Knowing the Terms of your Mortgage

Prepayment

Having the option to pay off your mortgage faster should be a consideration when reviewing your mortgage terms. Prepayments allow you to pay off a little more each year (usually a set portion of you mortgage amount). This is a great feature if, say, you get yearly bonuses from works, work commission based and would like to use the income from busy times towards paying down your debt, or expect to be earning more in the coming years.

Prepayments come in many forms, and each lender had their own features. Some allow you to increase you regular payments, so you pay a little more each period. Alternatively, you could have the option to make a lump sum payment that goes directly to decreasing your principal, so no interest is paid on those extra funds.

Portability

Now, what is you decide to move; you would like the option to take your current mortgage and terms to put towards your new home. You may also have the option to increase the amount without having to pay the possible costly consequences of breaking your mortgage. You get to move without the stress of having to obtain a new mortgage, at a possibly higher rate.

Assumability

Lastly, consider your parents’ mortgage and your family home. They might be moving to a smaller more manageable property or to warmer weather; but you love this home and would like to take over their mortgage. Without assumability, you would have to get a new mortgage at current rates, and your parents would likely have to pay discharge fees. Instead, so long as qualify for the outstanding amount, assumability allows you to take over the remaining balance of their mortgage with their rate and terms.

Mortgage Payment Frequency Options

There are many factors that may influence your choice of payment frequency, including your budget flexibility and when your pay cheques come in each. Moreover, your ability to take on slightly larger payments will enable you to minimize total interest paid and pay off your mortgage quicker.

Monthly

Your mortgage payment is withdrawn from your bank account on the same day each month; making 12 payments per year.

Bi-Weekly

Your monthly mortgage payment is multiplied by 12, then divided by pay period per year.

Accelerated Bi-Weekly

Your monthly mortgage payment is divided by 2; this amount is withdrawn every two weeks. Like Bi-Weekly, you are making a total of 26 payments per year, however, the payment amount is slightly more. So, you accelerate paying off your mortgage and will be paying less interest total.

Using a Guarantor

A guarantor or co-signer assures payment responsibility if the primary borrowers default. They will enable the applicant to qualify for a mortgage, if on their own; the applicant(s) have to poor credit and/or insufficient income. A guarantors name will be on the loan but not the property and must be a spouse. Conversely, a co-signers name will appear on both tile and the loan, but can be any person that agrees and qualifies. There is a significant amount of risk involved in agreeing to be a guarantor or co-signer. If the borrower defaults, they are responsible for the full amount of the mortgage. So, lenders require them to qualify as if they were the sole applicants for the loan. Like a primary applicant, the lender will require a credit check and discloses of income, liabilities, and assets. Further, a guarantor or co-signer should consider how this would affect their ability to qualify for a loan in the future for their own personal purposes. Despite not making any real monetary contribution, the loan will be treated as if they have sole liability and included in their debt servicing calculations.

Mortgages Beyond Purchase

Once you have purchased your home with your new mortgage; what do you do with it down the road? Well, there are options to refinance, renew, or transfer. All of these options can be utilized at any point throughout the term of your mortgage.

Refinance

Say you have been in your home for a few years now; the value has increased and you have paid off a portion of your mortgage. Why add to your mortgage? Perhaps you wish to do some renovations or other debt with higher interest rates you wish to pay off. Well you have additional equity that you can access that you can receive in cash now, which will be added you your existing mortgage amount for you to pay back with interest.

Renewal

Now, say you committed to a 5 year term and that time is now passed. You still owe the remaining balance of your mortgage. Your current lender will contact you with a renewal offer with the interest rate they can offer you on the remaining balance and amortization. Unlike the initial approval process, the renewal process is much less extensive – no pre-approval, less required documents and application processes.

Transfers

Instead of re committing with your currently lender, you found a competitive rate or more extensive product offerings at a different lender. All other factors (mortgage amount, home, ownership, ect) will remain unchanged except who the interest will go to. You will them be transferring your mortgage from one lender to another.

How to get a copy of your Credit Bureau

Lenders look to credit reports to assess the risk of a given borrower. Your credit score is a number from 300 to 900 that reflects how you have handled your finances in the past. The lower the number, the more risky you appear to lenders, so you are likely to be offered higher rates. It is always recommended to keep an eye on your credit. In Canada, you can receive a free copy of your credit report once a year from both Equifax and TransUnion. The bureaus refer to your credit report as “client file disclosure” and “consumer disclosure” respectively. Ordering your “free report by mail” does not effect your score. Check your report for errors inconsistent with your true financial history and balances such as late payments; amount owing; or missing accounts. If you do find an error, report it it to the credit bureau to be corrected.

Interest Rates: Fixed vs Variable

Fixed Interest Rates

Fixed rates are often viewed as the safest choice – no surprises. You can rest easy knowing exactly how much interest you are paying and that regardless of fluctuations in the prime rate (for better or worse), you interest will remain unchanged.

Fixed interest rate can be taken on 1, 2, 3, 5, 7 and even 10 year terms. Note the distinction between term and amortization; term is when your mortgage is up for renewal while amortization is the total time it will take to payoff your debt.

Now, say you committed to a 5 year term, but three years in you want to take advantage of a different lenders product. To do this, you will need to beak your mortgage. THERE WILL BE A PENALTY. The size of penalty varies depending on the lenders current rate, the rate you held, the length remaining on your term, and balance outstanding. Lenders charge a penalty using the greater of the Interest Rate Differential (IRD) or three months interest.

Variable Interest Rates

For those of us that are comfortable with a little uncertainty, Variable rates provide potential for interest saving and term flexibility.

Variable rates are based on a lenders prime rate; plus or minus a set premium of discount. These rates are mostly available on 5 year terms. However, unlike fixed interest rate, the penalty is calculated only using 3 months interest. So, breaking the mortgage will likely be significantly less costly.

Top 4 Tips for Being Prepared to Buy

1. Strengthen your credit rating. It’s pretty simple: the higher your credit score, the lower your mortgage rate will be. Spend the time now to improve your credit. Check your credit report. Many credit reports have errors, so you need to ensure that your credit bureau is current and correct. Always pay every single one of your bills on time. Set up automatic payments if you have had any late payments over the last couple of years. Spend only 30% of credit limits on credit cards.

2. Find a Mortgage Broker and figure out how much you can afford to spend. The home buyer’s mantra: Get a home that’s financially comfortable. Get Pre-Approved sooner than later!

3. How much home do you need? Buying a cheaper, smaller home might sound like a good place to start, but could end up costing you more if you need to move due to changes in your lifestyle, including a growing family. Then again, buying more house than you currently need will cost you more with higher mortgage payments, higher maintenance, energy and tax costs. Prioritize your housing wish list. The 3 most important things to think about when buying are home are location, location, location.

4. Remember closing costs. While you’re saving your down payment, you need to save for closing costs too. They’re typically 1.5% of the purchase price and due on the completion date. Transfer Tax, Legal Fees, Insurance and Home Inspection are all considered part of Closing Costs.

Mortgage Amortization

Selecting the length of your mortgage amortization period — the number of years it will take you to become mortgage free — is an important decision that will affect how much interest you pay over the life of your mortgage.

While the lending industry’s benchmark amortization period is 25 years, and this is the standard that is used by lenders when discussing mortgage offers, and usually the basis for mortgage calculators and payment tables, shorter or longer timeframes are available up to a maximum of 35 years.

Advantages Of Shorter Amortization

The main reason to opt for a shorter amortization period is that you will become mortgage-free sooner. And since you’re agreeing to pay off your mortgage in a shorter period of time, the interest you pay over the life of the mortgage is, therefore, greatly reduced.

A shorter amortization also affords you the luxury of building up equity in your home sooner. Equity is the difference between any outstanding mortgage on your home and its market value.

While it pays to opt for a shorter amortization period, other considerations must be made before selecting your amortization. Because you’re reducing the actual number of mortgage payments you make to pay off your mortgage, your regular payments will be higher. So if your income is irregular because you’re paid commission or if you’re buying a home for the first time and will be carrying a large mortgage, a shorter amortization period that increases your regular payment amount and ties up your cash flow may not be the best option for you.

We will help you choose the amortization that best suits your unique requirements and ensures you have adequate cash flow. If you can comfortably afford the higher payments, are looking to save money on your mortgage, or maybe you just don’t like the idea of carrying debt over a long period of time, we will discuss opting for a shorter amortization period.

Advantages Of Longer Amortization

Choosing a longer amortization period also has its advantages. For instance, it can get you into your dream home sooner than if you choose a shorter period. When you apply for a mortgage, lenders calculate the maximum regular payment you can afford. They then use this figure to determine the maximum mortgage amount they are willing to lend to you.

While a shorter amortization period results in higher regular payments, a longer amortization period reduces the amount of your regular principal and interest payment by spreading your payments out over a longer timeframe. As a result, you could qualify for a higher mortgage amount than you originally anticipated. Or you could qualify for your mortgage sooner than you had planned. Either way, you end up in your dream home sooner than you thought possible.

Again, this option is not for everyone. While a longer amortization period will appeal to many people because the regular mortgage payments can be comparable or even lower than paying rent, it does mean that you will pay more interest over the life of your mortgage.

Switching Amortization

Regardless of which amortization period you select when you originally apply for your mortgage, you do not have to stick with that period throughout the life of your mortgage. You can always choose to shorten your amortization and save on interest costs by making extra payments when you can, or an annual lump-sum principal pre-payment. If making pre-payments (in the form of extra, larger or lump-sum payments) is an option you’d like to have, I can ensure the mortgage you end up with will not penalize you for making these types of payments.

It also makes good financial sense for you to re-evaluate your amortization strategy every time your mortgage comes up for renewal (at the end of each term of your mortgage, whether this is three, five, 10 years, etc.). That way, as you advance in your career and earn a larger salary and/or commission or bonus, you can choose an accelerated payment option (making larger or more frequent payments) or simply increase the frequency of your regular payments (ie, paying your mortgage every week or two weeks as opposed to once per month). Both of these features will take years off your amortization period and save you a considerable amount of money on interest throughout the life of your mortgage

As always, if you have questions about which mortgage amortization is best for you or how you can pay off your mortgage faster, please give us a call to discuss your options with one of our professional mortgage brokers.