The following is a link to the official press release - http://www.fin.gc.ca/n10/10-011-eng.asp

The most important points are below.

Require that all borrowers meet the standards for a five-year fixed rate mortgage even if they choose a mortgage with a lower interest rate and shorter term. This initiative will help Canadians prepare for higher interest rates in the future.

Lower the maximum amount Canadians can withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. This will help ensure home ownership is a more effective way to save.

Require a minimum down payment of 20 per cent for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation.

I believe that the industry has a number of clarification questions that we need answered before we fully understand how this will affect the market place this spring.

When everything is all sussed out I will be sure to update you.

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.

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.

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.

So for example if you get a 5 year fixed closed mortgage and decided to move to another house 3 years later then you would be forced to end your mortgage and pay the penalty fee.

But portability is an option in most mortgages of this type.

So in this example you may be better off to port your mortgage to the new property.  This means that you would not have to pay the penalty and you would get to keep the rate that you had for the past three years.  If further money was needed you would borrow that amount at the rates of that time.  These two amounts and their rates would be blended into one convenient payment.

So by using this option people can really save themselves lots of money and get the home they want.