Are you preparing to purchase a home?  Many people make 3 common mistakes right before applying for a mortgage.  In this video, we define these mistakes and give you tips on how to avoid them.  By avoiding these mistakes, you will make your home buying process smoother and your mortgage application stronger!

Don’t have cash for a down payment?  Don’t worry…if you have RRSP’s and you are wanting to purchase your first home…the Canadian Government has a program designed especially for you!  Watch the video below to learn how to use your RRSP’s to help purchase your first home.

This has left thousands of people wondering how they will financing the repairs to their condos, if and when they are necessary.  With many, many buildings still not assessed for damages, the cancellation of the Reconstruction-loan program may lead to thousands of condo-owners needing financing for home repairs.

Although there are still options the standard financing options for people who can qualify for standard home loans, the people this strands are those that cannot qualify for conventional loans.  Especially with the falling property appraisal values, many people do not have the equity in their home to draw from.  Compound that with the tight economy and many job losses, many people are having difficulty qualifying for loans.  Hence, the need for the government-assisted, interest-free reconstruction-loan program.

Think for a minute about those who will receive an assessment of repair for $50,000 (although many repair bills come in as high as $80,000 per unit) without any idea where the funds are going to come from.  Unfortunately, many experts foresee a large number of these units going into foreclosure with their owners declaring bankruptcy because of a lack of funding options.

If you are in this position, information and action is key. There may be options still available.  Please consult your financial institution or mortgage advisor for possible options and information.

As long as our economy continues to experience the downturn that its in, the rates will remain historically low.  Eric Lascelles, chief economics and rates strategist at TD Securities: “My inclination is to say mortgage rates are likely to remain unusually low for some time.”  Will Dunning, chief economist for the Canadian Association of Accredited Mortgage Professionals: “I don’t really see rates moving a whole lot.”

Typically, five-year fixed mortgages are pegged at 1.1 to 1.2 basis points above the five-year Government of Canada bond yield.  With the financial crisis of the past 18 months, this difference has increased, to upwards of 3 points; however it is falling now to clower to 2 points and will continue to fall.  This allows room for further mortgage rate decreases.

Variable-rate mortgages are slightly different, they operate off of the Bank of Canada’s prime lending rate.  While 18 months ago and longer you could get variable-rate mortgages at prime minus, we have seen in the last 18 months move to prime plus.  However, as with the fixed-rate mortgages, the trend is falling back to pre-18 month ago trends.  Some Lenders are looking at variable-rate mortgages at rates closing to prime.

So, is now the time to lock in your variable-rate mortgage?  In short, no.  Because the Bank of Canada has committed to keeping is prime lending rate steady for as long as a year, while facing the worsening state of our economy, Lending institutions will also follow suit. However, if you have a more recent variable-rate loan, one with a rate of prime plus greater than 1, perhaps you should look at locking in to 5 year fixed rates.  Fixed 5 year rates are at about 3.75%, allowing people a very low interest rate to lock into for 5 years, versus floating with the variable-rate through the next 5 years.  This all depends on your financial situation and your risk-tolerance level.

With historically low rates, there are a number of scenarios that we should all be considering.  Penalties for breaking a mortgage term that is only a year or so old are very high, however this can often be rectified through blended mortgages, taking advantage of lower rates, and waiting until you are further into your term.  Just remember, that these rates are indeed historically low, never before seen interest rates, that will definately not last forever!

The above charts show the monthly savings of $200, which may not seem like that much.  However look at the charts below to see the real significant difference: the savings on interest during the course of a term.

As you can see, by reducing an interest rate by 2.00% you are saving 15% in interest, and paying 15% more on your principal.  In this example, this equates to about $16,500 in savings on interest and $7,000 more on principal over the 5 year term.

There are typically two methods for calculating a mortgage penalty, 3 Months Interest Penalty, and Interest Rate Differential (IRD).  The 3 Month Interest Penalty is just that, 3 months worth of interest.  For example, if you have $250,000 outstanding on your mortgage at a rate of 5.75% you would pay $3,593.73 as your penalty.  This penalty can be rolled into your new mortgage.  

$250,000 Outstanding Balance x (5.75%Interest Rate/12 months per year) x 3 Months =

250,000 x (.00479) x 3 =

$3,593.75

The second method for calculating penalties is the Interest Rate Differential (IRD).  This essentially is the difference between the interest that you are paying and the rate at which they are currently lending money.  Using the same example as above with $250,000 outstanding on your mortgage at a rate of 5.75%, 2 years left in your term, and a current interest rate of 3.95%,  you would pay $9,000. This can also be rolled into your mortgage.

250,000 x (5.75% – 3.95%/12) x 24 (# of months left in your term) =

250,000 x (1.8%/12) x 24 =

$9,000.00

Although this may seem like a lot of money, you would get this penalty back in a couple years, while paying less in interest and having overall lower monthly payments.  Just think about enjoying a lower monthly payment AND saving thousands in interest. Most Lenders will charge the higher of the two methods.  Finding out the penalty you are facing to discharge your mortgage is your first step to analyzing whether it would be beneficial to refinance to a lower rate.  Once you determine your penalty, a Mortgage Broker can help you decide whether refinancing is right for you.

Your mortgage amount and interest then gets spread out over a specified time frame, called the Amortization schedule.  In essence, the amortization schedule is how long it will take to pay your mortgage and interest off.  Loans typically have an amortization period of between 20 and 30 years, with few loans being shorter and few loans being longer.

In the beginning stages of your loan, your monthly payment consists of a large amount of interest and a small amount of principal being paid down.  As you get further into your mortgage, the amount paid in interest is less and the amount paid to principal is more.  Below is a typical amortization schedule for a $300,000 mortgage at 3.89%, paying monthly.

Amortization Schedule for a $300,000, 25 Year Mortgage at 3.89%

As you can see, in the first few years, you are paying more in interest than you are towards your principal in each monthly payment.  This trend starts to reverse around the  7th year of your mortgage.  At this time, your monthly payments begin to pay more down on your principal than you pay in interest.  

So now that we understand how a mortgage loan is constructed, how can we avoid paying so much interest and pay down the principal faster.  There are a few options.  The first thing to take into consideration is the amortization period.  The shorter the amortization period, the less interest you will pay and the faster you will pay off your principal.  When selecting your mortgage product, know what your financial goals are.  If your goal is to pay off your mortgage in the shortest amount of time, and you are willing to have higher monthly payments in exchange, choose a shorter amortization period.  

The second way to pay down your mortgage quicker is to make additional payments on your mortgage principal.  Most Lenders allow you to make additional payments on your mortgage, over and above your monthly payment.  Any additional payments made throughout a year go directly to principal, which pays down your principal quicker and allows you to pay less interest.

A third way to pay down your mortgage quicker applies only to Variable Rate Mortgages.  With a Variable Rate Mortgage, the interest you pay each month is dependent on the changing interest rate.  In times like we are experiencing now, your payment has undoubtably gone down because the interest rate has dropped so significantly.  If you are able to continue paying your original monthly mortgage payment, can continue to do so, and any additional money paid goes directly to your principal.  

To show you the difference between amortization schedules, take a 10 year, 15 year, 25 year, 30 year, and 40 year loan all at 3.89% paid monthly.  After the 10th year:

• 10 Year Mortgage has been paid down by 100%
• 15 Year Mortgage has been paid down by  60%
• 25 Year Mortgage has been paid down by 29%
• 30 Year Mortgage has been paid down by 22%
• 40 Year Mortgage has been paid down by 13%

As you can see, there are many ways you can maneuver your finances to help pay off your mortgage quicker.  Begin with the loan type that best suits your needs and financial situation, and continually assess your situation throughout the term of your mortgage.