February 3, 2010
Book, Case Study, Employed Persons, First Time Home Buyer, Interest Rates
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Closed mortgages offer great rates and typically fit most people’s needs. Most people feel that they can stick to the term of the mortgage they have chosen. But like a wise man once said – life is what happens while you were making other plans.
Things happen – divorce, your job is moved to another city – your needs change. This is ok. Lenders will allow people to get out of mortgages that they have gotten themselves into – for a fee of course.
These fees are called Pay Out Penalties.
Pay out penalties are typically determined in two different ways:
- Interest Rate Differential
- Three Months Interest
Lenders take whichever of the two is greater.
The Alberta Mortgage Broker Association defines the how these are calculated as follows:
“You can calculate these two penalty amounts using the simple interest formula to five a borrower an approximation of the cost:
I = P x R x T”
I = Interest
P= Principal
R = Rate
T = Time
For the three month interest calculation the formula would look as follows:
I = Current Mortgage Balance x Original Mortgage Interest Rate x 3/12 (Since time is in years we only want to calculate 3 months)
So if you have a mortgage of $150k at a rate of 7.5% the calculation to determine 3 months interest would give us a value of $2812.50.
For the Interest Rate Differential calculation the formula would look as follows:
I = Current Mortgage Balance x (Original Mortgage Interest Rate – Current Mortgage Interest Rate) x Time remaining in contract
So if you have the same scenario as above and the current mortgage Interest Rate is 6% and you have 3 years left in the term the calculation to determine the Interest Rate Differential would give us a value of $6750.
In this case the lender would charge you $6750 for leaving this mortgage.
What I believe is important to note in this case are:
- The lender is not picking a number out of the air – there is a clear formula that they use.
- People need to know what the consequences are. This allows people to make educated decisions and educated decisions are good decisions.
If you have any questions regarding this please do not hesitate to contact me or another qualified Mortgage Broker.
February 3, 2010
Book, Employed Persons, First Time Home Buyer, Pre Approval
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When people think about a getting their mortgage they usually think it is all about them. If they can qualify to make the payments why would a bank ever say no to any property?
The reality is that the borrowers are only one part of the equation – the property is the other part.
Lenders want to make sure that if unforeseen circumstances arise and they are forced to start foreclosure proceedings that they can sell the property for market value. This means that the house/condo has to be in at least “average” condition.
Lenders may shy away from properties that are great deals because of the following:
- Refurbished grow op house
- One of those houses where there were 20 cats living there
- “Fixer-upers”
- Dirt basements
The lender also wants to make sure that the property has enough funds in the Condominium reserve funds to handle any unforeseen expenditures for the building. So if a building is 35 years old and only has $2500 in its reserve fund this will likely raise a red flag.
It is important to understand that the lender did not implement these policies to stop people from buying places. They just want to be sure that they have invested their money someplace safe – they already think you are strong now they need to confirm that the property is strong as well.
This is just one of the many reasons to be sure that you use a qualified Realtor, home inspector and mortgage broker in your purchase.
January 28, 2010
Case Study, Employed Persons, Interest Rates, Uncategorized
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In my time as a mortgage broker 75% of all mortgages I have done have had 5 year terms. This means that the specifics of the mortgage (amount, property, interest rates and payments) are set for that entire period. So if a home owner decides to change some of these arrangements then a new mortgage is required and pay out penalties need to be paid.
But what if a home owner decides to move to another property before the 5 years is up?
The lender wants to hold onto good customers so they implemented a clause called “Portability”. What this means is that you can move your mortgage without penalty to another property.
For example if Jane and John own a townhouse worth $300k with a mortgage of $200k and want to move to a single family detached home worth $450k. What is the process to port this mortgage?
- Jane and John would need to visit their mortgage broker to confirm that they would qualify for the increase in mortgage amount.
- They sell their property.
- They put an offer on the new property.
- Once accepted key data is sent to the lender.
- The lender reviews that application, supporting data and the property.
- Once accepted a the lender takes the original mortgage of $200k at its current rate and blends it with the additional $150k at the best current rate – giving them a new mortgage balance and a new rate.
- Then the lender instructs Jane and John’s lawyer.
- Jane and John sign the docs at the lawyer’s office.
- They take possession of their new house.
So the important things to note from this example are:
- You can move your mortgage to a new property without penalty.
- Get a good mortgage broker who can help you work through this process with confidence.
January 20, 2010
Credit, Employed Persons, First Time Home Buyer, Pre Approval
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In a previous blog post I ran through the steps that most people take to get their first property. One of the steps that I had written I didn’t have a previous blog post about – Get your down payment prepared.
The down payment is a critical part to getting a mortgage on a property. It determines how much equity you will have in the property after you purchase it. The more equity you have the less risk the lender and insurer will see in your file.
Down payments can come from many different resources:
- Personal savings – This is the money that you have squirreled away for years in a savings account. If it is not in a bank account and you intend to use it put it in a savings account today.
- RRSP – As you may know the Government of Canada has a First Time Home Buyers Program that allows people to take money out of their RRSPs tax free as long as they promise to repay it in a certain time. Check out the following link to the Government of Canada’s website that explains the program. Link
- Gift from an immediate family member – Just like it sounds your parents or your sibling gives you all or a piece of the down payment.
- Borrow the funds for the down payment - This method requires that you use a good mortgage broker to show you if this option will work for you. Depending on the lender there can be a maximum that you can borrow and there maybe other terms in the mortgage that you will need to be made aware of.
There are a couple more options available to you please call to find out more.
Down payments are very important and the lender has some specific needs in proving where the down payment comes from. If you have any questions please contact me and I will answer them.
January 14, 2010
Employed Persons, First Time Home Buyer, Interest Rates, Pre Approval
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On my last blog post I mentioned that clearing away debt is a good (and common) step to take before getting your first property.
The reasons for such actions are two fold.
-Firstly you can help out your debt ratios. In a previous blog post I explained that two specific ratios determine how much you can borrow. By paying down some of your debt you can increase the amount of money the lender will be willing to lend you.
-Secondly it is a great idea to pay down your debt because you will likely have some new purchases to make your property a home.
I recommend that you speak with a quality mortgage professional to determine how to best pay down outstanding debt so it helps you achieve your dream.
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