Monster in your mortgage

You have found your dream home. Congratulations!

Your realtor was a great negotiator and you bought your new home for $475,000. Your mortgage is $350,000 with monthly payments of $1,601 per month over a 25-year amortization.

You were also able to negotiate a great rate (2.69%) with your mortgage lender, so you are feeling pretty good right about now.

But wait a minute, let’s total those payments — 300 payments times $16,01 equals $480,000.

That’s $480,000 worth of mortgage payments over the next 25 years.

With your down payment of $125,000, does that mean you are paying $130,000 more than you agreed to pay for the house?

Assuming that there is no increase in mortgage rates over the next 25 years, the answer is yes.

If rates increase, the overall cost of buying your home will increase significantly as you renew your mortgage at higher rates assuming that rates will increase within the next five years, which is most likely.

If you are a typical Canadian mortgage holder, you will take a fixed rate mortgage (68%) Canadians are highly motivated to repay their mortgages as quickly as possible.

Surveys find consistently that each year more than a third of mortgage holders take actions that will shorten their amortization periods (making lump sum payments, increasing their regular payment to more than is required, or increasing the frequency of payments).

The most recent buyers expect that, on average, they will repay their mortgages in 22.2 years, which is 2.8 years shorter than their average contracted period.

The Monster in your mortgage is the interest you are paying. It’s really quite outrageous when you think about it. Yet every day, many Canadian homeowners are accepting The Monster in their mortgage without a thought to what it might mean to their overall financial health for the future.

The good news is, something can be done to weaken The Monster and make it nearly helpless.

With a few small affordable strategies that do not even require lump sum payments, you could potentially save thousands in mortgage interest even within the first five years of your mortgage.

You can start by setting your mortgage repayment at accelerated bi-weekly payments. Just rounding up your payment to an even amount will save you and then set yourself on a program to increase your mortgage payments annually.

These are only three of the many strategies that are available to get your mortgage under control and you don’t have to be a new homeowner or wait until your mortgage is up for renewal.

They can be implemented at any time during the life of your mortgage.

It’s up to you to get the ball rolling, so if you would like to know more specifically how these strategies can put a large amount of the interest on your mortgage back into your pocket, let me know.


Renewing your mortgage

When your current mortgage is getting close to its maturity date, you will need to re-negotiate.

This is the opportunity to decide:

  • the new term length
  • to negotiate the new mortgage interest rate
  • to move your mortgage to a new lender.

Most lenders (federally regulated) are required to provide you with a new mortgage offer at least three weeks before your maturity date, if they are interested in renewing your mortgage.

They are not obligated to offer you a renewal should there be a change in your circumstances or a late payment history.

Statistics show that more than 50% of homeowners renew their mortgage with the current lender without negotiating the terms.

This doesn’t give the lenders much incentive to offer the best rates at renewal time. They are betting on the fact that you won’t shop around or won’t want to go through the hassle of applying for a mortgage with a new lender.

Signing the mortgage renewal offer without exploring other options is not in your best interest.

It’s easier to remain with your current lender as you don’t have to go through the hassle of providing new documents, etc., but you could find better rates and terms with another lender perhaps saving you thousands of dollars in interest costs.

Here are a few questions to ask yourself before you sign that mortgage renewal offer.

Have you explored all your options?

We can look for opportunities that could better meet your needs right now. 

Are you comfortable with your payments?

If you’ve been feeling financially strapped each month making your mortgage payments, this could be the time to reduce them to a more easily managed level.

On the other hand, if you’re earning more, why not pay down your mortgage faster and save thousands of dollars in interest over time? 

Do you need cash flow for other things?

Your priorities may have shifted since you first bought your home, and your cash flow needs can shift too. Things like paying for a child’s university education, planning a career change, or a major purchase such as a vacation property may call for spending money on things other than your home.

You may be able to refinance your mortgage to take this into account. 

Can you handle fluctuating rates?

Some homeowners are nervous about any hikes in interest rates, while others are comfortable to go with the flow. Rates are tough to predict. It’s best to base your decision on your personal situation, not what you read in the news, and tailor your mortgage renewal around your needs.

We can help you decide whether to opt for fixed or variable rates. 

Will you sell soon?

If so you might want to consider a shorter-term mortgage or one that has flexible terms so you’re not penalized if you sell your house before the mortgage comes due. Not all mortgages can be moved to a new property.

Are you thinking about a major renovation?

Before you renew, look at all your financing options, which may include getting an additional line of credit or keeping your monthly mortgage payments low so you have money on hand to finance the renovations.

When do you want to be mortgage free?

If you’re planning extended time away from work or perhaps an early retirement, it may make sense to pay down your mortgage sooner rather than later.

While increasing your payments will raise your monthly costs now, you’ll ultimately save on interest in the long term and can prepare for that fabulous, mortgage-free lifestyle. 

Could you use your home equity to fulfil other goals?

Refinancing a mortgage can be one way to free up cash you need for other things, which could even include buying another property. Mortgage renewal time is an ideal occasion to review all your options. 

Are you getting the best rates and terms? In a competitive mortgage environment, your good credit history can make refinancing work to your advantage.

We analyze mortgage markets daily to ensure you don’t miss any money-saving opportunities.

Questions about your mortgage renewal? Please give me a call at 1-888-561-2679 or email [email protected]

Home-buyer incentive

The First-Time Home Buyer Incentive program to assist first-time home buyers was announced with the last federal budget.

The intention of the program is to assist qualified first-time home buyers to reduce their monthly mortgage payments.

A few more details about the program have been released recently.The program is scheduled to commence on Sept. 2, (barring any unforeseen circumstances) with the first closings on Nov. 1.

Here a few of the qualifiers for the program:

  • you need to have the minimum down payment to be eligible (currently 5% of the purchase price)
  • your maximum qualifying income can be no more than $120,000
  • your total borrowing is limited to four times the qualifying income

The program effectively limits the amount of the mortgage and the CMHC incentive to $480,000, and with a 15% down payment, this would mean the value of the home cannot exceed about $565,000.

Buyers can receive an interest-free loan of up to 5% on an already-built home and up to 10% for a newly-constructed home.

The program will not be available for those with a down payment of 20% or more.

This is a loan and not a grant or subsidy. It’s not free money. The amount borrowed must be paid back at some point.

The incentive would be a second mortgage on the title of your property. The loan has no interest and does not require any regular principal payments.

You must repay the loan after 25 years or when you sell the house, whichever comes first. You can also repay the loan at any point before that with no penalty.

This is an equity share program which means CMHC will own a share of equity in the value of the home, regardless of whether the value of the property goes up or down.

When you sell your home, you will pay back the equity share the government has in your home. If your home increases in value, you will pay back more than you initially received under the plan.

If your home decreases in value, you will pay back less than you received under the plan.

This new program may help some first-time home buyers, but it is debt that has to be paid back.

As with any programs, it’s important to fully understand the pros and cons both for the short-term and also for the long-term so you can make an educated decision.

Participating in the program could actually reduce a buyer’s purchasing power is some instances. The program may assist in some areas of the country but not in areas with the higher average home prices.

There are still some unanswered questions regarding this incentive and no doubt will be more as the program rolls out on Sept. 2. Please reach out if you have questions.


Solutions for self-employed

Self-employed mortgage solutions

It is no longer as easy as it once was for the self-employed to obtain mortgage financing.

If you have tried to secure a mortgage recently with an institutional lender, you may have already found that out for yourself.

In the past, all you had to do was state your income to your lender without any third party verification. As long as you had a great credit rating, that was good enough then, but not any longer. Now, you have to provide documentation to prove that you have the ability to make your mortgage payments.

There are still good options available with traditional lenders such as banks or credit unions but you will have to prove that you are declaring a ‘reasonable income’ for your profession on your tax returns and also have a great credit rating.

These two factors combined could be a challenge for many who are self-employed as their accountants may be minimizing their income declared for tax purposes which is great unless you are planning to secure new mortgage financing.

With these standard mortgage programs you will either require a minimum 35% equity or if you have less than a 20% down payment, a lender will require a minimum of two years proof of income as self-employed.

The good news, there are many alternative lender options for self-employed clients who no longer qualify with a traditional lender. These lenders are the market’s response to consumer demand spurred on by the tighter mortgage regulations.

These are reputable companies who offer alternative mortgage products to consumers who can no longer qualify with conventional lenders. They fill an important role in fulfilling the dreams of home ownership for Canadians or have assisted with financing needs in other ways such as accessing equity or refinancing to pay off high interest debt.

Many of these lenders, who currently offer prime mortgages, are now expanding their offerings beyond traditional mortgages to fill this gap in the market and are generally only accessible through mortgage brokers.

My best piece of advice for someone who is self-employed and looking to obtain a mortgage whether it is to purchase a property for the first time or moving up, refinancing a mortgage or looking to purchase an investment property – be prepared!

Meet with your mortgage broker well in advance to discuss what is required to obtain a pre-approval for your financing.

You may have to work a little harder and provide more documentation but there are still many options available to the self-employed so please give me a call 1-888-561-2679 to ensure that you are in the very best position when it comes time to arrange your mortgage financing.

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About the Author

April Dunn is the owner and a Mortgage Broker with The Red Door Mortgage Group – Mortgage Architects. She has been assisting clients to purchase, refinance or renew their mortgages for over 20 years.

April has experience as a Credit Union manager, a Residential Mortgage Manager with a large financial institution and as a licensed Mortgage Broker. By specializing in Strategic Mortgage Planning she has the tools available to build a customized mortgage plan, with the features and options that meet your needs.

April provides a full range of residential and commercial mortgage financing options for clients all over the province of British Columbia and across Canada through the Mortgage Architects network.

Contact e-mail address: [email protected] or by phone at: 888-561-2679.

Website:  www.reddoormortgage.com

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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