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The-Mortgage-Gal

The stress of house buying

There are many stresses associated with home buying — both financial and emotional.

It doesn't help that the process comes with its own foreign language. While a mortgage broker can help de-mystify these terms, it helps to have a bit of a primer on what some of these terms mean.

After all, it's your money and your home we're talking about as a mortgagor; you have a right to understand what you're reading. (You didn't know you were a mortgagor? Read on.)

We'll start with amortization and term. Both refer to periods of time in the life of your mortgage, and you'll want to be sure that you understand the difference.

The amortization of your mortgage is the length of time that would be required to reduce your mortgage debt to zero, based on regular payments at a specified interest rate.

The amortization period is typically 15, 25 or even 30 years (conventional only), although it can be any number of years or part-years.

You can establish that you are able to make a certain payment each month of say $1,600 for your $300,000 mortgage at 2.49 per cent.

In this case, your amortization period will be just under 20 years.

Or you could tell your broker that you'd like to be mortgage-free in just 10 years. With an amortization period of 10 years at the same interest rate, your $300,000 mortgage will cost you about $2,825 per month.

That's a tougher monthly payment, but you would save thousands of dollars in interest. (More than $38,600 in fact).

As you arrange your mortgage, then, keep in mind that your amortization period may be fairly long.

The shorter you can make it, the less you'll wind up paying for your home in the long term.

The "term" of your mortgage will typically be shorter. The term is the duration of your mortgage agreement, at your agreed interest rate.

This will be a specific length of time, although you will have several choices. A six-month mortgage is a short-term mortgage.

A 10-year mortgage will be one of the longest terms, generally with a higher rate of interest to represent the higher degree of uncertainty in the economic outlook.

After your mortgage term expires, you will need to either pay off the balance of the mortgage principal, or negotiate a new mortgage at whatever rates are available at that time.

Now, back to the term mortgagor. This is one of three very similar terms: mortgagee, mortgagor, and mortgage.

A mortgagee is the lender of the money a bank, company, or individual.

A mortgagor is the borrower: the person or persons (or company) that is borrowing the money, and who will pay it back to the mortgagee.

The mortgage is, of course, the legal document that pledges the property as a security for the debt.

Still confused? Speak with a mortgage professional. Get the best mortgage suited to your needs and all your questions answered in plain talk.

You can call me at 250 862 1806 or email





Don't sell, reno

Anyone who has lived in the same house for a long time inevitably gets the reno itch.

While gutting a home is expensive, home renovations are still an affordable way to upgrade without moving.

It's natural that after a certain point, homeowners start to notice the flaws in their homes.

It could be that the layout is no longer practical, the bathrooms are outdated or the exterior needs some curb appeal.

Each of these areas can increase the property value of a house while making it more suitable to the homeowner's needs.

Before picking up the hammer and hardwood, experts recommend that homebuyers plan for the cost of a home renovation:

Consider upgrades that save money:

  • Green options, like installing insulated-glass windows may cost more initially, but they can make sense financially in the long-run when future energy bill savings are considered.

Research and budget for the unexpected:

  • The reality is that a home renovation often costs more than planned. Before starting any work, consult with more than one contractor to help accurately assess costs of materials and labour. It's also a good idea to build a buffer into the budget for any unexpected expenses.

Explore financing options:

  • A home equity line of credit (HELOC) allows homeowners to use the equity they've already built in their homes to finance upgrades at a competitive interest rate. Consider using a HELOC to pay different tradespeople as the work progresses to avoid paying interest on credit that hasn't been used.
  • With ongoing access to credit, it can be tempting to go overboard, so remember to stick to the budget.

For further advice on financing a renovation, contact me at 250-862-1806 or [email protected] and I will be happy to assist you.



Down-payment blues

How much of your savings should go toward your down payment?

There is no definite right answer and sometimes it depends on where the investments or savings are. 

Does the buyer have a large amount invested in RRSPs, TFSAs or is it just in mutual funds or bank accounts?

There are few things that need to be considered: 

Job stability.

  • It does not make sense to use all of your money set aside for an emergency if there is a possibility that you could lose your job. 
  • Experts recommend having at least three months of expenses, which include bills, groceries and accommodations. 
  • If you are self-employed, it is recommended that you maintain six months of savings in an account to cover these expenses. 
  • Do not include theses emergency savings as part of your down payment or closing costs.

Can you save 20 per cent for the purchase?

  • If you have less than 20 per cent down payment on a home under $1 million the lender will require that the mortgage be insured for default by either the government insurer, Canada Mortgage and Housing Corp (CMHC) or one of the private insurers, Genworth or Canada Guaranty.  
  • The minimum down payment for any owner occupied property is five per cent of the purchase price. 
  • The default insurance premium is based on the loan to value and is more expensive with lower down payments.  If a purchaser only has five per cent down they will pay 3.6 per cent of the mortgage amount to one of the three insurers. 
  • So for a purchase of $400,000 with five per cent down ($20,000) the borrower would pay a premium of $13,680 based on the mortgage of $380,000. 
  • The premiums decrease as the borrower increases the percentage of the down payment. 
  • For 10 per cent down the premium is 2.40 per cent of the mortgage, 15 per cent down 1.80 per cent and of course no premium if there is 20 per cent down payment.
  • 3)Will you still have money to go out.

Purchasers need to look at the affordability of the home from their own budgeting perspective. 

There is nothing worse than being house poor and regretting buying. To figure out your budget look at your spending over the last 3, 6 of 12 months. 

Replace the rent you have paid with the estimated mortgage payments but don’t forget to include:

  • utilities
  • property taxes
  • home insurance
  • home repair fund

When you have taken these new costs into account does this exceed your income or does it leave you with a comfortable lifestyle? 

Can you make any cutbacks — the daily Starbucks, for example?

Will you be able to plan for retirement with increased living expenses?

  • Buying a home is a fabulous way to build up equity over your lifetime.  There should be other strategies to look fat to plan for your retirement. 
  • Make sure you have extra income to put away to build up a portfolio. Experts say 30-year-olds should aim to save 12-20 per cent of their gross income and minimum 10 per cent. 
  • Did you earn $60,000 per year, you should ideally save $8,000 per year or $670 per month. 
  • This amount will change as your income changes.
  • If you expect that your income will remain constant over the next five years or more, you should add the retirement savings to your budget to make sure you can continue to save.
  • If you decide to postpone buying or rent, make sure you put away more for retirement as you won’t have the equity building up in your home to help with retirement. 
  • Maybe putting down 20 per cent and when you have a bit extra, you can use it to build a nice nest egg.

Lifestyle

  • Home ownership involves a big lifestyle change as there is a lot of work involved in maintaining a property. 
  •  If you finances are in order, then it is just a matter of preference whether you buy or rent. Some people enjoy yard work and shopping at Rona.
  • Renting is not a bad idea if you there are ample rentals and you can make up for the lack of equity building by socking away money in a retirement savings plan. 
  • Buying is a good idea for some,  as long as you make sure to set aside money for emergence home repairs and the payments don’t you leave you too poor to put away funds for your retirement.

If you need further assistance determining if you should buy or rent please call 250 862 1806 or email





Musical mortgages

Stop! Before you transfer your mortgage…..

Too switch or not to switch, that is the half-a-million-dollar question. 

Mortgage lenders that is.

Many buyers purchasing homes already have a mortgage with their existing financial institution or another lender. 

Most assume that in order to save the penalty, they should stay with the existing lender. 

Is this a wise decision?

There are two questions you need to ask yourself.

  • Are you adding more mortgage money to your existing mortgage balance? 
  • And how long are you going to stay in this new home?

If you are adding money to your mortgage, some lenders will blend the new money at the posted interest rate, which is sometimes as much as 2% over the current discounted rate. 

It may make sense to take a look at the difference in cost  over the remaining term of paying the penalty and getting a new discounted rate on the entire mortgage. Also sometimes a discounted five-year rate is preferable as it may allow you to qualify for a larger mortgage.

If you are thinking that you may not stay in the home for the full five-year term, then, you will definitely not want to blend and increase your mortgage because this will leave you with a higher rate mortgage now over  a longer term and you may face a large penalty again when you go to pay it out. 

Most borrowers need to blend the mortgage out for five years for ease of qualification. The government requires that short term mortgages (less than five years or variable) be qualified at the posted five-year rate of 4.64%.

Speaking of penalties, have you ever wondered how those penalties are calculated? 

Most major financial institutions (banks and credit unions) take your existing mortgage mortgage rate, add on the discount they gave you when you took out the mortgage to determine the base rate.

They then find the posted rate that they are currently offering that matches your remaining term and calculate the difference in these two rates for the balance of the term remaining.  This is to reimburse them for the loss of a higher rate mortgage. 

If your mortgage is lower than the current rate then the penalty is three months of interest at the posted rate, not your contract rate.

I went to the various websites below and calculated the penalty on my own mortgage that I had.  Here are the results of my calculations:  (These results are subject to change based on the date and balance of the mortgage and the current mortgage rates).  The mortgage was $281, 901.65 with a 2.70% discounted rate, $132.0.54 monthly payments and a maturity date of November 1, 2018, held at the CIBC.

As you can see there is huge discrepancy in the penalty from a high of $9887.97 to a low of $2793.18.  This is the reason I challenge to question porting your existing mortgage and take a look at some of the other options available to you especially with the monoline lenders who generally work through mortgage brokers. 

Mortgage rates are only one aspect of a mortgage.  The prepayment options available and the penalty calculations can cost or save you thousands of dollars.

If you need help deciding whether to port your mortgage or how to calculate your penalty please call me at 250 862 1806 or email.



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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 since 1991 and a broker since 1997. 

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 Laurie at 250-862-1806 or visit:
http://www.okanaganmortgages.com

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



The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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