Most people believe their penalty is going to be about 3 months interest. Which is true of most closed variable rate mortgages. However, fixed rate mortgages have a feature called Interest Rate Differential, or IRD. Lenders are not keen on letting you break a higher rate mortgage to get a new lower rate mortgage. They use the IRD to ensure they don’t lose if you decide to do this. (Canadian banks are smart remember? )

Basically if you got a 5 year 5.5% mortgage 2 years ago and wanted to break your mortgage for a 5 year 4.00% mortgage today your lender is going to charge you the difference between your rate and the current rate. Which will turn out to be a lot more than 3 months interest.

For instance I have seen $200,000 mortgages with $10,000 penalties because of the IRD calculation. In order to get an equivalent 3 months interest the mortgage rate would have to be 21%! ($200,000 at 21% is $3,356 a month!)

The reality is for some people the penalty on their higher rate mortgage is too high for them to consider breaking their mortgage. It is worth having a mortgage planner do the math to see if you will end up saving money or not. There is no point in paying your bank a hefty penalty just so you can say you have a shiny new sub 4.00% mortgage. What follows are 3 ways you can legally lower your penalty if you are considering breaking your mortgage early.

1. Utilize your prepayment privilege
Most lenders have an annual prepayment option. Usually somewhere between 15%-25%. For instance, if you can prepay your mortgage by 15% you will reduce your penalty by 15%. Since your penalty is based on your outstanding balance at the time of payout. There are 2 ways to accomplish this:

• Use cash or other credit to make a lump sum payment on your mortgage before you pay it out. (Be careful, some lenders have a clause written into their contract that will prevent this. Do your homework first)
• Ask your lender to reduce your penalty by the prepayment amount. Often if you are planning on staying with the same lender they will lower your penalty by the prepayment amount. ING Direct does this.

2. Blend and extend your interest rate

Another option you can consider is blending and extending your mortgage. Basically here is how it works: If you are in a 5.00% mortgage with 2 years left until maturity, call your lender and ask them what would your rate be if you blended and extended your mortgage for another 5 years. Blending and extending means you are signing up for another 5 years.

You may be thinking, why on earth would I want to extend my term since I plan on paying off my mortgage anyway. The reason is your penalty is calculated based on your rate versus the current rates. I just recently did this with my mortgage here is what happened:

My mortgage $200,000

My rate; 5.19%

My blended rate: 4.18%

Penalty based on the 5.19% – $7,500

Penalty based on the 4.18% – $3,500

As you can see I cut my penalty in half.

(Be warned this will not work with every lender. Some lenders will not let you blend and extend unless you increase your mortgage. Contact me if you want help with this)

3. Readvanceable strategy -

You must have a readvanceable mortgage for this to work. (A readvanaceble mortgage is a mortgage and line of credit that are linked. As you pay down the mortgage your line of credit limit increases. Scotiabank does this, so does Manulife one, National Bank and many others.)

Here is how it works:
Assume you have a mortgage of $200,000 at 5.5% and a line of credit of $50,000 at 4.00% with a zero balance. Take the $50,000 from the line of credit and use it to pay down your mortgage. This will effectively reduce your $200,000 mortgage to $150,000. If you were planning on paying out your mortgage you just reduced your penalty because your penalty is calculated on what you owe.

Like in strategy 2 if you reduce your mortgage amount your penalty will usually decrease.

If you are facing a big penalty and want advice on how to tackle it please contact me and I’ll be happy to see what we can do to help you.

Life insurance is the type of thing you buy and hope you never need. Unfortunately not all types of life insurance are created equal.

One type of insurance I do not like is “Creditor Insurance” it is when you have life insurance on a loan or mortgage. Basically, it will pay off the loan in the event of a claim. This sounds wonderful, but can actually be a huge problem for young families.

CBC did a review on some of the problems a couple years ago.. To be fair not all types of Creditor Insurance are the same, but as a general rule it is better to get life insurance separate from your mortgages and loans.

In this video I talk about the problem a young family could face if they choose Creditor Insurance instead of getting a separate life policy.

In 5 years of mortgage brokering I have never sold a single policy. When I first got into the industry I did my homework and realized there were cheaper and better alternatives. I recommend borrowers speak to a licensed life insurance agent.  Don’t ever buy it from your banker or broker unless it is just for temporary coverage.

Disclaimer: If you currently have Creditor Insurance and want out -do not cancel it until you talk to a qualified life insurance person.

Jim Flaherty changed the mortgage rules on April 19. The changes were designed to prevent Canadians from piling on too much debt.

Most of the changes will have a minor impact on the overall housing market.

In Kelowna the change is going to impact first time buyers who have been relying heavily on rental income to qualify for our expensive homes.

I believe these changes will force more first time buyers into affordable condos and townhouses because rental income will not work as well.

What do you think?

Rental Income is being recalculated. Under the old system we could deduct $800 of rent for every $1000 of rental income. Under the new system we can only deduct approximately $200 per $1000 dollars of rent.

For a buyer to qualify for the same amount of mortgage after the changes the rent has to increase to $4000 a month or the purchase price has to lower by almost 20%.

Bob & Cindy

Example: Bob and Cindy have good credit, monthly debt $300 of a month and $50,000 of family income. They are buying house with $1000 of suite rental income.

When does this take effect?
April 19, 2010 is the official day of the changes. However, anyone who has entered into a contract prior to April 19^th will be qualified under the old rules.

Does this apply to in-law suites too?
Yes. This will apply to legal and illegal suite rent. The only possible exception is if a borrower has 20% down.

What if a borrower has 20% down?
If a borrower has 20% down there may be some exceptions. Exactly how this is going to play out will be more clear once the changes take effect. (I will keep you posted)

What does this mean?
If you have first time buyers who are considering buying and will be relying on rental income get them out house hunting now.

Oh, and get them pre-approved with someone who knows how all this stuff works while you are at it.

Scott’s latest video demonstrates the difficulty in selling potential value. Sellers occasionally attempt to list their home for more than market value because of a perceived notion of potential value. Unfortunately it is often difficult to convince a buyer of this potential value.

For instance a home in the Agricultural Land Reserve (ALR)may have the potential to be changed to multi-family use, but there are rarely any guarantees until you will have the zoning approved. Of course once the zoning has been changed it is no longer potential value, but real value.

Let us know your thoughts, comments or feedback.

Jim Flaherty announced major changes to Mortgage rules. Changes that are scheduled to be implemented April 19, 2010.

Three of the major changes are:

1. Increase down payment on rental properties from 5% to 20%
2. Decrease maximum Loan to Value on refinance from 95% to 90%
3. Increase the rate used to qualify for a variable rate mortgage

This video is my take on the changes.

Where to buy a home can be influenced by many factors. One I have heard about, but never really believed was schools. I have been told by numerous people and read in Real Estate training books, but never believed it until I had to stand in line to get my first 2 children into school.

This video talks about my experience waiting in line in the wee hours of the morning.

The answer, it appears, is actually much less sinister. It is possible to have two Newspapers make contradictory interest rate claims and yet both be accurate. The trouble is when the term ‘interest rate’ is used you must ask an important question. Is the writer referring to fixed rates, variable rates, or both?
The reality is fixed rates and variable rates, although loosely linked, are about as similar as apples are to oranges. The reason for this is simple. Fixed rates are tied to bond yields while the variable rate is tied to the Bank of Canada overnight rate.

Where does the fixed rate come from?

Fixed rates are tied to the bond market and are actually more volatile in the short term. Bond markets trade daily and if a borrower wants a fixed rate mortgage the lender will go to the bond market and grab some money, mark it up and lend it to the borrower. If the 5 year bond was at 2.50% a lender may charge 3.85% to 4.55% or more on a 5 year mortgage. The profit comes from the spread between their cost and their lending rate.
Clearly if the bond market goes up the lender is going to pass on the higher cost to the borrower. (Incidentally a reasonable spread between bonds and fixed rates is 1.35% -1.55%. Be aware however, many lenders will try and charge 2.00% or more if they can get away with it.)

Where does the variable rate come from?

Variable rates, on the other hand, are tied to the Bank of Canada overnight rate. The Bank of Canada has not adjusted the overnight rate since April 21, 2009 –it has remained completely flat. However, fixed rates have swung widely back and forth by more than 1.00% over the same span.

The Bank of Canada (BoC) manipulates the overnight rate to influence the economy. They use it like the brake on a truck. If the economy is going too fast they will raise the rates, apply the brake, in order to slow the economy down. Alternately, like the past year, the BoC will take off the brake, lower rates, to get the economy moving again.

This brings me back to the point of this article. The BoC has reaffirmed their commitment to keep the overnight rate unchanged until June 2010. As you are now aware this does not mean the fixed rates mortgages cannot change. In fact there is a very real possibility fixed rates will actually begin climbing before the BoC adjusts the interest rate.

Like most things in life, the devil is in the details. If you would like some advice on where rates are going and what it means for your specific situation talk to your Mortgage Planner or banker today.

Scott Peckford is a Mortgage Planner and owner of Mortgage Architects and can be reached at scott@scottpeckford.ca

If you are considering buying a home don’t forget about the importance of your credit score. This video explains what a credit score is and where it comes from.

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The Truth About The HST and a Secret GST Rebate

[podcast]http://scottpeckford.com/Podcast/GST-HST.mp3[/podcast]

The jury is still out on exactly how the HST will affect the overall housing market. However under the current proposal a homebuyer purchasing a used or resale home will see only a marginal increase in their actual costs.

According to Tony Spagunolo, “The average buyer purchasing a used home will see an increase of maybe $100 if the HST is implemented in the current form.” Spagunolo owns, The Spagunolo Group of Real Estate Law firms, and specializes in Real Estate conveyance.

When you break down the numbers it becomes apparent Tony is right.

Buyers only pay GST on new real estate. Therefore a resale property should not be subject to HST. Legal fees already include GST and PST therefore will have no change.

The only additional cost will be on home appraisals and inspections. Home appraisers and inspectors currently only charge GST.

In the Okangan an appraisal can cost about $300 while an inspection is around $175. The total GST on both is currently $23.75. Once the new rules take effect July 1st, 2010 the total tax will increase to $57.00 which is an increase of only $33.25, which is not enough to

Who will the HST hurt the most?

Sellers will actually pay quite a bit more HST than buyers. Sellers pay Real Estate commissions which are subject to GST. Considering the average $400,000 sale generates a commission of around $16,000 the HST will add an additional $1120 in tax. Not a small sum, but probably not enough to prevent a sale either.

Perhaps the single group most likely to feel the pinch from the HST are homebuilders. In particular builders who have a building completing after July 1/2010 will be the most impacted. There is a transitional tax planned for these buyers, but rest assured the builders, or more likely buyers are going to absorb some of the new tax.

It seems the provincial government is convinced more tax is the cure for what ails us. Whether this is the case still remains to be seen. At least homebuyers purchasing resale real estate can breathe a collective sigh of relief since the increased cost of the HST will be less than a less than a pizza and a six pack of beer.

If you are considering buying a home don’t forget about the importance of location. A busy street is likely to be less desirable and less marketable if you ever need, or want to sell. This video highlights one of the dangers of living on a busy street.