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Finance

Mortgage penalties

Most mortgages in Canada have penalties based on the greater of 3 months of interest or the interest rate differential.  Variable rate mortgages where the interest rate fluctuates with the prime lending rate usually have a 3 month interest penalty.  Open mortgages most variable and fixed are usually at a higher interest rate but allow the borrower to pay out the mortgage at any time without paying a penalty.

Variable rate mortgages have very competitive rates right now depending on the prepayment options and other terms.  Usually the penalty is limited to 3 months of interest but sometimes if the borrower has received an extra discount there may be a larger penalty - for example, 2% of the outstanding balance.  This can make a huge difference if the borrower sells or has to pay out the mortgage earlier than expected.   Another misconception borrowers have is that the 3 month penalty is calculated at the rate on the mortgage.  Some of the major banks charge the penalty based on the posted rate for the current term.  So, for example, if the mortgage rate was 2.15% (Prime-.70%) the penalty may be calculated at 3.85% which is the open variable rate.

Fixed rate mortgages are also offered at competitive rates and in some cases have restrictions in the extra payments a borrower can apply to the principal without penalty.  There are also some lenders that are offering lower interest rates but an increased penalty if the borrower repays the loan before the term is up.  Again this is in the 2-3% range and can increase the cost if the borrower had to sell.  Similarly with variable rate mortgages, if the borrower has a 3 month interest penalty on their fixed rate term of 2.69% sometimes the banks may charge the mortgagor the penalty based on the posted rate of 4.29%.  When it comes to the interest rate differential there is a real spread in the procedure for calculating the penalty.  The interest rate differential is the difference in the borrower’s rate compared to the current rate offered for the remaining term.  For example, if the borrower had a mortgage rate of 2.69% with 3 years remaining and a 3 year rate was 2% then they would pay .60% of the mortgage balance for 3 years with most monoline (non bank lenders). However, again some lenders use their posted rate and the discount the borrower received, so if the posted rate was 4.69% when the mortgage was taken out the penalty becomes 2.69% of the mortgage for the remaining term.  That is a HUGE difference in the penalty.  It is very important that the borrower understand how their penalty is calculated prior to funding their mortgage.  Make sure your lender takes the time to explain this to you before you sign the approval, this is a service some mortgage brokers offer.

 

For more information on mortgage penalties please call 250-862-1806 or email [email protected].



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Buy versus rent

Consider the top five reasons to buy versus rent:

 

#5 Experience Freedom:  Home ownership will free you from the ties that bind you to a landlord...no longer will you be dependent on someone else’s schedule to change or fix things in your home.

 
#4 Take Advantage of Today’s Low interest Rates: With today’s great rates, your monthly mortgage costs may even be less than the rent you’re paying now!
 
 
#3 Decorate: Get 100% financing and spend your savings on things like renovating - according to your own style, not your landlord’s!
 
 
#2 Invest: Take comfort knowing that a portion of your monthly mortgage payment will go towards your home equity.  Also, with real estate prices still on the rise, when you sell you will have a healthy capital gain (tax free!).
 

#1 Save money every month:  Compare $1500/month rent to a $1345/month mortgage payment on a $300,000 home with 5% down. That’s a savings of $155 each and every month!*  based on 25 year amortization, 5 year term at 2.69%



Reverse mortgage solution

With the housing and financial markets on solid footing, some retired Canadians may consider cashing in their growing assets to enjoy vacations and major home renovations. Others, on the other hand, are evaluating tax-neutral solutions like a reverse mortgage to supplement their retirement income.

A CHIP Home Income Plan from HomEquity Bank is a simple and sensible financial solution for any senior aged 55 and over regardless of income, credit history or medical status. Also known as a reverse mortgage, it offers homeowners up to 50 per cent of the value of their home to use as tax-free cash to improve their day-to-day cash flow or finance larger activities like home renovations or family vacations. Furthermore, borrowers have the flexibility to choose how they want to receive the money – either in one lump sum advance or as planned advances over a set period of time and there are no payments required until the home is sold or both homeowners move out.

There are many ways to use home equity through a reverse mortgage:

• Use it to supplement an insufficient monthly income by redeploying a portion the home’s equity into income generating investments.

• Use it to preserve investment assets without worrying about withdrawing RRIFs above the annual minimum or selling non-registered investments to cover living expenses.

• Use it to travel, invest in a hobby or second career, help the kids or hire in-home help.

• Use it to pay off high interest debts and increase monthly cash flow.

CHIP Home Income Plans are provided by HomEquity Bank to senior homeowners with no credit, income or credit qualifications. You can obtain more details by contacting us at 250 862 1806 or [email protected].



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Down payment

If you have less than 20% down payment, mortgage insurance is required through Canada Mortgage & Housing (CMHC), Genworth or Canada Guaranty. Homeowners no longer need the minimum 5% down payment from their own funds to purchase a home.  You can now use borrowed funds for your 5% down, but keep in mind that there are higher credit criteria and your insurance premiums increase.

 

Down payment from your own resources (non borrowed):

You must supply verification satisfactory to the lender of accumulated savings from non-borrowed funds.  This may be in the form of:

  • Copy of your bank statement or bankbook (including cover) showing a minimum three-month history.  Any large deposits during this time period must be explained and documented.
  • Copy of RRSP statement, term deposits, CSBs, or other investments.

 

Down payment from a gift (non borrowed):

All or part of the minimum equity requirement (5% for down payment plus 1.5% for closing costs) may be provided by way of a financial gift, as long as all of the following conditions are met:

  • The donor is an immediate relative of the borrower (recipient); and
  • The Approved Lender has verified that the money is a genuine gift; and
  • The Approved Lender has verified that the funds are in the borrower’s (recipient’s) possession at least 15 days prior to closing.

The Approved Lender will verify the authenticity of the gift by obtaining a written confirmation, signed by the donor and the borrower (recipient), which will include the following points:

  • The money is a genuine gift from the donor and does not ever have to be repaid;
  • No part of the financial gift is being provided by any third party having any interest (direct or indirect) in the sale of the subject property.

 

Borrowed down payment:

Effective March 1, 2004, homebuyers can get their down payment from borrowed sources that include:

  • Lender cash back incentives;
  • Personal loans, lines of credit or credit cards;
  • Unsubstantiated gifts.

When using a borrowed down payment, there are a higher credit criteria and also increased insurance premiums.

 

Down payment from the sale of an existing property:

You will be required to provide a copy of the unconditional Agreement of Purchase and Sale on your existing property.  This needs to be accompanied by a copy of a recent mortgage statement showing the balance owing on any mortgages presently registered against the property.  The difference between the sale price and the mortgages owing will substantiate the funds available for your down payment.

 

If you have any questions regarding your down payment or any other mortgage related question please call (250) 862 1806 or email [email protected].



Read more Home Finance articles

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About the author...

Laurie Baird is a Mortgage Broker with Verico Complete Mortgage Services. She has been in the mortgage business for 17 years starting as a lender with Royal Trust. She later worked at the Royal Bank as a Mortgage Consultant and 11 years ago became a Mortgage Broker. As a Mortgage Broker she is able to match her clients' needs with a lender who will provide them with competitive rates and products. Laurie has a Bachelor of Education degree from UBC.

Contact her at 250-862-1806 or by fax 712-0209 or visit:
http://www.okanaganmortgages.com/

Visit Laurie's blog at: http://www.okanaganmortgages.com/blog.html




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The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet presents its columns "as is" and does not warrant the contents.


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