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Calculating your mortgage penalty…

Todays market is bringing alot of questions about whether you should consider refinancing your mortgage for a better rate.  There are many different reasons people might re-negotiate their current mortgage.   You may be considering using some of the equity in your home you have built up and use it to buy a rental property,  Make and RRSP contribution or investment, pay off some high interest rate debt or just renegotiate your current rate for a better more competitive rate and lower monthly payment.

Below are some ways in which you can get a good idea on what kind of penalty you may be faced should you want to refinance your current mortgage.  Again these are used simply as a guideline and are in no way exact.   The lending institution you are currently dealing with will give you the exact amounts relating to your specifac situation.

Calculating Payout Penalties & Interest Rate Differentials (IRD)

Many closed mortgages include a clause stating that the payout privilege on the mortgage will be a three-month interest penalty, or interest differential, whichever is greater.

For the calculations below,  using the following scenario:
  • $300,000 remaining on the mortgage
  • 3 years into a 5-year fixed term at 5.5%
  • Today’s interest rate: 3.5%

We’ll just be using the simple interest amount – the actual amount of the penalty could be a little less than the amount quoted in the examples.

Three Month Interest Penalty :

Mortgage Balance X Interest Rate X 3 months

Plugging in the variables above, we would get:

=   $300,000   X   0.055    X   0.25                (5.5% = 0.055,  3/12 = 0.25)

= $4125.00 would be the 3 month interest penalty

Now we have to calculate the interest differential – and that’s where penalties can be quite substantial – especially since interest rates have dropped considerably lately.

Interest Differential Penalty:

Current Mortgage Balance  X Interest Rate Differencial  X Time remaining

=$300,000 X 0.02  X 2

(0.02 = 2% which is the difference from 5.5%-3.5%, and 2 years left in term)

=$12,000.00 would be the Interest Differential Penalty

In the example above, the bank would then use the Interest Differential Penalty since that amount is the greater of the two. Remember that the way banks calculates their penalties sometimes is a mystery to me and can be greater than the figures above so make sure you ask.

Please remember that its not always about RATE,  although important,  there are other important steps you need to take into consideration when considering paying a penalty and shopping for a mortgage.  Let a mortgage expert, put strategic steps and the right product in place that will ultimately make sure its in your best interest to pay a penalty and that your saving money.

I would also invite you to take a look at this link.  I am part of a community of mortgage brokers that created a forum to get our best ideas together a create a simple and educational strategy  showcased here on this website.    A program I implement with all my clients, wherever they are in the mortgage process.  Its a program created in mind to help consumers pay more attention to their mortgage and implement simple easy steps to save thousands of dollars.   When was the last time  your bank phone you up at any time to show you how to save money on your mortgage.  I think i know the answer…..Please click the link and learn something valuable  today then contact me to get started.

http://www.moneyinyourmortgage.com/af/194/lisaalentejano/about

I am a licensed mortgage broker with years of financial experience,  able to help you with your mortgage  any where in Canada and Alberta. Remember my services are free and never should you feel there is any obligation.   So please pick up the phone and contact me directly I would love to hear from you 1-888-819-6536. If your more comfortable with email please feel free to email me your questions at lisa@mortgageplayground.com

Expert, unbiased advice is what i offer to all of my clients.

Author, Lisa Alentejano

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Is it time to lock in your mortgage?

Do you lock in your mortgage or not?

Heres an interesting article on things to consider when locking in  your mortgage or at least considering renewing your mortgage for a better rate.  Lots of things to look at when rates are at an all time low.  You can imagine consumers are taking a good look at their mortgage and where they want to go with it. Small differences in rates can save  you thousands over the longer term.  As most of us have a mortgage for years, take advantage of at least looking at your current mortgage and consider whether making a change could be beneficial.   As always any questions or comments please feel free to contact me at 1-888-819-6536.

The gap between short-term and long-term rates has shrunk enough that it might be time for anyone renewing a mortgage to consider locking in.

Moves last week by the major banks to reduce the discount on variable-rate mortgages comes as the discounts for long-term mortgages have gotten as steep as they have ever been.

“What seems to be happening is they are focusing their attention on fixed rates. We are starting to see some aggressive competition on four-and five-year products,” says Gary Siegle, a mortgage broker and Invis Inc. regional manager in Calgary.

How aggressive? Try as much as 190 basis points. A five-year, fixed-rate mortgage with a posted rate of 5.39% is now being offered for 3.49%.

For whatever reason, the four-year, fixed-rate mortgages are being priced even more aggressively.

Mr. Siegle says he can lock consumers into a four-year, fixed mortgage for as low as 3.09%.

The discounting comes as variable-rate products, linked to prime, have become more expensive. Short-term money has become more expensive in the bond market, forcing banks to reduce discounts.

The banks traditionally move their prime rate with the Bank of Canada rate. With no flexibility there and existing customers getting huge discounts based on old deals, banks are forced to raise rates for new loans as short-term money gets more expensive.

The trend began in April when FirstLine Mortgages, a subsidiary of Canadian Imperial Bank of Commerce known for its low rates, cut its discount on variable rates.

Others banks were slow to follow, hoping to make money on volume. But refinancings have dried up under tougher mortgage rules and sales have slowed, creating the need to tighten profit margins on variable-rate products.

Today, the discount on a variable-rate mortgage is about 55 basis points off the prime rate of 3% – in other words, 2.45%. Compare that to 3.09% on a four-year mortgage and the premium to lock in is not that much.

“This gap is about as narrow as it goes,” says CIBC deputy chief economist Benjamin Tal. “It reflects a flat yield curve, which makes it difficult to make money in this business.”

Mr. Tal says variable-rate mortgages tend to be more attractive when there are inflation expectations not yet expressed in short-term rates. This time, he says, the bond market is depressed, anticipating recession, and that has shrunk spreads dramatically.

The one thing keeping people in short-term money is the sense that there is no urgency to move because the U.S. Federal Reserve Board has pledged not to raise rates for two years, which also effectively ties the hands of the Bank of Canada.

“We know the five-year rate is attractive, but we also know short-term rates are not raising,” Mr. Tal says.

What does that mean on a practical, dollars-and-cents basis?

Let’s use the Canadian Real Estate Association’s 2011 average sale price forecast of about $360,000 and assume a 20% down payment and a $288,000 mortgage.

At 2.45%, your monthly mortgage payment based on a 25-year amortization would be $1,282.98. At 3.09%, your monthly payment rises to $1,376.28.

But even at the gap, you would pay about an extra $7,000 in interest to lock in over four years.

Ultimately, the $7,000 amounts to an insurance policy. You get payment certainty for four years, but at a price.

If rates climb 200 basis points on your variable-rate mortgage, it could cost you $22,000 more in interest over four years. The reality is that rates wouldn’t jump at once and, therefore, increases would likely be gradual.

Moshe Milevsky, the York University finance professor who wrote the oft-quoted study that variable-rate mortgages do better than fixedrate mortgages 88% of the time, said if you start thinking about it like insurance, it comes down to your risk tolerance.

“There are people who pay a lot for protection on their portfolio; there are people who pay a lot for life insurance,” Prof. Mr. Milevsky says. “If the premiums are low enough, you might say, ‘Sure, I’ll pay.’ But if you have a tight budget, every basis point counts, and it might not be worth it.”

To me, he still has the ultimate answer for the tough decision whether or not to lock in.

“I still don’t get why more Canadians don’t split their mortgage,” Prof. Milevsky says. In other words, locking in half of the mortgage and floating with prime on the other half.

“When is a bank going to come to the realization Canadians hate making this choice?”

He’s right. Even with rates this low and the gap between short-term and long-term rates this narrow, it is still a tough call

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Condo for the studious kid?

Summer is drawing to a close and if the student in your household is studying in Toronto, they may be moving back into residences or private rental accommodation.

However, some parents are choosing to buy a place for their offspring, and perhaps some friends, to live in for the duration of their studies. While it may sound like a great investment, your financial planner will be getting you to ask some tough questions.

Ask yourself: “Can we afford it?” says Carol Bezaire, vice-president, tax and estate planning at MacKenzie Financial in Toronto, who reccomends planning ahead by asking: “‘What are we going to do with this property if our child doesn’t go to school or drops out?’ Down the road if the child decides they want to stay in the place, ‘What kind of arrangement with the child are we going to have?’ ”

Ms. Bezaire recommends getting legal and tax advice when drawing up an agreement between you and your child. If you charge your child rent, they can write it off as a tax credit. However, you will need to record the rent as income on your return and you will be liable for tax on any capital gain when you sell the property. If space will be rented to non-family members, Ms. Bezaire says, you must get tax advice on operating a business rather than a personal arrangement.

The type of housing stock available may also affect the rent-versusbuy decision.

“As a market investment, condos have definitely grown exponentially. In Q2, we had 9,445 condos sold,” says Pauline Lierman, senior research analyst, Urbanation in Toronto. A lot of that is due to the fact that students have a desire to be in the city, but there is a shift away from the houses that are broken down into units. “Families are moving back in and buying them and converting them back into singlefamily units, so you’re getting areas where there isn’t as much supply of the traditional type of student-ghetto housing.”

Some parents – particularly from overseas – have been planning ahead.

“Some projects have been very successful in their marketing to forward-thinking families,” says George Carras, president, RealNet Canada. “They may consider that, ‘My child is much younger, we like Canada and we’d like them to come to school in Canada. So let’s just invest in the condo as possible accommodation.'”

Mr. Carras says such purchases tend to be focused around University of Toronto’s and George Brown’s main downtown campuses.

“You can start to see some of the development acquisitions and interests taking place further north,” Mr. Carras says. “For Seneca, [there’s interest in] some of the growth that’s taken place in and around the Sheppard corridor. You’re within a reasonable distance to the school but you’re also accessible to public transit.”

While your child studies, many new and resale condos will come up for sale in the GTA. Mr. Carras and Ms. Lierman both say continued population growth, coupled with a decline in single-family home construction, means there will likely be decent demand should you decide to sell the condo when your child graduates.

Posted in Applying for a mortgage - Lisa Alentejano services the interior, BC Mortgages, BCMortgage, Best Rate Mortgages, Canadian Economy, Canadian Mortgage News, Home Buyer Closing Costs, HST, Kamloops Mortgage Broker, Kelowna Mortgage Broker, Mortgage Affordability, Real Estate Market, Salmon Arm Mortgage Broker, Vernon Mortgage Broker

Whats the impact of the HST when buying a home?

What’s the impact of the HST when buying a home?

The BC government’s move to introduce a harmonize sales tax, or HST, that combines the federal and provincial sales taxes into a single 12% will mean increased costs for some homebuyers.

Most importantly, new homes in BC will be subject to the 12% HST. Re-sale homes are not subject to the HST.

According to the BC Real Estate Association, “To offset the increase in costs, the BC Government is offering a partial rebate of the HST for new housing, intending that new homes up to $525,000 should bear no more tax than under the previous PST system. Homes above $525,000 will receive a flat rebate of $26,250. New home sales over $525,000 will be impacted, as buyers will have to pay an additional 7% tax less the $26,250 flat rebate.”

“On November 18, 2009 the provincial government announced the HST transitional rules on housing which includes a threshold increase from $400,000 to $525,000, moving the threshold to above the median new home price in the province.”

The British Columbia Harmonized Sales Tax of 12% HST is also applicable to any costs and fees associated with your property/home purchase including legal/notary fees, real estate commissions and other closing costs.

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Could bonds pull mortgage rates down even more?

 

Could bonds pull mortgage rates down even more?Falling bond yields could spur a slight drop in medium-term residential mortgage rates this summer, but bargain-hungry consumers would be foolish to count on considerably cheaper borrowing costs, experts say.

About a month ago, banks blamed soaring bond yields for two sizeable hikes to key residential mortgage rates.

Those moves drove up posted rates on five-year fixed-rate loans by 60 basis points to 5.85 per cent.

While yields have reversed course in recent weeks, banks have yet to pass on those savings to consumers. Meanwhile, there are fresh signs of life in the housing market, fuelling increased demand for mortgages.

Some economists and rate strategists believe that yields could fall a bit further and speculate that mortgage rates might follow suit. But there are no guarantees and experts surmise those potential declines would be minimal at best.

Doug Porter, deputy chief economist at BMO Capital Markets, says banks will be more inclined to tweak their rates if yields continue heading south

“Typically, they want to be convinced that it is not a flash in the pan and that any retreat in yields is sustained,” he said.

“I believe that we are probably not too far away from that point. It might take a little more of a deeper rally (in bond prices) to make it completely convincing.”

Bond yields move inversely to prices. While variable-rate mortgages are largely influenced by the banks’ prime rates, conventional fixed-rate mortgages are linked to the bond market.

Banks generally try to match maturities when they finance mortgages with bonds. That means five-year mortgages are paired with five-year bonds.

Earlier this year, banks were confronted with a sharp spike in their own borrowing costs. Yields jumped after a flurry of better-than-expected economic data. At that time, traders were also focused on the threat of inflation as governments issued massive amounts of debt to stimulate growth.

Central banks usually try to control inflation by raising interest rates and the market was betting the U.S. Federal Reserve would hike rates this year.

That sentiment, however, has since soured.

Last week’s disappointing U.S. jobs report is among a string of more recent indicators that dampened earlier expectations of a snappy recovery.

The yield on the five-year Government of Canada bond peaked at 2.82 per cent on June 10. Yesterday, it closed at 2.39 per cent. Experts say it is impossible to predict how much lower it could go.

“I think most of the juice has been wrung from this move. I would still say the risk is that yields could fall a bit further, but I think we’re well past halfway,” said Eric Lascelles, a rates strategist at TD Securities.

Benjamin Tal, CIBC’s senior economist, thinks another 5 to 10 basis-point decline in yields is likely. He agrees that might cause mortgage rates to dip but believes the discounts will be minimal and short-lived. “By the end of the year, we’ll start seeing rates rising.”

Mark Chandler, a senior fixed-income analyst at RBC Capital Markets, stressed that other factors also influence mortgage rates, including higher demand and recession-driven risk premiums.

Even if rates don’t budge, they remain near historic lows, observed Jim Rawson, Toronto regional manager at mortgage brokerage Invis.

“I know that people are so rate-conscious these days, but really when it comes down to what (falling yields are) really going to mean for you on a monthly basis – it is really nothing

RITA TRICHUR Toronto Star

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Your line of credit just got jacked

Your line of credit just got jacked
Your line of credit just got jacked

What’s going on with your line of credit?

It is most likely rising, much to the chagrin of many Canadians who thought it would continue to track the Bank of Canada’s key benchmark rate, percentage point for point.

Edmonton machinist Neil Gordey found that out the hard way, when he got a notice last month that his line of credit was going from prime, up to prime plus one percentage point.

“Can they do this? After entering in to an agreement with them for a product at a decided rate, can they simply change the terms like they did?” asks Mr. Gordey, who had taken the remaining loan amount on his variable-rate mortgage and rolled it into a line of credit for better flexibility.

The answer to that is that it depends on your contract. But know this: The bank can change the rate and some have raised it on credit lines because their own cost of capital has gone up.

Some, such as the Canadian Imperial Bank of Commerce and the Bank of Montreal, have done just that. TD Canada Trust has chosen to “grandfather” customers whose rate was set before the credit crisis.

The good news is that with prime at 2.25%, customers with strong credit are still borrowing at 3.25% if their loan is secured by something such as a house. In the end, you might be better off because prime at most of the major banks was above 3.25% just seven months ago.

The outstanding loan amount on lines of credit has exploded over the past year, jumping by 20%. “I think consumers realize there is a deal out there that they might not be able to get later,” says Benjamin Tal, senior economist with CIBC World Markets.

Mr. Gordey is one of the unlucky ones because he had a variable-rate mortgage that was negotiated at .375 percentage points below prime, but he switched to the line of credit. Instead of borrowing money at just above 1.85%, his loan is now 3.25%.

The difference between the rules on a variable-rate mortgage versus a line of credit are subtle but important. Most consumers taking out a variable-rate mortgage agree to a term with the rate calculated based on prime. These days, that’s about 100 basis points above prime. Before the credit markets blew up, it was 60 basis points below prime.

“Historically, a lot of lines of credit have been priced right at prime,” says Gary Siegle, a mortgage broker and Calgary regional manager with Invis Inc. “The typical range has been from prime, to prime plus two [percentage points], depending on your credit.”

Mr. Siegle says credit lines are great for consumers because they operate like credit cards, but with nowhere near the same interest rates. And, unlike mortgages, you can opt to pay just the interest.

The downside? Most lines of credit are callable upon demand, even if you have not defaulted. Most mortgages are not. To keep this point in context, it is almost unheard of for a Canadian financial institution to call in a consumer line of credit that is not in default.

The major difference is your rate and the bank’s ability to change it on a line of credit versus a mortgage.

Variable-rate mortgages are tied to prime, which banks can set at any level they want. But the reality is, Ottawa has leaned on them to keep the prime rate moving in step with the Bank of Canada’s rate, regardless of the cost of debt. There were a few hiccups in the fall, but the banks played ball as rates have been lowered.

Lines of credit are a different story. At Bank of Montreal, they are calculated using what is called “the base rate,” which is a combination of the prime rate plus whatever discount or premium the bank is willing to offer customers.

Unlike consumers with variable-rate products, who have contracts that specify they get a certain discount off of prime, the rules on a credit line tend to be looser and allow the banks to raise your rate as their costs go up.

“Our base rate has been adjusted. All the banks have done it because of our cost of funds,” says Laura Parsons, area manager of specialized sales for Bank of Montreal in Calgary. “The base rate can move. It is prime plus something.”

The “something” is something to think about.

Dusty wallet Is your interest rate calculated on a daily, monthly, quarterly, semi-annual or annual basis? It can make a difference in your effective interest rate. On a 4% mortgage, if interest is calculated daily, the effective rate is 4.0808%. If it’s calculated monthly, it’s 4.074%; quarterly, 4.06045%; and bi-annually, 4.04%. How your interest is calculated becomes a much bigger issue as you get into higher rates

Financial Post

Side note: We still have variable rate mortgage available between prime plus .40 and prime plus .60 so effective rate for your variable rate mortgage is between 2.65% and 2.85%.  Line of credits are a different type of credit vehicle and not for everyone, they do have some more flexibility with things such as interest only payments and if you need credit in the future your dont have to go back to the bank to access it.    Credit lines are priced at more of a premiume at prime plus 1% and higher today.

Posted in Applying for a mortgage - Lisa Alentejano services the interior, BC Mortgages, BCMortgage, British Columbia Mortgages, Canadian Housing Market - Lisa Alentejano, Canadian Mortgage News, Debt, Fixed rates, Home Loans, Interior Mortgages, Kamloops First Time Home Buyer Tips, Kamloops Mortgage Broker - Lisa Alentejano, Kamloops mortgage consultant, kamloops mortgage financing, Kamloops Mortgages, Kelowna Mortgage Broker, Kelowna Mortgage Financing - Lisa Alentejano, Low Interest Rates, Mortgage Affordability, Mortgage Broker Kamloops, Mortgage by Lisa Alentejano, Mortgage Consultant Kamloops, mortgage financing kamloops, Refinance Your Mortgage, Refinancing, Salmon Arm Mortgage Broker, salmon Arm mortgages, Salmonarm Mortgage

Calculating your mortgage penalty..

Mortgage Prepayment Penalty

Todays market is bringing alot of questions about whether you should consider refinancing your mortgage for a better rate.  There are many different reasons people might re-negotiate their current mortgage.   You may be considering using some of the equity in your home you have built up and use it to buy a rental property,  pay off some high interest rate debt or just renegotiate your current rate for a better more competitive rate and lower monthly payment.

Below are some ways in which you can get a good idea on what kind of penalty you may be faced should you want to refinance your current mortgage.  Again these are used simply as a guideline and are in no way exact.   The lending institution you are currently dealing with will give you the exact amounts relating to your specifac situation.

Calculating Payout Penalties & Interest Rate Differentials (IRD)

Many closed mortgages include a clause stating that the payout privilege on the mortgage will be a three-month interest penalty, or interest differential, whichever is greater.

For the calculations below,  using the following scenario:
  • $300,000 remaining on the mortgage
  • 3 years into a 5-year fixed term at 5.5%
  • Today’s interest rate: 3.5%

We’ll just be using the simple interest amount – the actual amount of the penalty could be a little less than the amount quoted in the examples.

Three Month Interest Penalty :

Mortgage Balance X Interest Rate X 3 months

Plugging in the variables above, we would get:

=   $300,000   X   0.055    X   0.25                (5.5% = 0.055,  3/12 = 0.25)

= $4125.00 would be the 3 month interest penalty

Now we have to calculate the interest differential – and that’s where penalties can be quite substantial – especially since interest rates have dropped considerably lately.

Interest Differential Penalty:

Current Mortgage Balance  X Interest Rate Differencial  X Time remaining

=$300,000 X 0.02  X 2

(0.02 = 2% which is the difference from 5.5%-3.5%, and 2 years left in term)

=$12,000.00 would be the Interest Differential Penalty

In the example above, the bank would then use the Interest Differential Penalty since that amount is the greater of the two. Remember that the way banks calculates their penalties sometimes is a mystery to me and can be greater than the figures above so make sure you ask.    Please speak to your mortgage broker for your personalized mortgage advice, as payout penalties are dependant on the contract you signed and remember are subject to change.

Are you now ready to look a little more closely on whether or not you should refinance your mortgage, pay the penalty (which we can most likely build into your new mortgage) and still save thousands of dollars in interest.  Contact me direct at 1-888-819-6536 or email me at lisa@mortgageplayground.com.  You’ll be able have all the information you need to make an informed decision.  Expert, unbiased advice is what i offer to all of my clients.

Author, Lisa Alentejano

Author- Lisa Alentejano