgage term.
The length of time you expect to be in a property may have a bearing on the length of your mortgage term. Some buyers will decide they don’t want to worry about renegotiating their mortgage payment for the length of time they plan to live in the house, says Vaughan.
The average length of a mortgage term is five years for both fixed vs Variable Rate Mortgages.
In Vaughan’s experience, some people will take a term to match elections, as historically, interest rates tend to be lower during election years. This isn’t always the case, but it is public perception, she says.
While rates are important, flexibility and features may be the determining factor for you when choosing your mortgage product.
The ability to put lump-sum payments down on your principal is what’s usually referred to as prepayment privileges. Banks and lenders differ on the amount usually ranging from 15 per cent to 20 per cent of the amount owed. Be sure to check the frequency because some lenders only allow this payment to be made once per year, which may not be convenient for you. So, if they allow you to prepay $10,000, and you opt for $5,000, you won’t be allowed to pay off another $5,000 in the same year. Lump-sum payments are traditionally annualized, meaning you can’t skip a year and then double it the next year.
You may want the flexibility to put down large lump-sum payments if you receive a bonus through work, a tax refund, an inheritance or just come into some extra money, says Vaughan.
“The other thing that I’ll typically advise them to do is round off their payment,” she says. “I’m a round number thinker. So if the payment is $873, I’ll round that number up to $900 because you won’t feel it in your budget, but that extra $27 is going to pay down your principal that much faster.”
You may also want to see if you have the option to increase your payments. With some products you can increase your payment by 10 per cent to 20 per cent.
“Price is important. Getting a great rate is important. You can have the greatest rate in the market on a product but unfortunately when it comes to your life and events all of a sudden you can be stuck,” says Turner. “So I think it’s important to look at features. What would you use or could you use as opposed to the nice-to-have.”
While uncommon, some lenders offer payment holidays. For instance, if a borrower is going on maternity leave or paternity leave, Bank of Montreal has a program called family care, which allows a customer to defer four months’ worth of payments.
Another feature available is re-borrowing capability. How important is re-borrowing to you? As you pay down the mortgage, can you get access to the cash again? Not all lenders will offer this option. But it might be one worth looking at.
“For instance, if you receive a bonus for $20,000 and put it toward your mortgage, and then your roof falls in and requires $10,000 worth of repairs, can you retrieve the prepayment on your mortgage?” asks Turner, whose company offers a feature that would allow borrowers to do so.
If there’s a possibility you’ll move before your mortgage term is up, you might want to consider a portable mortgage product. Not all mortgages are portable so be sure to ask your mortgage specialist if the products you’re considering can be transferred to a new home. If you’re considering a closed product and there’s some type of penalty you could incur, ensure you get the details of the penalty upfront, says Turner.
The standard penalty to pay out a fixed-rate mortgage is either three months’ interest or interest rate differential – whichever is greater of the two.
If you got a mortgage two years ago when rates were at 5.5 per cent or six per cent and if you wanted to rewrite that mortgage to current rates which are around four per cent you are looking at an interest rate differential, which could be thousands of dollars depending on your mortgage, says Vaughan.
Basically what you’re doing is prepaying those interest charges on your contract – the difference between your contract rate and your current rate – to your maturity, she says.
It’s not advantageous to buy out your mortgage, unless you have less than two years to maturity, Vaughan says. If you still have four years until maturity, you’re only really buying an extra year as you move into a five-year term. If you don’t have the cash to pay that interest rate differential, then you have to apply it to the mortgage and then you’re paying interest on interest, she says.
So if you’ve got the cash, Vaughan advises to make a principal payment on your mortgage and don’t buy the rate down.
Break it down (Source: John Turner, Bank of Montreal)
Variable-rate products appeal to some because the rate is calculated based on prime and is typically lower than the fixed rate. Payments are generally fixed over a period of time (eg. three years). As interest rates go down more of the mortgage payment goes to principal. But as interest rates go up less goes to principal. This means that your Amortization period (the number of years you’ve selected to repay the mortgage (both principal and interest) could be longer or shorter if interest rates have risen or fallen since the start of the term.
Open variable: Being open allows you to put down as much as you want, or pay off the entire mortgage at any time. It also lets you change to another term at any time, without charge. Payments are generally fixed throughout the term. This product is ideal for those who have swings in their cash-flow that would allow them to pay their mortgage off in lump sums, are thinking of selling their home, wish to prepay more than 20 per cent of their mortgage amount or believe rates will decline. However, expect higher rates with an open product than a closed product of the same term length.
Closed variable: With closed products, the payments are generally fixed for the term. It’s important to know what your prepayment options are. Can you make lump-sum payments? How much and how often? Typically a closed mortgage will have limited prepayment options.
The appeal of fixed mortgages is that they allow you to accurately budget. You know what your mortgage payment will be for a determined length of time, as well as how and when your mortgage will be paid in full.
Open fixed: You’re able to prepay in full or in part at any time with no prepayment charge. In addition, you can change to another term at any time without charge. Ideal for those who want maximum flexibility, are thinking of selling their home, wish to prepay more than 20 per cent of the mortgage amount or believe rates will decline.
Closed fixed: Your interest rate and payments are fixed for the term you choose. This product is ideal for the budget-conscious who prefer peace of mind, knowing rates will not rise during the term. They also want a lower rate than an open mortgage of the same term.
Convertible fixed: Let’s you convert to a closed term of one year or longer at any time, without charge. This product may be for you if you want to keep your options open and want a lower rate than an open mortgage of the same term. Your prepayment privileges are less flexible than those of an open nature.
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