Mortgage prepayment: Know your options

Overview
Mortgage prepayment refers to paying more than the regular mortgage payments you have agreed to pay in your mortgage contract.
Examples of prepayment:

• increasing the amount of your regular mortgage payments
• making lump-sum payments to reduce your mortgage balance
• paying off your mortgage in part or in full before your term is over.

If your mortgage gives you prepayment privileges, you can save thousands of dollars in interest charges by paying down your mortgage faster.
However, if you have a closed mortgage, your lender will generally require you to pay a charge to make a prepayment that is more than your privileges allow.
Prepayment charges can be costly, so it is important to know when they can apply and how they are calculated. Prepayment charges are sometimes called penalties or breakage costs.
If you have an open mortgage, you can prepay any amount without paying a prepayment charge.
When you shop around for a mortgage, look carefully at the prepayment privileges and charges as you consider your options.

What are prepayment privileges?

Prepayment privileges are terms of your mortgage contract that allow you to pay an amount toward a closed mortgage on top of your regular payments, without triggering a prepayment charge.
For example, each year, your privileges might allow you to:

• make a lump-sum payment up to 15 percent of the original mortgage amount, and
• increase your regular payments by up to 15 percent.

Privileges vary from lender to lender. Generally, if you do not use a privilege, you cannot carry it over to the next year.

Example: Savings using prepayment privileges

Farah received a raise which allowed her to save $20,000. She wants to use it to make a prepayment on her mortgage at the beginning of the second year.

• Mortgage amount: $200,000, amortized over 25 years
• Prepayment privileges: lump-sum payment of up to 10% of original mortgage amount allowed once a year
• Assumptions: for this example, the interest rate will be 5.45% for the entire 25-year mortgage.
  (In reality, interest rates are only valid for the length of a fixed-rate term and will likely change.)

By using her privileges, Farah can make a lump-sum payment of $20,000. This prepayment will reduce the amount of interest Farah will pay over the life of the mortgage by more than $44,000. She will be able to pay off her mortgage over four years sooner.
You can use the Mortgage Calculator to find out how much you can save by making prepayments.

What are prepayment charges?

If you have a closed mortgage, you may be required to pay a prepayment charge if you:

• pay more than the amount allowed by your prepayment privileges
• refinance your mortgage – for example, if you want to borrow additional funds using the equity you have built up over time
• renegotiate your mortgage – for example, if you want to break your mortgage contract to take advantage of lower interest rates
• transfer your mortgage to another lender before the end of your term.

Prepayment charges are based on factors such as:

• the amount you want to prepay (or pay off early)
• the number of months left until the end of your term
• interest rates
• the method your lender uses to calculate the prepayment charge.

Your estimated charge will change from day to day since it is based on factors that change over time, such as the amount left to pay on your mortgage.
You may also have to pay an administration fee to make a prepayment

How will my prepayment charge be calculated?
These are the two most common methods for calculating a prepayment charge:

• Three months’ interest: an amount equal to three months’ interest on your outstanding mortgage balance.
• Interest rate differential (IRD): an amount based on the difference between two interest rates. The first is the interest rate for your existing mortgage term. The second is today’s interest rate for a term that is similar in length to the time remaining on your existing term. For example, if you have three years left on a five-year term, your lender would use the interest rate it is currently offering for a three-year term to determine the second rate for comparison in the calculation.

Your mortgage contract may state that the prepayment charge will be the higher of the two amounts that result from the calculations using the different methods.

Examples: Prepayment charge calculations

Note: The calculations in the examples below are simplified for demonstration purposes. Review your mortgage agreement or contract to find out exactly how your charge will be calculated.

Jim is considering breaking his mortgage to take advantage of lower rates. He wants to estimate how much the prepayment charge would be.

• Outstanding mortgage balance: $200,000
• Annual interest rate: 6%
• Number of months left in term: 36 months (or three years) left in a five-year term
• Today’s interest rate for a term of the same length: Jim’s lender is offering a 4% interest rate for a mortgage with a 36-month term

Method I: Three months’ interest

To estimate Jim’s charge based on three months’ interest, we can use this formula:

A × B ÷ 12 months × 3 months

• A: Outstanding mortgage balance
• B: Annual interest rate

Amount of Mortgage

Step 1: Identify the outstanding balance on Jim’s mortgage (A).

$200,000

Step 2: Multiply the outstanding mortgage balance (A) by the annual interest rate (B).

Write the annual interest rate as a decimal. For example, 6% = 0.06

$200,000 x 0.06
= $12,000
Step 3: Divide the answer by 12 months to get the amount of interest payable for one month.

$12,000 ÷ 12
= $1,000

Step 4: Multiply the answer by 3 months.

$1,000 x 3
= $3,000

Prepayment charge estimate based on three months’ interest

$3,000

Method II: Interest rate differential (IRD)

To estimate Jim’s charge based on the interest rate differential (IRD), we can use this formula:

A × (B – C) ÷ 12 months × D

• A: Outstanding mortgage balance
• B: Annual interest rate
• C: Today’s interest rate for term of similar length. Note: the lender may round up or down to the nearest term.
• D: Number of months left in term

Amount

Step 1 : Identify the annual interest rate on Jim’s mortgage (B).

6%

Step 2: Identify today’s interest rate for a term that is similar in length to the time left on Jim’s term (C).

4%

Step 3: Subtract the answer from Step 2 from the answer in Step 1 to get the difference in interest rates (B – C).

Write this interest rate as a decimal. For example, 2% = 0.02

6% – 4%
= 2% or 0.02

Step 4: Multiply this answer by the outstanding mortgage balance (A) to get the interest differential for one year.

0.02
x $200,000
= $4,000

Step 5: Divide this answer by 12 months to get the interest differential for one month.

$4,000 ÷ 12
= $333.33

Step 6: Multiply this answer by the number of months left on Jim’s
term (D). $333.33 x 36
= $12,000

Prepayment charge estimate based on interest rate differential:

$12,000

How is the prepayment charge calculated if you received a discount on your interest rate?

If you negotiated a discounted interest rate, the calculation of the interest rate differential will depend on the lender and the terms of your mortgage contract.

• Some lenders may use the posted (or advertised) interest rate at the time you signed your mortgage agreement and compare this to the current posted rate for the term remaining.
• Other lenders may use your actual discounted interest rate but also apply the discount to the current rate for the comparison. In this case, the difference in rates remains the same as if posted rates were used and the results of the calculation will be very similar.
• Some lenders may use your discounted interest rate for your existing term but will not apply the discount to the posted interest rate used for comparison. This will usually result in a lower prepayment charge.

How can you find out about your prepayment charges?

If your lender is a federally regulated financial institution, such as a bank, it must outline prepayment privileges and charges, along with other key details, in an information box at the beginning of your mortgage agreement.
By law, it must tell you how the prepayment charge will be calculated. It must also provide you with a description of the components used in the calculation of the charge. This information must be presented in a manner and written in language that is clear, simple and not misleading.
If the calculation is complex, your lender may provide a simplified example, illustration or method to help you estimate the prepayment charge.
Read your mortgage contract carefully to confirm these details before you sign. Ask questions about anything you do not understand.


How can you reduce or avoid prepayment charges?

• Shop around: Before you sign, look for flexibility in a mortgage, such as prepayment privileges.
• Make full use of your prepayment privileges: This way, any prepayment charges will be based on a lower mortgage balance. If possible, make a lump-sum payment before you break your mortgage.
• Wait until the end of your term to prepay: If your prepayment charge will be a large amount, consider waiting until the maturity date, when you can make a lump-sum prepayment without triggering any charges.
• Port your mortgage: If you are buying a new home, your lender may allow you to “port” your mortgage, or take your existing interest rate and terms and conditions, with you to your new home.

Questions to ask when shopping for a mortgage

• How much can I prepay without paying a charge or a fee?
• Is there a minimum or a maximum amount for a prepayment?
• When and how often can I make prepayments?
• Are there any conditions related to prepayments?
• If there are charges or fees, how much are they, and how are they calculated?

Carney Pledges Clear Signal

Bank of Canada Governor Mark Carney speaks in Nanaimo, B.C., on Monday. (Chad Hipolito /The Canadian Press)

Carney pledges clear signal if household debts warrant rate hike

Bank of Canada Governor Mark Carney says that if the central bank opts to raise interest rates to deter households from taking on more debt, he would “clearly declare” what the central bank is doing.

“If we were to lean against emerging imbalances in household debt, we would clearly declare we are doing so and indicate how long we expect it would take for inflation to return to the 2 per cent target,” Mr. Carney said in prepared remarks for an audience in Nanaimo, B.C.

The pledge is significant because Bay Street investors and economists are at odds over the Bank of Canada’s forward guidance on borrowing rates. The central bank has held its benchmark rate at an ultra-low 1 per cent for two years, reflecting tepid economic growth at home and abroad.
Yet for several months, policy makers have indicated that they would like to raise interest rates at the earliest possible moment.
Tiff Macklem, the No. 2 at the Bank of Canada, reiterated that stance earlier this month, isolating Canada’s central bank as one of the few in the world that is leaning toward higher interest rates. At the same time, revised Statistics Canada figures released Monday show Canadians’ debt-to-income ratio reached 163.4 per cent in the second quarter, a heavier burden than U.S. households carried ahead of the housing crash.

Mr. Carney’s comment on the conduct of policy comes as he and his deputies gather this week to reassess interest rates and complete the central bank’s third-quarter report on the economy.
The Bank of Canada’s next interest rate announcement is scheduled for a week from Tuesday; it is set to release its latest Monetary Policy Report the next day. Mr. Carney said the central bank’s revised economic forecasts will take into account the impact of a pervasive sense of uncertainty, which the central bank chief said has paralyzed economic actors around the globe.
“We must take care not to allow uncertainty to dominate our actions, letting profitable opportunities slip away and, more generally, compounding the very real, but still manageable, challenges facing the global economy,” Mr. Carney said.
Mr. Carney urged European policy makers to act quickly and decisively to diminish uncertainty by setting in place a realistic three- to five-year plan for reforming the euro zone, including creating a banking union and closer fiscal union.
And U.S. politicians must act to avoid the fiscal cliff in 2013, when trillions of dollars in tax increases and automatic spending cuts would automatically be triggered if policy makers don’t reach a settlement. Without action, the U.S. economy would take a hit amounting to roughly 4 per cent of gross domestic product, Mr. Carney said.
“If authorities do not change these provisions, this massive fiscal drag will likely push the U.S. economy back into recession next year,” he warned. “That is not what we expect, but like others, we cannot be sure.”
With files from The Canadian Press

For more information on mortgages

 

Angela Kroemer, AMP

Mortgage Professional

TMG The Mortgage Group Canada Inc.

TMG Sharie Marie Mortgage Team

Local: 1.250.650.4182

TFP: 1.888.679.0190

Fax: 1.888.679.0192

akroemer@mortgagegroup.com

www.KROEMERmortgages.com

Real Estate Investment Canada Or the US

While economic turmoil has flooded worldwide markets, Canada has become an economic safe haven. International money has been parked for safety and ROI, and has fundamentally became a haven to provide the world what it needs for at least the next couple of decades.

Though Canadians have been programmed to look elsewhere for opportunity, 2011-2020 will be the exact wrong time to be doing so. In fact, Canada is in its first year of what will prove to be Canada’s economic decade, and the best time in history to invest here.

Unfortunately, due to a misguided belief that cheap is good when investing in real estate, many Canadian investors have turned their prospects south of the boarder to the US as real estate prices continue to plummet.

Canadian media has been flooded with the tales of investors chasing the cheap price of US real estate, as well as their deals and steals. However, what these investors failed to consider were the metrics involved in analyzing a market’s potential, such as currency risk, taxation, unemployment rate, vacancy rates, property supply and demand, and have taken the ‘buy cheap’ risk anyways despite the reality.

Moreover, replacement costs mean nothing if demand is non-existent, however it is a wonderful tool to use when selling properties. Investors searching for long-term sustainable wealth also need long-term sustainable economic fundamentals. An economy that shows a downward progression will eventually spillover to the real estate market as well, therefore creating a high-risk real estate market.

GDP growth leads to job growth, with attracts migrations, leading to population growth and increased rental demand. This demand drives rental prices up, pushes people to buy properties, and eventually leads to property price increases.

This is exactly the situation in Canada right now, creating jobs by becoming the world’s safest supplier of four key commodities entering the supply and demand super-cycles – food, fuel, fertilizer and forestry).

Among some of the best Canadian cities to invest in real estate are in Alberta were more jobs are projected to be created in a month than the total jobs created in US over the next 10 years.

Source: Don Campbell – Canadian Real Estate Wealth

Need a 'Toolkit" to Learn About Your Debt?

Ottawa believes Canadians might need a little help in how they spend and save.

The federal government has released a “Financial Toolkit” that it says can help Canadians make sense of everyday financial questions they face.
The toolkit, which is available online and in printed form, includes worksheets, quizzes, questionnaires, case studies and educational videos to educate Canadians on making rational, responsible money decisions.  Click here for the Tool Kit

The toolkit was created in partnership with the Financial Consumer Agency of Canada, the Investor Education Fund and l’Autorite des marches financiers.

The initiative is part the government’s efforts to promote financial literacy and follows months of warnings from the Bank of Canada as well as the finance minister about the record high levels of consumer debt.

On a national basis, the average household debt stands at 152% of disposable income, just shy of the 160% level that was reached in the U.S. and the United Kingdom prior to the housing market collapse in 2008.

Economists have said that the high levels of consumer debt are a consequence of low interest rates that have been in place since 2008 as part of efforts to stimulate the economy by making it less expensive to borrow and spend.

Junior finance minister Ted Menzies says the toolkit is another way Canadians can acquire life skills.

Angela Kroemer, AMP

Mortgage Professional

TMG The Mortgage Group Canada Inc.

TMG Sharie Marie Mortgage Team

Local: 1.250.650.4182

TFP: 1.888.679.0190

Fax: 1.888.679.0192

akroemer@mortgagegroup.com

www.KROEMERmortgages.com

 

Vendor Take-Back Mortgage(VTB)?

But what exactly is a Vendor Take-Back (VTB)? 

This is when a seller offers to lend the buyer funds in order to help facilitate the purchase of the property. The VTB is a legally binding agreement that will represent a secondary lien on the property. The term, rate, payments and fees are all negotiated by the Seller and the Buyer (with help from their real estate agents and lawyers of course).

In other words, think of it as a second mortgage that is being offered by the seller. However, in most cases, take-back mortgages are offered at a rate below traditional market value and do not typically include fees.


What are some of the benefits?

The most obvious benefit to the buyer, is that it helps to facilitate the purchase of a home with a much lower down payment option -- when traditional 'A' high ratio financing is not attainable.

However, there are also many benefits to the seller as well.
When in a buyers market, it can be attractive to offer a vendor take back in order to help sell the property quicker. As lending guidelines continue to tighten up, offering financing to assist in the purchase can often result in a faster sale with more eligible buyers.
There are also tax deferral advantages for capital gains if the property is labelled as an investment for the seller-- but i do suggest speaking with a certified accountant to learn more on this.

When a successful vendor take-back is negotiated up to 90% LTV, with some mortgage companies you can:

 

place as little as 10% down (owner occupied or rental)
-use flexible stated income programs for BFS/Commission/Tips
-use 100% rental offset (subject or non-subject including room and board)
-have a 30 year amortization
-have flexible TDS calculations (no GDS)
-obtain financing that is not focused on beacon score
-use 100% gifted down payment from an immediate family member
-be as little as 1 day discharged from bankruptcy
-and much much more!

Even though Vendor Take-Backs are not for every one or situation, remember that it can be used as an option with some mortgage companies as; Creative Financing ! 

For more information on Vendor Take-Back mortgages
call or email me

Angela Kroemer, AMP

Mortgage Professional

TMG The Mortgage Group Canada Inc.

TMG Sharie Marie Mortgage Team

Local: 1.250.650.4182

TFP: 1.888.679.0190

Fax: 1.888.679.0192

akroemer@mortgagegroup.com

www.KROEMERmortgages.com

info from hometrust.ca