This episode of the Mortgage Minute begins to decode the language used when applying for your mortgage.  Knowing “mortgage” language gives you a leg up when trying to understand your mortgage and how to personalize your mortgage to your situation.  This video explains the difference between amortization and term as it applies to your mortgage!

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? Dusty wallet Double check your credit card statements. DW is in a bit of a skirmish with Visa over a taxi cab bill. Of course, DW is too cheap to use cabs, but does succumb to them to get to and from airports on vacation. Last trip, the family took an airport limousine and paid the $56 charge. Guess what? The same amount was billed a month later. So far, the taxi cab company has yet to produce a second receipt. In the interim, DW had to pay the second $56 charge.

Gary Marr, Financial Post Published: Saturday, June 13, 2009

Applying for a mortgage is the easy part: filling out paperwork, gathering financial documents, and signing mortgage commitments; however in these three easy steps, many people make mistakes.  Most of these mistakes are easily avoidable with some preparation and informed advice.  Below are the Top 5 Mortgage Mistakes people make when trying to secure financing for their home.

1. Failing to choose the correct loan product for their situation
2. Automatically renewing their current mortgage with existing lender
3. Signing documents without reading them
4. Taking it to the limit – running up credit
5. Not planning for your mortgage application

Failing to Choose the Best Loan Product for Your Situation

There are many different types of loans out there.  There are fixed-rate products, variable (ARM) rate products, line of credit products, 15 Year term, 35 Year terms, and more.  However, for every person looking for a mortgage, each has their own unique situation.  While one person would benefit from a variable rate product, their neighbor may be better suited to a fixed-rate product.  The moral of the story is to explain your current situation and future goals in detail to your mortgage advisor and ensure that he/she selects a product that best meets those needs.

Automatically Using Your Existing Lender, Without Consulting other Lenders

Although you may feel an allegiance with your current lender (financial institution which holds your loan, not your mortgage advisor), they may not be able to offer you the best products.  When refinancing or renewing, you must consult other institutions to make sure that what you are being offered is in fact the best rates and terms available.  Many times your bank will offer you posted rates in hopes of you signing the commitment without shopping around.  Make sure you do your due diligence when refinancing and renewing.  This is your home, your mortgage, and your money!

Signing Documents without Reading Them

Never sign documents without reading them.  If you are unsure about your understanding, ask for clarification from someone you trust, your mortgage advisor, lawyer, friends, family members.  Remember that you are the one entering into the agreement, you need to understand and agree with what you are committing to.

Taking your Credit to the Limit

Make sure that your credit balances are in your favor when in comes to your mortgage application.  Lenders are looking for an appropriate debt-to-income ratio.  In short: you need to have more income than you have debt.  Avoid running up a balance on your credit cards, pay-down existing debts as much as possible.

Not Planning for your Mortgage Application

If you know that you will be needing a mortgage, or refinancing your current mortgage you need to make sure you plan for it.  Make sure your credit is in order, if its not, start preparing it.  Do not make any purchases on your credit cards that you cannot pay off, if you carry a balance on your credit cards, start paying them down.  Refrain from making any large purchases before securing your mortgage.  If you are planning on buying a car, wait until after you have secured financing, as your debt-to-income ratio will rise and you don’t want this while trying to secure a mortgage.

Understanding how the mortgage process works and how lenders qualify your loan will help you avoid the above mistakes.  If at all possible, avoid all 5 of these mistakes, it will make your mortgage application process much less stressful.  Remember that the best way to be a successful homeowner is to learn how to manage your mortgage by making informed, responsible decisions!

OTTAWA – The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/4 per cent. The Bank Rate is unchanged at 1/2 per cent and the deposit rate is 1/4 per cent.

Information received since the Bank’s April Monetary Policy Report (MPR) is broadly consistent with the Bank’s medium-term outlook for output and inflation in Canada. The economy is undergoing major restructuring in a number of sectors. The already significant output gap will continue to widen through the third quarter, putting downward pressure on inflation. The Bank continues to expect that the global and Canadian recoveries will be more muted than usual.

In recent weeks, financial conditions and commodity prices have improved significantly, and consumer and business confidence have recovered modestly. If the unprecedentedly rapid rise in the Canadian dollar (which reflects a combination of higher commodity prices and generalized weakness in the U.S. currency) proves persistent, it could fully offset these positive factors.

The outlook is subject to considerable uncertainty. While the underlying macroeconomic risks are roughly balanced, the Bank judges that, as a consequence of operating at the effective lower bound, the overall risks to its inflation projection remain tilted slightly to the downside.

Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target.

The Bank retains considerable flexibility in the conduct of monetary policy at low interest rates, consistent with the framework outlined in the April MPR.

The next scheduled rate announcement is July 21, 2009.

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.

Now we know that interest rates do in fact make a difference in the amount of interest you pay, the following is a real-life example of how much money this really means.  Those of you that have purchased a home or refinanced a loan in the last 5 years or so are probably paying an interest rate of somewhere in the range of 5-6%.  So for this example we will use 5.25% on a $300,000 mortgage.  If we change the rate to 3.8%, which is a rate that is fairly standard in BC right now, you will save 1.45% interest.  In real money terms that equals $362 per month in interest and approximately $22,000 over a 5 year term.  In addition to these savings, your monthly payments are significantly lower, allowing for a positive cash flow each month.

As we would all agree, these savings are significant.  The moral of the story is to always know what you are paying on your mortgage and to be aware of the changes in interest rates, even though 1% doesn’t seem like a lot, it can make a huge difference to your payments!

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.