2 Feb

9 Reasons Why People Break Their Mortgages

General

Posted by: Kelly Hudson

9 Reasons Why People Break Their Mortgages

Break your Mortgage Sept16Did you know that around 60% of people break their mortgage before their mortgage term matures?

Most homeowners are blissfully unaware that when you break your mortgage with your lender, you will incur penalties and those penalties can be painfully expensive.

Many homeowners are so focused on the rate that they are ignorant about the terms of their mortgage.

  • Is it sensible to save $15/month on a lower interest rate only to find out that, 2 years down the road you need to break your mortgage and that “safe” 5-year fixed rate could cost you over $20,000 in penalties?

Check out my BLOG Mortgage Penalties – Ouch… How Much??

There are a variety of different mortgage choices available. Knowing my 9 reasons for a possible break in your mortgage might help you avoid them (and those troublesome penalties)!

9 reasons why people break their mortgages:

1. Sale and purchase of a home
• If you are considering moving within the next 5 years you need to consider a portable mortgage.
• Not all of mortgages are portable. Some lenders avoid portable mortgages by giving a slightly lower interest rate.
• Please note: when you port a mortgage, you will need to requalify to ensure you can afford the “ported” mortgage based on your current income and any the current mortgage rules.
2. To take equity out
• In the last 3 years many home owners (especially in Vancouver & Toronto) have seen a huge increase in their home values. Some home owners will want to take out the available equity from their homes for investment purposes, such as buying a rental property.
3. To pay off debt
• Life happens, and you may have accumulated some debt. By rolling your debts into your mortgage, you can pay off the debts over a long period of time at a much lower interest rate than credit cards. Now that you are no longer paying the high interest rates on credit cards, it gives you the opportunity to get your finances in order.
4. Cohabitation & marriage & children
• You and your partner decide it’s time to live together… you both have a home and can’t afford to keep both homes, or you both have a no rental clause, or??? The reality is that you have one home too many and may need to sell one of the homes.
• You’re bursting at the seams in your 1-bedroom condo with baby #2 on the way.
5. Relationship/marriage break up
• 43% of Canadian marriages are now expected to end in divorce. When a couple separates, typically the equity in the home will be split between both parties.
• If one partner wants to buy out the other partner, they will need to refinance the home
6. Health challenges & life circumstances
• Major life events such as illness, unemployment, death of a partner (or someone on title), etc. may require the home to be refinanced or even sold.
7. Remove a person from Title
• 20% of parents help their children purchase a home. Once the kids are financially secure and can qualify on their own, many parents want to be removed from Title.
–Some lenders allow parents to be removed from Title with an administration fee & legal fees.
–Other lenders say that changing the people on Title equates to breaking your mortgage – yup… there will be penalties.
8. To save money, with a lower interest rate
• Mortgage interest rates may be lower now than when you originally got your mortgage.
• Work with your mortgage broker to crunch the numbers to see if it’s worthwhile to break your mortgage for the lower interest rate.
9. Pay the mortgage off before the maturity date
• YIPEE – you’ve won the lottery, got an inheritance, scored the world’s best job or some other windfall of cash!! Some people will have the funds to pay off their mortgage early.
• With a good mortgage, you should be able to pay off your mortgage in 5 years, there by avoiding penalties.

Some of these 9 reasons are avoidable, others are not…

Mortgages are complicated… Therefore, you need a mortgage expert!

Give me a call and let’s discuss the best mortgage for you, not your bank!

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

2 Feb

What is a BC Property Assessment vs a Home Appraisal?

General

Posted by: Kelly Hudson

What is a BC Property Assessment vs a Home Appraisal?

BC-Assessment-logo Jan18What is BC Assessment?

It’s January and people in BC are getting their property assessments.

BC Assessment is a provincial Crown corporation that values all real estate property in British Columbia. Every year, BC Assessment sends property owners a Property Assessment Notice telling them the fair market value of their property as of July 1 the prior year.

To see the most recent assessment for a property, click on the link BC Assessment and type in the address.

The real estate market is the single biggest influence on market values. Market forces vary from year to year and from property to property. The market value on an assessment notice may differ from that shown on a bank mortgage appraisal or a real estate appraisal because BC Assessment’s appraisal reflects the value as of July 1 of the previous year, while a private appraisal can be done at any time.

Use your BC Assessment as a starting point for the value of the property your planning your home purchase… Do not rely on BC assessment for the exact value of the property you’re considering purchasing.  Markets in BC can change quickly both increasing and decreasing in value depending on the area.

Appraisal Jan18What is a Home Appraisal?

An appraisal is a document that gives an estimate of a property’s current fair market value.

Often there is no connection between BC Assessment and appraised value.  This is why lenders want an appraisal – an independent evaluation of the properties value at this moment in time.

Primarily home appraisals are completed at the request of a lender.   Lenders want to know the value of a property in the current market before they are willing to lend against the home.

The appraisal is performed by an “appraiser” who is typically an educated, licensed, and heavily regulated third party offering an unbiased valuation of the property in question, trained to render expert opinions concerning property values.

When an appraisal is done, consideration is given to the property, the home, its location, amenities, as well as its physical condition.

Appraisals may also be required when an owner has less than 20% down payment and needs mortgage default insurance.

Who pays for the Home Appraisal?

Typically, the borrower pays the cost of the appraisal, and upon completion, the appraisal goes directly to the lender (does not go into the home buyer’s hands).

I know it sounds odd, but brokerages, lenders and appraisers cannot just show the buyer the appraisal on a property, even though the borrower paid for it.

  • Think of an appraisal as an administrative fee for finding today’s current value of the property

You need a Home Appraisal since the lender doesn’t want to lend on a poor investment and the appraisal helps the buyer decide if the property is worth what they offered (especially in hot markets like Vancouver & Toronto).

  • What if you offered $475,000 and the home appraisal came in at $450,000?

Why don’t you get a copy of the appraisal? The appraiser considers their client to be to the lender (the reason the appraisal was ordered).  The lender has guidelines for the appraisal, and the appraiser prepares his report according to those parameters.

The lender is free to share the appraisal with the borrower, but the appraiser cannot share it.  This is because the lender is the client… NOT the borrower!!  It doesn’t matter who pays for the appraisal.

Sometimes an appraisal can come in lower than the purchase price, causing angry calls to the Appraisal Institute of Canada (AIC), and the answer they give is: the Brokerage or Lender is the client of the appraiser, and as such has ownership of the report.

One of the main reasons the buyer pays for the appraisal, is that if the mortgage doesn’t go through, the lender does not want to be on the hook for paying for the appraisal and not getting the business.

Lenders are also aware that home buyers could take the appraisal and shop it around with other Lenders to try and get a better deal.

It is rare for Lenders to share the report. With most appraisal companies, the appraisal is only provided after the closing of the mortgage transaction and must have the lender’s approval.

After the funding of your mortgage, some mortgage brokers will refund the appraisal fee or sometimes the lender may agree to reimburse the cost of the appraisal.

While a lender does not have to release the entire appraisal, there are some pieces of information that remain the personal property of the buyer, and PIPEDA legislation guarantees them access to that. However, any information on the report that does not relate to the property itself (such as the neighboring properties or other data about the community) would come off the report before the lender provided it.

Some other reasons for getting an Appraisal:

  • to establish a reasonable price when selling real estate
  • to establish the replacement cost (insurance purposes).
  • to contest high property taxes.
  • to settle a divorce.
  • to settle an estate.
  • to use as a negotiation tool (in real estate transactions).
  • because a government agency requires it.
  • lawsuit

Home in Hands Sept15Getting your home ready for an Appraisal:

The appraiser report involves a report including pictures of the home and property with the appraiser’s value of the property, along with a short summary of how that information was derived.

9 tips for high value home appraisals

Most lenders have an approved appraiser list which requires appraisers to have the appropriate designation. Lenders tend to reject appraisals that are ordered directly by property owners.  Lenders want the appraisal to be ordered by the broker or the lender, primarily to avoid potential interference from the property owner.

Home Appraisal Costs

Appraisal costs do vary.  Most home appraisals start around $350 (plus tax) but they can go much higher depending on how expensive the home is, complexity of the appraisal and how easily the appraiser can access comparable data.

BC Assessment vs appraised value: lenders want an appraisal – a professional, independent evaluation of a homes value, at this point in time!

Are you thinking of buying a home? As you can tell there is lots to discuss, give me a call and let’s have a chat!

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

13 Oct

Self-Employed?? Here’s What You Need to Know About Mortgages

General

Posted by: Kelly Hudson

Why, why, why it is so challenging for entrepreneurs to obtain a mortgage in Canada?

If you’re among the 2.7 million Canadians who are self-employed, regrettably your income is not as easy to document as someone who’s traditionally employed.

Since 2008, mortgage regulations in Canada have made it more challenging for those who work for themselves to qualify for a mortgage due to tighter restrictions on “stated income” loans.  In 2012, Canada’s Office of the Superintendent of Financial Institutions (OSFI) introduced Guideline B-20, which requires federally regulated banks to evaluate applications for residential mortgages and home equity lines of credit with more scrutiny.

These rulings made it more challenging for the self-employed to prove income.

Here’s what Self-Employed home buyers need to know:

  1. Most self-employed are motivated to decrease their earnings to avoid paying tax through legitimate expenses and personal deductions.
    • Therefore, much of one’s self-employed income does not show up on paper.
  2. I’m sorry… but you can’t you can’t have your cake and eat it too! If you choose to write off as much of your income as legally possible to avoid paying taxes, claiming low take-home pay, you will end up paying a higher interest rate on your mortgage.
    • i.e. home buyer is a tradesperson, they earn $70,000/year and legitimately write off their business expenses to $40,000/year on Line 150 of their tax return. Lenders use income from Line 150… not gross income to determine affordability.
    • Some lenders allow you to “gross up” your declared taxable income (as opposed to stated income) by adding up to 15%.
      • i.e. if your declared income on your Notice of Assessment (NOA) is $40,000, the lender could add 15% for a total of $46,000. In most cases this doesn’t really help the business owner, as their income is still too low to qualify for the mortgage they want.
  3. The new mortgage rules mean the assessment of a self-employed applicant’s income has become far more rigorous. Lenders now analyze the average income for the industry a self-employed candidate works in, and study the person’s employment history and earnings in the field. Their stated income should be reasonable, based on:
    • industry sector
    • type of business
    • length of time the operation has been in business
  4. Work with professionals. You need to hire a qualified book keeper and a Chartered Professional Accountant (CPA). Their job is to know the ins and outs of taxes so that you can put your focus on growing your business.
    • You need to keep all your financial affairs up to date. That means getting the accountant prepared financials, filing your annual tax returns and most importantly paying your taxes. Government always gets first dibs on any money.  Lenders won’t be interested in you if you haven’t paid your taxes.
    • I recommend having a discussion with your CPA. Let them know that you want to buy a home.  Come up with a budget of what income you need to be able to prove on your tax returns.
      • Suggestion: you could choose to pay more personal income tax this year, to push your line 150 income up and help you qualify for any mortgage transactions you hope to make.
      • Please note: most lenders will want to see 2 years history, to prove consistency in earnings.
  5. For self-employed borrowers, being able to document income for the past 2-3 years gives you more lending options. Some of the documents your lender may request include:
    • Credit bureau (within 30 days of purchase)
    • Personal tax Notice of Assessment (NOA) for the previous two to three years.
    • Proof that you have paid HST and/or GST in full.
    • Financial statements for your business prepared by a Chartered Professional Accountant (CPA).
    • Contracts showing your expected revenue for the coming years (if applicable).
    • Copies of your Article of Incorporation (if applicable).
    • Proof that you are a principal owner in the business.
    • Business or GST license or Article of Incorporation

6. If you have less than 20% down payment, Genworth is the only option of the 3 mortgage default insurers that still has a stated income program.

Self-employed home buyers, who can document proof of income, can generally access the same mortgage products and rates as traditional borrowers. 

Tips for self-employed applying for a mortgage to ensure the process goes smoothly:

  1. Get your finances in order. Pay down your debt!!
    • Every $400/month in loan payments lowers your mortgage eligibility by $100,000
    • Every $12,000 in credit card debt lowers your mortgage eligibility by $100,000
    • Do you see a theme here??  Pay down your debt!  Resist buying/leasing a new vehicle or taking on any additional debt prior to buying your home
  1. 3 “Rules of Lending” what Banks look at when you apply for a Mortgage in Canada 
  1. Have two to three years’ worth of your self-employed supporting documentation available so your mortgage broker can work with you to set up your Mortgage Preapproval.
  1. Be consistent and show stability. Lenders prefer self-employed borrowers who work in a business that’s established and have expertise in that field.

What happens if the banks still don’t want you for a conventional mortgage??  

Many high net worth business owners with low stated incomes turn to private mortgage lenders for financing, since they can’t prove their income.

It is difficult to navigate which lenders specialize in self-employed mortgages.  Using a mortgage broker has obvious advantages, since mortgage brokers have access to multiple lenders and have a broad knowledge of the mortgage market.

Being self-employed need not be a deterrent to buying a property.  Let’s have a chat so I can connect you to the lender most suited to your situation.

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

15 Nov

The Mortgage Minute – Kelly’s November Newsletter is now available

General

Posted by: Kelly Hudson

Welcome to the November issue of Kelly’s monthly newsletter!  

Please click on image to view the complete newsletter!

This month’s edition discusses the impact of the Federal election on interest rates, as well as what being on Maternity or Paternity leave means when shopping for a new home or renewing your existing mortgage. We also offer tips on how to save energy and water in your home.

Please let me know if you have any questions or feedback regarding anything outlined below.

Thanks again for your continued support and referrals!

I am always here to help!  Please feel free to ask questions or offer feedback via phone or email.

Kelly Hudson, Mortgage Expert 604-312-5009 KellyHudsonMortgages@gmail.com

If you would like to receive the DLC Monthly Newsletter automatically, please email me with you preferred email address and I will add you to my monthly mailing list.

22 Oct

The Liberal Effect on Home Ownership & Bank of Canada Rate remains the same

General

Posted by: Kelly Hudson

 

No Rate Change from the Bank of Canada
The Bank of Canada will maintain its target for the overnight rate at 1/2%. In explaining its decision to keep its overnight rate at 0.5 per cent, the bank noted that inflation and economic activity was largely unfolding as predicted, even as low oil prices continue to weigh on the economy. 

It said the country’s economy is bouncing back from the technical recession that kicked off 2015.

The rebound, the bank added, is supported by the long-awaited “signs of strength” in non-resource sectors, thanks to solid growth in the United States. “Economic momentum is rebuilding,” the report said. 

DLC Chief Economist Dr. Sherry Cooper “I am not suggesting that mortgage rates will rise rapidly… I expect mortgage rates to edge up only gradually.” For excellent insight read Canadian Interest Rates have Bottomed and Housing has Peaked

The Liberal Effect on Home Ownership

Liberal leader Justin Trudeau has repeatedly pledged help for Canada’s middle class.

Here’s what he’s promised to do as Prime Minister of Canada as it relates to household balance sheets:

1. Balancing the budget is not a priority until 2019. Trudeau is expected to go on a spending spree suggesting a greater supply of government debt and potentially higher long-term yields to come, which could mean at slightly higher fixed mortgage rates than we’d otherwise see. 

2. No cut in Bank of Canada prime rate: More spending by Ottawa puts less pressure on governor Stephen Poloz to stimulate the economy with rate cuts. The implied probability of a rate hike by next October has almost doubled, from 8% yesterday to 15% as we speak. 3. Wider RRSP Access: The Liberals say they’ll open access to the RRSP Home Buyers’ Plan particularly for homebuyers coping with significant life changes (divorce, death of a spouse, a sick or elderly family member, etc.). More access to down payment funds will prop up housing sales and home ownership slightly, and support home prices. 

4. More “Affordability”: The Liberal platform includes a review of housing policy in high-priced markets. The new government will “consider all policy tools that could keep home ownership within reach.” What that means, we’ll have to wait and see. It could definitely be positive for renters and income property investors, given the Liberals have promised to “direct CMHC…to provide financing to support the construction” of new rental housing. 

5. First-timer Support: Trudeau’s government will add more flexible programs for first-time homebuyers. This could mean any number of things, potentially even higher amortization limits for new buyers.

As always, I am available at any time to discuss, plan, help, and listen to your questions, concerns, and feedback. And please forward any of my emails on to anyone who you know would be interested in receiving it, because your referrals are what keep me in business! 

Thanks for reading!
Kelly

Kelly Hudson

Mortgage Expert & Certified Reverse Mortgage Specialist
Dominion Lending Centres Aegis Mortgage Services
 

c: 604-312-5009
KellyHudsonMortgages@gmail.com

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7 Oct

The Mortgage Minute – Kelly’s October 2015 DLC-Aegis Newsletter is now available

General

Posted by: Kelly Hudson

Welcome to the October issue of Kelly’s monthly newsletter!

Please click on image to view the complete newsletter!

This month’s edition aims to lower stress levels with real math, as well as highlight the use of professionals.

Please let me know if you have any questions or feedback regarding anything outlined below.

Thanks again for your continued support and referrals!

I am always here to help!  Please feel free to ask questions or offer feedback via phone or email.

Kelly Hudson, Mortgage Expert 604-312-5009 KellyHudsonMortgages@gmail.com

If you would like to receive the DLC Monthly Newsletter automatically, please email me with you preferred email address and I will add you to my monthly mailing list.

4 Aug

The Mortgage Minute – Kelly’s August 2015 DLC-Aegis Newsletter is now available

General

Posted by: Kelly Hudson


Please click on image to view the complete newsletter!

Welcome to Kelly Hudson’s August issue of the Home Financing Journal, which is designed to help keep you in the know regarding Real Estate and Mortgage related matters!

This month’s edition addresses common questions about the recent Bank of Canada rate drop, and touches on an interesting move by a very popular mortgage lender that, by all appearances, runs contrary to the suggestion that tighter lending guidelines are just around the corner. Please let me know if you have any questions or feedback regarding anything outlined below.

Thanks again for your continued support and referrals!

I am always here to help!  Please feel free to ask questions or offer feedback via phone or email.

Kelly Hudson, Mortgage Expert Cell 604-312-5009  KellyHudsonMortgages@gmail.com

If you would like to receive the DLC Monthly Newsletter automatically, please email me with you preferred email address and I will add you to my monthly mailing list.

20 Jul

How LOW Can Mortgage Rates Go???

General

Posted by: Kelly Hudson

How LOW Can Mortgage Rates Go???

Somewhat expectedly, on July 15 the Bank of Canada (BOC) cut their Benchmark Interest Rate for a second time this year by 25 basis points, down from 0.75% to 0.50%.

There is a direct correlation between the BOC’s key interest rate and consumer “Prime Rate” which affects everything from variable rate mortgages to lines of credit.

Prior to July 15 the consumer Prime Rate with all major financial institutions was 2.85%.

Minutes after BOC lowered the rate, TD was first out of the gate first to say that they would only be dropping their Prime Rate down to 2.75% – which only reflects a 10 basis point cut, not the full 25 basis points.

The other major banks, (Scotia, RBC, BMO etc.) lowered their prime rate by 15 basis points (still not the full 25 basis points) and TD followed suit.

If you recall, back in January when the BOC cut their key rate from 1.00% to 0.75%, TD was the first out of the gate again, and they stated that they wouldn’t be cutting their Prime Rate at all! However within a few days, RBC and Scotia both announced a cut on their Prime down to 2.85%, and TD quickly followed suit.

What should you do with your mortgage? 

In my opinion, variable rate mortgages (VRM) are still your best bet – for a few reasons:

  • A typical discount on a 5 year VRM is Prime -.65%
  • The cut to Prime rate by all lenders lowers your interest costs and results in a lower payments.

Furthermore, the outlook for the BOC’s Benchmark rate remains low. BOC Governor Steven Poloz stated in his announcement July 15 that “The Bank anticipates that the economy will return to full capacity… in the first half to 2017.” This timeframe was pushed back from his previous statement that the Canadian economy would be back to full capacity by the second half of 2016.

Even if we assume no further rate cuts will happen over the balance of 2015; we’re unlikely to see a rate increase in the short to medium timeframe.

It’s a great time to get your mortgage or line of credit paid down!

Some interesting things to consider:

  • One major effect the rate cut had was an immediate drop in the Canadian dollar. The loonie ended the day, July 15 at 77.40 cents US, down 1.09 cents after the rate cut. Today, July 20 the dollar down further at 76.94 cents US.
  • This rate cut will also continue to lead to further speculation of an over-valued housing market. Always a hot topic in Canada.

The Globe and Mail wrote a good piece about this on July 15: Five things to watch after the rate cut.

As always, I am available at any time to discuss, plan, help, and listen to your questions, concerns, and feedback.

Let’s have a chat to discuss your next steps to home ownership.

Kelly Hudson
Mortgage Expert
Dominion Lending Centres – Aegis Mortgage Services
Mobile 604-312-5009
KellyHudsonMortgages@gmail.com
KellyHudsonMortgages.com

13 Jul

The Mortgage Minute – Kelly’s July 2015 DLC-Aegis Newsletter is now available

General

Posted by: Kelly Hudson

Please click on image above to view the complete newsletter!

Welcome to Kelly Hudson’s July’s issue of the Home Financing Journal, which is designed to help keep you in the know regarding Real Estate and Mortgage related matters!

Summer vacation at last! Two months of fun in the sun lie ahead! This month’s edition of the Dominion Opinion takes a look at the seemingly endless stream of rate-hike warnings in the media, as well as tips and tricks for buying a foreclosure property.

Please let me know if you have any questions or feedback.

Thanks again for your continued support and referrals!

I am always here to help!  Please feel free to ask questions or offer feedback via phone or email.

Thanks again for your continued support and referrals!

Kelly Hudson, Mortgage Expert

Cell 604-312-5009  KellyHudsonMortgages@gmail.com

If you would like to receive the DLC Monthly Newsletter automatically, please email me with you preferred email address and I will add you to my monthly mailing list.

30 Jun

Fixed vs. Variable rate mortgages – Pros & Cons

General

Posted by: Kelly Hudson

As an independent Mortgage Broker, I am often asked “should I choose a fixed or variable rate mortgage”

Buying a home is very exciting, but it can easily be overwhelming.

Understanding how mortgages work is your first step. Education is a huge part of my job, I give people as much information (as you can handle), so you make the best decision regarding a mortgage for your particular circumstance.

When deciding on a mortgage you will need to choose between a variable or fixed rate mortgage. Your income, size of your mortgage, lifestyle and risk tolerance will help you determine which product best suits your particular circumstance.

The key to variable and fixed rates is to understand how interest rates are calculated and how these impact each type of mortgage:

  • Fixed rate mortgages (FRM)provides stability and eases budget anxiety, because it is constant over the deration of the term of the mortgage (i.e. 5 years).
    • Fixed rate mortgages are based on the Canadian bond market (the 5 year fixed rates is based on the yield of a 5-year bond). As bond prices rise, fixed rates will also rise and the spread between the two reflects the risk investors are willing to take when they move their money from a secure product, like bonds, to invest in mortgage securities.
    • There are times when that spread becomes very wide or very thin—usually a reflection of world events, such as the subprime mortgage crisis of 2008.
  • The Fixed Rate Mortgage is recommended for the following reasons:
    • Clients are risk averse.
    • They have bought a property at the high end of their affordability range.
    • Clients are not knowledgeable about borrowing and are more advised to take something secure.
  • Variable rate mortgages (VRM), (also called a floating or adjustable) is a mortgage where the interest rates can fluctuate during your term.
    • That means if the prime rate goes up — based on changes made to the Bank of Canada’s overnight rate — then variable rates will go up. That means your interest rate and mortgage payments could change from month to month

Fixed & variable mortgage rates Pros & Cons

  Fixed mortgage rate (closed)  Variable mortgage rate (closed)
Description Set for the duration of the mortgage term (i.e. 5 years). Mortgage interest rate and payments are fixed.  Fluctuates with the Bank of Canada rate, known as  the ‘prime rate’. Mortgage payments can fluctuate.
Pros ·Can essentially set the payments and forget about it until your term is over, regardless of whether Canadian bonds or interest rates rise or fall.

 

·Eases budgeting anxiety and offers stability.

·If the difference between the variable & fixed rate is less than 1%, it may be worth paying a premium for the stability protection of a fixed rate.

 ·Historically, over the last 25 years variable rates have proven to be less expensive over time.

 

 ·Since the current Bank of Canada rate is 0.75%  and prime is 2.85% there isn’t a lot of room for  interest rates go much lower.

 ·80% of people break their mortgage* before the  term is complete.

  o   Variable rate mortgages typically charge 3  months interest penalty which typically is lower  than the Fixed Rate Mortgages *varies depending  on lender

Cons ·If the difference between the variable & fixed rate is significant, it may not be worth paying a premium for the stability protection of a fixed rate.

 

·80% of people break their mortgage* before the term is complete.

o   Fixed rate mortgages typically charge the greater of: 3 months interest OR Interest Rate Differential *varies depending on lender

 When interest rates change, depending on the  lender and the terms of your mortgage, the  following scenarios are possible:

 

 ·Your payment goes up or down each time Prime  rates change.

 ·Your payment stays the same when Prime rates go  down, but increases when market interest rates go  up. In this scenario, more of your payment goes  toward paying down the principal when the interest  rate falls.

 ·Your payment does not change unless Prime rates  increase to a “trigger” point (shown in your  mortgage agreement). Only at that point will the  lender increase your payment.

 ·If you choose variable rate OR a term less than 5  years, the Canadian government dictates that you  must qualify for your mortgage at the Bank of  Canada Benchmark Rate currently 4.64%. This is to  ensure you can still afford your mortgage if interest  rates increase. Click Here To See The Bank of  Canada Benchmark Rate Qualification Index  

*Drawing Conclusions: How much does it cost to break a mortgage?

 puzzle-pieces-2 Sept2014What is the best option?

According to Robert Abboud, an Ottawa – based CFP and the author of No Regrets: A common sense guide to achieving and affording your life goals, Ram Balakrishnan, blogger, and Dr. Moshe Milevsky, the York university professor whose initial 2001 study became the impetus behind the current belief that you’ll always save with a variable rate mortgage, a variable rate mortgage may not be in your best interest.

According to Milevsky’s 2001 study (and the updated study released in 2008), homeowners who opt for a variable rate mortgage save approximately $22,000 in interest payments over a 15 – year period.

  • But context is everything. The study, and its update, examined mortgages between 1950 and 2007. Since the study was published, the spread (otherwise known as the difference between variable and fixed rates) has thinned out.
  • Also interest rates, which were consistently falling over the last 25 years, have slowed considerably.
  • Add to this the historical response by governments in tough economic times: stimulate spending, which generates inflation. To combat this inflation, governments raise interest rates — sometimes suddenly and ruthlessly — and this has an immediate impact on variable rates (the overall economic condition will eventually impacts fixed rates).

For that reason, Milevsky, and others, have voiced their support for locking – in to a fixed rate. The rationale: any savings you see from currently low variable rates will be eaten up when you’re forced to renegotiate your mortgage in five years. That’s because as rates slowly creep up over the next five years, your monthly payments remain the same — and this results in a larger percentage of your payment going to interest payments, rather than repaying the principal.

To help you decide whether a variable or fixed mortgage is the best option for you, answer the following 4 questions:

  1. Does the thought of uncertain mortgage interest rates and fluctuating payment amounts keep you up night?
  2. Do you have a big mortgage? Do you expect to have a big mortgage in five years?
  3. Would it be virtually impossible to make additional monthly or lump – sum payments against the mortgage?
  4. Would it be a burden to find an extra $100 or $200 per month for mortgage payments?

If you answered YES to any of these questions, you need to seriously consider a fixed – rate mortgage. Despite the temptation of saving money with a variable rate mortgage, a fixed rate will provide a level of stability and predictability that your situation requires.

Mortgage borrowers need to understand and measure risks when deciding between a fixed-rate mortgage (stability) and a variable rate mortgage (balance between risk & reward).

Besides the Fixed vs Variable rate mortgages, there are many other factors you need to be aware of prior to buying your home.

Let’s have a chat to discuss your next steps to home ownership.

Kelly Hudson
Mortgage Expert
Dominion Lending Centres – Aegis Mortgage Services
Mobile 604-312-5009
KellyHudsonMortgages@gmail.com 
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