This story is specifically speaking about Variable Rate mortgages.
I don’t have a crystal ball – I leave that for people that are smarter than I am but above is one man’s opinion.
Over the past few weeks there has been some major mortgage news. I want to address these issues directly so you can see how they may affect you. I believe if you can see clearly what the repercussions, if there are any, then you will be able to make an informed decision.
As you may have heard recently interest rates at Canadian Lenders have been rising above their historical lows. This was largely expected by the industry.
If you have been properly pre approved you likely have a rate hold for 120 days before you take possession of your property. So for example if you are expecting to take possession of your property on September 1, 2010 then you will get the best rate offered between May 4, 2010 and September 1, 2010.
So what does the industry think short term rates will do? Obviously we do not have a crystal ball but we feel that in all likelihood the recent rate hikes are temporary reactions to the market place. We feel that these rates will only rise slightly from their current levels, stay steady or even drop a little.
Rest assured that when you take possession of your property you will be getting a great competitive rate from a stable Canadian Lender.
You may have also heard that the insurers (CMHC/Genworth) recently changed some of their guidelines. The insurers do this from time to time and it is very typical – contrary to what the media sometimes leads people to believe.
For the most part they made the following changes:
- Most self employed people need to verify income. There are some exceptions to this so if you would like to investigate further then please call.
- Rental properties will need to have a larger down payment.
- If you decide to get a variable rate then you will need to qualify at the “Benchmark” rate. Currently sitting at 5.25%.
- If you decide to get a fixed rate with a term that is 4 years or less then you will need to qualify at the “Benchmark” rate. Currently sitting at 5.25% as well.
So if you are an employee of a company that is not owned by you, buying a home that will be your primary residence and getting a 5 year fixed mortgage then nothing has really changed for you in these guidelines.
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These types of situations are exactly the reason why people should use a mortgage broker – to cut through all the noise and get to the way that situations affect you specifically.
I am here to answer all of your questions. Please use my services and expertise to your advantage and I am sure that I will win your business.
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.
If you are like me at all you like order. Most of us get bothered by chaos and crave a process that gets us the things or the situations we want. People who are looking for a mortgage are the same way and from my experience they want to work with a person who takes out the guess work.
So lets look at the general process for getting you a mortgage.
1 – Get a mortgage broker
2 – Get educated and pre approved
3 – Collect all the paperwork you will need
4 – Put down an offer and get approved
5 – Go sign some documents at a lawyer’s office
6 – Move into your new home
There it is in a nutshell. Simple. Easy.
Things only get tough when there you don’t know what the current step is or what the next step is going to be.
Over the next few weeks I will share my insights into each of these steps because I want to help you to get to where you want to be in the easiest way possible.
All the best.
I have been quite fortunate in my business to work with many first time home buyers and am happy to take the time to explain all parts of the mortgage process and all mortgage terminology.
Invariably we always get to the topic of amortization and amortization period.
For those of you who do not know what amortization is the Alberta Mortgage Brokers Association (AMBA) uses this definition:
“The gradual retirement of a debt by means of partial payments of the principal at regular intervals…
The Amortization Period is a time of arrangement for paying off a mortgage by equal installments or periodic constant payments.”
The Amortization Period has a huge effect on the size of the borrower’s monthly payment. This, in turn, effects how much home they may qualify for. It stands to reason that if you borrow $100,000 and you decide to pay it off in 10 years that your monthly payments will be bigger ($1,005) than if you decide to pay it down in 20 years ($598).
Sometimes the “standard” Amortization Period of 25 years does not allow a couple to purchase the home that they really want. So I present them with the idea of extending the Amortization Period to the maximum – 35 years. This allows them to qualify for more and in turn get the property they want.
But it is really important for people to understand that there are two draw backs for extending the Amortizaton Period:
As long as the borrowers know that taking this action will effect how much they will pay and decide that they are ok with this then we will move forward with the 35 year Amortization Period.
In future blog posts I will reveal some strategies for paying down your mortgage faster thereby reducing the overall interest payments and negating some of the effect of extending the Amortization Period.
Call if you have any questions.