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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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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.

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Dont handcuff your mortgage

Dont handcuff your mortgage
Dont handcuff your mortgage

Would you like to pay an extra $300 per month on your mortgage? Not likely.

That hasn’t stopped a number of Canadians, with the deal of a lifetime on a variable-rate mortgage, from switching over to a more expensive fixed-rate product and paying the extra freight.

A fear of rising rates is driving the rash decision. But if you’ve finally managed to pin your banker to the ground, why on Earth would you let him off the mat?

More than 28% of Canadians have a variable-rate product tied to prime, according to the Canadian Association of Accredited Mortgage Professionals (CAAMP). If you negotiated a deal before October of last year, chances are you are now borrowing money for as little as 1.35%. That’s based on deals that at one point saw the banks giving 90 basis points off prime. Prime is now 2.25%.

The average sale price of a home last month in Canada was $306,366. Based on a 25% downpayment and a 25-year amortization, your monthly payment would be $962.61 at 1.35%. Convert that to a five-year fixed-rate term and you’re probably going to have to consider a 4% mortgage rate and a monthly payment of $1,289.04.

Rates are rising fast. Most major banks upped their five-year rate by 40 basis points this week, although discounters were still offering 4% this past week.

“It’s not a mass rush yet, but we are starting to see … people locking in. But variable rates are still so good,” says Joan Dal Bianco, vice-president of real estate-secured lending, TD Canada Trust. She stops short of questioning why a consumer would pull out of these “deals” that are no longer available on the market.

Try to get a variable-rate mortgage today and the best you can probably hope to get is 60 basis points above prime, or 2.85%.

The landscape changed dramatically in October during the credit crunch. As the Bank of Canada lowered rates, the major banks reluctantly lowered prime because of the massive amount of customers with variable-rate products negotiated under the old, higher terms.

“Bonds yields are going up rapidly and people are starting to realize the rates are going to go up,” Ms. Dal Bianco says. Throw in the fact the Bank of Canada used the weasel word “conditional”(on inflation rates)when it promised not to raise rates until June, and you can understand why some people think today’s record-low prime rate might not hold.

But if you’re someplace between 60 to 90 basis points below prime, the rate is going to have to go up pretty fast to justify locking in today at 4%, even though that is just slightly above the all-time low hit last month for a five-year term.

“I don’t understand why you would lock in,” says Jim Murphy, chief executive of CAAMP. “Sure, if they start to rise, but [Bank of Canada governor Mark] Carney says they won’t rise, so you’ve got another year at that prime-minus rate.”

Don Lawby, chief executive of Century 21 Canada, says even when rates do start to increase, they are not going to jump significantly right away. You are not going to get 4% on a fixed rate again, but double-digit rates seem unlikely. “The only logic two locking in would be for someone very sensitive to any rate change and they just want to be secure,” Mr. Lawby says.

But at what price? If you’re using the “feeling secure” logic, why not go for the 10-year fixed-rate product? Rates on that product can be locked at 5.25%, ridiculously low by historical standards. Yet fewer than 10% of Canadians consider a 10-year product.

There are some compromises you can make. For starters, there is nothing to prevent consumers from having a blended mortgage at most Canadian banks. Some banks will let you take half your outstanding debt and lock it in. Diversity is preached for stock portfolios, but few people seem to adhere to the same philosophy when managing their debt.

Consumers might want to take their cue from business. Few companies would want all of their debt coming due at the same time — it presents too much risk. The other option is knocking down principal: Make payments based on a 4% rate and have that extra $300 go straight to your principal every month.

The bottom line is if you’ve got a deal on your mortgage, why would you give it back?

 

Gary Marr, Financial Post

Note: A variable rate mortgage  historically outperforms a fixed rate mortgage.  With a variable rate you hit some peeks and valleys when prime fluctuates but overall a better rate long term.  The question again is to ask yourself are you comfortable with fluctuating payments should prime rate increase.   Merix financial is offering prime plus .40% giving you a variable rate at 2.65% (prime rate at 2.25%), one of the most competitive variable rates out there currently in the marketplace.  Merix Financial is only accessed threw an approved mortgage broker.

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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

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Protecting your biggest investment

Protecting your biggest investment
Protecting your biggest investment

A fantastic article that really lays out what types of things you need to consider and be aware of when thinking of refinancing your mortgage.  There is alot of good points in here and again its about being aware of “ALL” your options.   Thanks to Thestar.com for posting it….

Interest rates have fallen sharply in the past six months, prompting questions about refinancing.

How much will you save if you “break” a closed mortgage to get a lower rate?

If you’re a tough negotiator, or have a mortgage broker on your side, you can get a five-year mortgage at 3.55 to 3.75 per cent – down from 5.75 per cent last November.

Here’s a guide to extricating yourself from a fixed mortgage without losing the savings to penalty charges.

Read your mortgage contract.

It spells out the conditions for getting out early before the end of the term and the charges paid to compensate the lender against losses.

Find out what kind of penalty you face. In most mortgages, you have to pay three months’ interest on your current balance or the interest rate differential (IRD), whichever is greater.

Check out the IRD. It’s based on the amount you’re prepaying and an interest rate that equals the difference between your original rate and the rate the lender can charge today when relending the funds for the remaining term of the mortgage.

Ask the lender what is the original rate used to calculate the IRD. Is it the posted rate or the discounted rate? Using the posted rate results in a wider gap and a higher penalty.

Estimate the penalty. Suppose you have a balance of $200,000 and 30 months left of a five-year mortgage term. The original rate is 5.5 per cent and the current rate for a comparable term is 3.5 per cent.

The calculator shows that the three months’ interest penalty is about $2,750, while the IRD penalty is about $12,000. (This is a rough guide.)

Estimate the savings, using a mortgage savings calculator at Industry Canada’s website, developed by finance professor Moshe Milevsky at York University. (Go to http://www.ic.gc.ca/eic/site/oca-bc.nsf/eng/ca01817.html, to Learn More)

 Suppose you pay a $12,000 IRD penalty, which is added to the mortgage principal when you refinance.

You get a three-year rate of 3.5 per cent, but keep your monthly payments the same.

The calculator shows that, by refinancing, you can pay off the mortgage in 15.17 years and save 23 months of payments.

Find out about prepayment privileges. How much of the outstanding balance can you prepay each year and when? Make the most prepayments you are allowed, because they reduce the amount on which IRD is calculated.

Ask about an unsecured line of credit for prepayments. It will be repaid when you refinance the mortgage with a different lender or sell your house.

Ask about portability. Can you take your existing mortgage with you when selling a home and buying another one?   This can be less costly than breaking the mortgage when you sell.

Negotiate a longer portability period.  Instead of three to four months, can you get six months? How about a year?

Always remember that an IRD penalty is a moving target. When interest rates fall, the penalty grows.

Recognize that a lender can quote you a penalty today and raise the amount substantially by the time the mortgage is refinanced or the house sale closes. Act quickly to keep the IRD low.

Think about making prepayments to reduce your mortgage instead of paying a penalty to refinance. For many borrowers, this can be the smartest decision.

Again its about weighing your options and making sure that paying a penalty makes sense in your situation.

Author- Lisa Alentejano
Author- Lisa Alentejano
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Variable Rate comes down – first lender up to bat…

 

Merix Financial announced today that their 5 year variable rate mortgage will now be offered at prime plus .40%.  Most lenders still offer prime plus .60-.75%.  They are the first of any lender to offer this reduction.  This will now get you a rate of 2.65% (prime rate is currently 2.5%)

 

Merix Financials variable rate mortgage offers you the options to convert it to a fixed rate at any time and your guaranteed the best rate at the time of locking in!    Thats not something all lenders can brag about,  a few lenders dont offer the “best rate” at lock in so its important to talk to your mortgage broker about these details when considering a variable rate type product and when chosing your lender.

Once again, with rates like these if your considering refinancing a higher interest rate mortgage or want to consolidate some higher interest rate debt,  theres no time better than now!

Merix Financial offers an extensive line up of competivie mortgage products for both conventional and high ratio mortgages.   Along with competivie rates and mortgage terms they have 6 billion in assets under administration.

Merix Financial partners only with a select group of experienced originators and can only be accessed through an approved mortgage broker.

Merix Financial
Merix Financial