Beware Of Early Discharge Penalties!Have you ever needed to get out of your mortgage before the maturity date? It can be a confusing and surprising experience. Don’t forget that your mortgage is a legal contract, therefore, like most contracts it is expected that it would cost you something to break it.

The lending institution will have two options to determine how much you will pay, but first they will consider the type of mortgage term you have. Is it a variable rate or a fixed rate? If it’s a variable rate, you most likely will pay three months interest max, but if your term is fixed, you will pay either the Interest Rate Differential (IRD) or three months interest, whichever is greater.

Three Months Interest Penalty

Determining how much three months interest will cost you is usually pretty simple; take the remaining mortgage balance, multiply by the interest rate, divide by 365 to get the daily amount, then multiply by 90 (for three months) and you got it. Of course, you must verify your figures with your financial institution, but you get the picture.

Interest Rate Differential

IRD is more complex. In simple terms, the financial institution wants you to pay them back for the loss in revenue that they may experience when you pay out the mortgage early. So if you have two years left on your mortgage, and they can’t loan out the same funds for at least the interest rate you are paying they will want to be compensated for their loss.

For example; if your current rate is 5% but they can currently can only loan out those same dollars at 3%, they will want you to pay them the 2% loss.

With me so far? Here it comes…

Say your rate of 5% was a discounted rate at the time received, most are, and the posted rate at the time was actually 7%, the financial institution may actually charge you the difference between the 7% and the current 3%, or something even more complicated. Could be a difference of thousands of dollars!

Most banks and financial institutions have different ways of calculating their early discharge penalties, therefore, it is imperative that you find out how they will calculate this penalty upfront before you initially sign for your mortgage, especially if you think you might need to get out early.

A mortgage specialist will take a financial planning approach to sourcing your mortgage options and will help you throughout your decision making progress, making sure that you not only consider your current situation but make sure you look at future scenarios as well.

 The good news is that we have access to lenders who will calculate your penalty using your discounted interest rate against the current discounted rate when calculating the penalty.

If you are considering paying out your mortgage early, it is vital that you contact your mortgage specialist or financial institution to obtain a written calculation on how this penalty will be calculated before finalizing your plans. Knowing the costs prior to making the final decision on a house sale/purchase or early discharge can save you thousands of dollars and a lot of stress!

Better to know up front, than being surprised later!

The Fed minutes from its July 28-29 meeting, released Wednesday afternoon, reveal a rate hike is still in the cards but that a hard date has not yet been reached.

“In determining how long to maintain this target range, the Committee will assess progress— both realized and expected—toward its objectives of maximum employment and 2 percent inflation,” the Fed minutes say. “This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”

However, the Fed did say it deems it appropriate to raise the target range when further improvement in the labor market is seen, which it expects to happen in the “medium” term.

One fed policymaker voted to hike the rate, but most “judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point,” the minutes say.

That could very well be next month. Economic reports over the coming weeks will reveal clues as to whether the market can expect the first rate hike in nearly a decade.

Why banks want you to sign the renewal agreement that they mail out to you. Most banks boast a higher than 90% renewal rate on their mortgages (some even higher than 95%). Since it costs them a lot more money to acquire a new client vs. keeping an existing one, banks love the savings of a simple renewal. So you would think that they would offer you the best rate up front on your renewal as it’ll save them money in the long run? Well…not necessarily.

With renewal rates being as high as they are, there is not much incentive for banks to give their clients the best rates up front. They know that most people will stay as they know it’s easier to just sign a form as opposed to applying for a mortgage at another bank. Hence the dreaded renewal letter that gets mailed out automatically prior to your renewal date.

The banks would love nothing more than for you to just pick the term, sign the document, and send it back to them. It costs them relatively little to process it and they don’t have to follow up with you after that (other than sending you a new copy of the agreement).

Since the renewal documents are printed automatically (and yes they may include a “preferred rate” which makes it even more tempting to sign) they don’t factor in any rate specials that may occur after they’re printed.

Recently a client’s mortgage was coming up for renewal and they received the automatic renewal letter. Just calling the 1-800 number saved them an extra .10%, which on a $500,000 mortgage was an extra $500 per year in interest. Not bad for a 5 min phone call.

There are also some important questions to answer:

-are you planning on selling your home anytime over the next 5 years?

-do you need to access any equity from your home for renovations, children’s education, etc.

-what are your long term goals with the property?

These are important questions to ask as they help us suggest the right product for you.

So it’s important to treat your renewal as if you’re obtaining a new mortgage and spend some time researching your options. When I worked at the bank I was always shocked at the number of people that just signed the form and sent it back.

That’s why (in addition to the financial institution where your mortgage is now) you need to contact your Dominion Lending Centres Mortgage Broker and have them give you an unbiased view of which mortgage product is right for you, as they have access to hundreds of different financial institutions.

Brokers may have just found their campaign issue, with an industry association calling for something that could bring thousands more buyers into the market

The CMBA is advocating for 30-year amortizations for first-time homebuyers in the wake of a Conservative Party proposal to increase RRSP withdrawal limits.

“The Canadian Mortgage Brokers Association urges the implementation of policies to make housing more affordable, in particular, by increasing the amortization for first time high ratio insured home buyers to 30 years from the current 25 years,” CMBA wrote in a release. “This would decrease their monthly mortgage payments and allow them to keep their RRSP intact so it can be invested for growth and make retirement planning more effective for these buyers.”

CMBA argues the existing one million dollar cap on insured mortgages will ensure any impact the change might have would be negligible to the housing market.

And brokers are supporting the suggestion.

“Most Canadians consider home ownership a good thing and that buying a home is good for their financial health,” Geoff Lander of TMG The Mortgage Group told MortgageBrokerNews.ca. “If (the regulators) have agreed to allow 30-year amortizations for certain borrowers, I don’t see why they wouldn’t allow them to help younger people get into the market.”

Those younger potential homebuyers would surely welcome any change that makes it easier for them to purchase a home. Especially considering 91 per cent of Millenials consider owning a home is an important life milestone, according to recent RateSupermarket data.

Further, 79 per cent of those people polled believe Canadian real estate is a safe investment.

That study also found that Gen-Y ers struggle with affordability: 46 per cent say they can’t currently afford to purchase a house in their region.

CMBA’s suggestion was spurred by a Conservative Party proposal to increase RRSP limits to $35,000 from $25,000. The association argues the increased the amount of RRSP funds would not lower borrowing costs due to the fact that they would still have to be paid back within 15 years.

“The increase in RRSP withdrawal limits for first time home buyers will therefore be of limited benefit to many buyers, such as younger buyers and new university graduates, and may favour the more well-heeled or mature first time buyer,” CMBA wrote.

Toronto has been added to the Canada Mortgage and Housing Corporation’s list of the country’s riskiest housing markets, with the insurer citing a combination of price acceleration and overvaluation.

“The rise in house prices have not been matched by growth in personal disposable income, giving rise to a modest risk of overvaluation,” said Bob Dugan, CMHC’s chief economist, in a press release, pointing to the Toronto market.

However, the CMHC did not indicated whether Toronto investors, agents and buyers should expect a deceleration in prices.

The CMHC’s latest House Price Analysis and Assessment (HPAA) framework, which is designed to detect the presence of problematic conditions in Canadian housing markets, also pointed to a high level of risk in Winnipeg, reflecting risks of overvaluation and overbuilding, and in Regina, reflecting price acceleration, overvaluation and overbuilding, particularly of condo apartments.

Both Winnipeg and Regina were highlighted as risky markets in CMHC’s last report, published at the end of April.

“Nationally, CMHC continues to detect a modest risk of overvaluation,” said Dugan. “However, our overall assessment of the risk of problematic conditions varies from centre to centre due to regional differences in housing markets. Imbalances in local housing markets could be resolved with further moderation in house prices or improving economic conditions.”

According to the report, the risk of problematic market conditions continues to be assessed as moderate for Montréal and Québec due to the detection of some risk of overvaluation.

In Toronto, Ottawa and Montréal, CMHC is monitoring the risk of overbuilding, with condos under construction near historical peaks. “Inventory management is therefore necessary to make sure that these condominium units under construction do not remain unsold upon completion,” added the report.

Low overall housing market risk is observed for Vancouver, as none of the individual risk factors are currently detected.

A report from the Bank of Montreal says that despite the technical recession there is no sign of that in the housing market. The mortgage lender’s analysis of the market from economist Robert Kavcic is that, although housing starts have slipped back month-over-month, the overall numbers show a healthy housing market. In a client note he noted that the numbers are “consistent with demographic demand, but inconsistent with past national recessions.

Interest rates are set to stay at “ultra-low” levels in Canada for some months yet according to one mortgage lender. Reacting to the recent monetary policy announcement from the Fed, Canadalend.com says that it believes the US won’t raise interest rates until 2016 and its president Bob Aggarwal says that will mean good news for those with a mortgage here: “I expect that Canada’s fixed and variable mortgage rates will stay at ultra-low levels for the foreseeable future.”

The rules surrounding the income from rental units considered in home loan applications submitted to the Canada Mortgage and Housing Corporation are changing. The agency announced Monday that from September 28 it will allow 100 per cent of the rental income from a unit to be considered for new loan applications submitted to it for mortgage insurance. That means that a secondary rentals suite’s income, minus costs including property taxes, will boost the size of loan that buyers can secure. Qualifying units must have sustainable income, proven by two years of rental rent payments. These payments will be averaged to assess the unit’s income. Applicants will also need a credit rating of at least 680. Properties with more than a single rental unit will have slightly different rules and this change is most positive for homeowners with one rental unit.

One big bank believes the housing market will continue to be a driving force for the Canadian economy, even despite predicted cooling in 2016.

 “The housing sector is likely to remain a bright spot in 2015, but can be expected to cool next year as affordability continues to erode on the back of national home price growth that is outpacing income growth,” TD Economics’ Weekly Bottom Line, released late last week states.

 The bank also argued that the record-low rate environment has finally bottomed out.

 “With 5-year Government of Canada bond yields at around 80 bps, it’s hard to imagine rates going much lower,” the report argues.

 And some brokers expect rates to remain stable until they are eventually raised.

 “It’s really hard to say because we use a wide array of lenders, but I really don’t see rates pushing down,” David Jeffrey of Dominion Lending Centres Edge Financial told MortgageBrokerNews.ca. “Rates are pretty low and promos may pop up here and there every once in a while.”

 For the time being, however, industry players can expect an influx of clients who may have been waiting in the wings, biding their time before striking.

 “Based on historical experience, mortgage rate changes of this magnitude can boost demand for housing by 10 per cent to 15 per cent over a 6-month period,” TD said in a prior report, released just after the Bank of Canada’s most recent rate cut Since existing home sales are up only 6 per cent year-to-date as of June, the past decline in mortgage rates are likely to feed through to demand for several more months.”

 TD also considered a pent-up housing demand and a “significant” pool of buyers readying to jump into the current low-rate environment.

Brokers are frustrated by the increase in rate shoppers and the number of clients being given incorrect information about how the Bank of Canada rate cut affects rates.

“There is a lot of confusion among clients between fixed and variable rates; clients are wondering what affect the drop will have on fixed rates,” Michael Marini, a Toronto-based broker with Dominion Lending Centres told MortgageBrokerNews.ca. “More rate shopping is going on right now as a result.”

According to Marini, many clients aren’t aware that the Bank of Canada overnight rate and fixed mortgage rates aren’t correlated, despite what friends and family may be telling them.

He’s had to explain that it is only variable rates that are affected.

“I do a virtual meeting and go through the bond yield charts and how they affect fixed rates,” Marini said.

Many brokers likely experienced an increase in the number of inquiries from current clients wondering what sort of refinance they can expect following the Bank of Canada’s decision to slash its overnight rate target to ½ per cent.

But clients may be surprised by their options.

“Clients are calling and asking if fixed rates are down; they think the Bank of Canada rate drop affects all mortgages,” Michael Tulchenetskiy of Northwood Mortgage told MortgageBrokerNews.ca. “When they call I have to explain it to them but clients are shopping around more.”

“Clients are very rate-focused right now and looking to compare rates in the market.”

Still, analysts suggest there will be some knock-on effect for the bond market and yields, which should eventually influence fixed rates.