30 Apr

How to Pick the Best Mortgage for YOUR Situation!

Mortgage

Posted by: Kelly Hudson

Most Canadians are conditioned to think that the lowest interest rate means the best mortgage product. Although sometimes that is true, a mortgage is much more than just an interest rate. You can save yourself a lot of money if you pay attention to the fine print for the total cost of your mortgage.

In order to pick the best mortgage, you need to understand your options. This comes with Mortgage Intelligence, understanding how mortgages work and the pros and cons of the various options.

Once you’ve selected the type of mortgage, then you’ll need to shop for the most competitive option available to you and that means making some decisions based on your specific situation including:

  • Are you planning to move in the next 5 years
  • Will your family be growing/shrinking?
  • Will your employment change and if it does will you need to relocate?
  • Would $1000’s in penalties impact you if you need to break your mortgage?
  • What types of debts do you have?  Credit cards? Car loan? Student loan? Line of Credit?

Why do all this work? Because it will have a direct impact on your bottom line. A mortgage is made up of two parts—the principal and interest—you need to pay attention to how and when these parts get paid down. Ideally, you want to minimize your interest payments and maximize the principal payments.

New Government Stress Test Jan. 1, 2018 – whichever is the highest is how you must qualify for a mortgage.

  • Qualify at the Chartered Bank Benchmark Rate (Government Rate) which fluctuates (currently 5.34%)
  • OR the contract rate your lender gives you PLUS 2% i.e. 3.69% + 2% = 5.69%
    • Since 5.69% is the highest – that would be the stress tested rate.

What this means to you is… if you have to qualify for a mortgage at a rate about 2% higher than the lender is giving you, your buying power decreases by about 20%. 

To pick the best formula for your situation, you’ll first need to understand some of the factors that impact how much interest you’ll pay for your mortgage loan.

Understanding these 6 mortgage terms will help you make the best decision for your situation

Amortization

Amortization is a fancy word that means the “life of your mortgage” OR how long it takes to pay off your mortgage if you paid your mortgage for “X” years.  The amount of your mortgage loan repayment is calculated based on a length of time you agree to paying off that debt.  In Canada, the standard amortization period is 25 years.

Picking the best mortgage is not just about qualifying for the mortgage. The amortization period is integral in the best mortgage decision because it will decide how much or how little interest you will pay during the life of the mortgage loan.

  • The longer the amortization period (25 years vs 30 years) the more interest you will pay.
  • Therefore, a shorter amortization period will lower your overall cost of borrowing BUT you must be able to afford the higher payments.

Once you’ve decided on your amortization, you will need to decide if how frequently you would like to make your mortgage payments.  Every mortgage payment (consisting of both interest and principal) will help reduce your principal (the amount of money you borrowed) and eventually reduces the overall interest you pay on this loan.

Term

In the 1980’s mortgage interest rates were as high as 22%.  Interest rates can change over time therefore, lenders don’t want to negotiate a 25-year loan at 4% interest if the interest rates go up to 10% in 5 years. To avoid the risk, lenders break your mortgage amortization into smaller terms.

  • The term is shorter than the amortization period and locks you into your pre-negotiated rates during that time.
    • The length of term you choose (most Canadians choose 5 years) will depend partly on if you think interest rates will rise or fall. Typical terms are: 1, 2, 3, 4, 5, 7 & 10.

About 3-6 months before your current term matures, your current lender usually sends you a renewal notice with options on rates for the various terms they offer (typically 1 to 10 years).

Once you get your renewal notice, you need to contact your mortgage broker to ensure you’re choosing the best option for your situation.

Closed Mortgage

A closed mortgage usually offers the lowest interest rates available.

Closed mortgages cannot be paid off before the end of its term without triggering a penalty. Some lenders allow for a partial prepayment of a closed mortgage by increasing the mortgage payment or a lump sum prepayment.

Open Mortgage

An open mortgage is a more flexible mortgage that allows you to pay off your mortgage in part or in full before the end of its term without penalty, because of the flexibility the interest rates are higher.

  • The interest rates for an open mortgage are typically 3-4% higher than a closed rate mortgage.
  • i.e. a home buyer could pay 6.99% for a 5-year open mortgage vs. 3.99% for a five-year closed mortgage.

If you plan to sell your home soon or expect a large sum of money, an open mortgage can be a great option.  Most lenders will allow you to convert from an open to a closed mortgage at any time (and switch you to lower rates).

Fixed mortgage – you have the same payment for the term of the mortgage

Variable mortgage – the mortgage rate and your monthly payments will vary depending on the Bank of Canada rate (Prime)

Fixed vs. Variable Pros & Cons (in a nutshell) for more information check out my BLOG Fixed vs. Variable Rate Mortgages – Pros & Cons

Fixed Rate:

  • Pro – you would have the same mortgage payment for the entire term of the mortgage
    • Your mortgage payments are not affected by Bank of Canada Rate or Canadian Bond Yield
    • Think of fixed rate as an insurance policy – you pay a premium to guarantee “fixed” rates for the balance of the term
  • Pro – can port a fixed mortgage
  • Con – higher interest rates
  • Con – MUCH higher penalties if you need to break your mortgage (can be 4-5% of outstanding balance with Banks/Credit Unions)
    • 60% of home owners, break their mortgage before it matures!  There are penalties to break your mortgage, click on this GREAT 3 minute video from the Globe & Mail explaining how Banks calculate mortgage penalties for both Variable & Fixed mortgages and how banks squeeze even more money out of their clients by giving discounts off their inflated posted rates Drawing Conclusions: How much does it cost to break a mortgage?

Variable Rate:

  • Pro – lower rates than the Fixed Rate – you would pay less now that you would for a Fixed Rate mortgage
  • Pro – Penalty for breaking is 3 months interest (about 0.5-1% of outstanding balance).
  • Pro – you can lock into a fixed rate mortgage (assuming your mortgage is in good standing) at any time, based on the amount of time remaining on your mortgage and the current posted rates.
    • i.e. If you have a 5-year variable mortgage and you want to move to Fixed after 2 years, you would lock into the lenders current 3 year fixed posted rate
  • Pro/Con – porting is a little more complicated with a variable rate mortgage – it will depend on the lender and if you are adding more funds to the mortgage.
  • Con – Mortgage payments will increase/decrease based on the Bank of Canada rate – currently 1.75% and the lenders prime rate = Prime is currently 3.95%
    • Bank of Canada meets 8 times a year
    • Every 0.25% increase with the lender Prime rate will cost you an extra $13/$100,000 borrowed.  i.e. $300K mortgage = will be about $39/month more/less

BLOG 10 Helpful Words to Know when Buying a Home

The best way to decide on the best mortgage is to contact your friendly neighbourhood mortgage broker.  Mortgages are complicated, but they don’t have to be… Engage an expert!

Give me a call and let’s discuss a mortgage that works for you (not the bank)!

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Kelly Hudson
Mortgage Expert
DLC – Canadian Mortgage Experts
Mobile 604-312-5009
Kelly@KellyHudsonMortgages.com
www.KellyHudsonMortgages.com

9 Apr

7 Steps to Buying a Home

Mortgage

Posted by: Kelly Hudson

I’ve created a 7-step checklist to help you understand the home buying process

Step 1: Down Payment

The hardest part to buying a home is saving the down payment (a gift from the Bank of Mom & Dad also works).

  • For purchases under $500K, minimum down payment is 5%.
  • Buying between $501-999K you need 5% on first $500K PLUS 10% down payment for anything over $500K.
  • Buying a home over $1M you need 20% down payment.

BLOG 5 GREAT Reasons To Provide a 20% Down Payment when Buying a Home

For any home purchases with less than 20% down payment, you are also required to purchase Mortgage Default Insurance.  BLOG Everything You Wanted to Know about Mortgage Default Insurance

Step 2: Strategize, Define Your Budget and get Pre-Qualified

Unless you can afford to buy a home, cash in hand, you are going to need a mortgage.

You need to get pre-qualified, which should not be confused with the term pre-approved.

The big difference is that no approval is ever given by a lender until they have an opportunity to examine the property that you wish to purchase.  The bank may love you… but they also must love the property you want to buy.

Pre-qualifying will focus on gathering documentation to prove the information on your mortgage application including credit, debt load, income/employment, down payment etc.

BLOG Pre-Approved for Your Mortgage…  What Does that Really Mean???

Mortgage brokers will make sure you get a great mortgage rate.  Just as important as rates are the terms of your mortgage which should include:

We also discuss what type of mortgage fits your current situation

  • fixed vs variable?
  • life of the mortgage (amortization) 25 or 30 years etc.
  • payments – monthly, semi monthly, accelerated bi-weekly

Step 3: Set Your Budget

Keep in mind that just because you’re pre-qualified for a certain amount of mortgage, doesn’t mean you can actually afford that amount. Prepare your own monthly budget to be sure.

Typically, your total home payments (including mortgage, property taxes, strata fees & heat) should not exceed 32-39% of your gross (pre-tax) income.

Step 4:  Find the Right Property – Time to Engage a Realtor

Once you have been pre-qualified for a mortgage, based on your budget… you need to find a realtor.

Selecting the right real estate agent is a very important step in the home buying process.  When you work with an agent, you can expect them to help you with many things, including:

  • Finding a home
  • Scheduling tours of homes
  • Researching the market, neighbourhood and home itself
  • Making and negotiating your offer to purchase, and counter-offers
  • Providing expert advice on home buying
  • Handling the offer, gathering documentation and closing paperwork

I recommend interviewing at least 3 realtors.  You will quickly decide who has your best interests in mind.  Do you want to deal directly with a realtor who’s going to work with directly when you go home hunting, or do you want to deal with a BIG name realtor, who has buyers & sellers realtors working under them?  There are advantages to each – you need to decide what is the best fit for your situation.

Get referrals for realtors from friends and family… OR ask me, I have a group of realtors that I know and trust.

Step 5:  Mortgage Approval

Once you have found the property you would like to call home, your mortgage broker will send your mortgage application and property information to the lender who is the best fit for your situation, based on your input.

If the lender likes your financial situation and the property, they will issue a “commitment” letter outlining the terms of the mortgage.  The lender will send you a list of documents, so they can verify and validate all the information you told them on the mortgage application.

Step 6:  Time for the Solicitor (Lawyer or Notary)

Once the lender has reviewed and approved all your mortgage documentation and the property documentation, your file will be sent to your solicitor (in BC you can use a lawyer or notary).  They will process all the necessary title changes and set up a time for you to meet, review mortgage documents and sign.

Step 7:  Get the Keys

On the closing day the documentation for your home purchase will be filed at the land titles office by your solicitor.  Typically, the possession date is 1 or 2 days later, giving time for the money (down payment & mortgage) to get to the home seller.  On possession day you set up a time to meet with your realtor to get the keys.

Congratulations you’re done – you now own your home!!

Mortgages are complicated, but they don’t have to be… Engage an expert!

Give me a call and let’s discuss a mortgage that works for you (not the bank)!

Kelly Hudson
Mortgage Expert
DLC – Canadian Mortgage Experts
Mobile 604-312-5009
Kelly@KellyHudsonMortgages.com
www.KellyHudsonMortgages.com