Why I paid $10,000 to break my mortgage
Below is a great article about why paying the payout penalty can be worth it for you. We always do the math for you to ensure that it is a better deal AND we also include any other costs in that math – like an appraisal and legal costs – lots of other brokers do not. Ensure ALL the costs are included in the math before making the change.
Want to ensure it is worth it – give us a call for a free 5-minute mortgage checkup at 403-681-4376.
Tara Walton/Toronto Star By Bryan Borzykowski |
Last September, my wife and I started scouring the city for a new house. We were living in a cozy bungalow, but with a growing kid and another on the way, we decided it was time to move.
Buying a new house is, of course, expensive, so I wanted to do whatever it took to reduce my costs. Most of the fees couldn’t be avoided, but there was one costly payment I desperately wanted to steer clear from: The mortgage penalty charge.
I had just over 12 months left on my five-year mortgage term, which meant that I either had to break my mortgage or stay with my current lender by transferring my mortgage to my new house. The latter option would have allowed me to avoid the fee. However, my lender couldn’t give me the best interest rate.
The new lender, a bank, was offering a variable rate of 2.25 per cent, a much lower rate than my old lender was willing to offer. I calculated that over the term I’d be better off paying the fee and taking the lower rate.
It was going to cost me $10,000 to break my contract. It felt like an unnecessary cost — I paid my lender so much in interest over the four years, why would I have to cough up so much cash?
I asked my broker to see if the lender would waive the fee, even though I was using a new lender for my next house, but they didn’t. Peter Veselinovich, vice-president of banking and mortgage operations at Investors Group, isn’t surprised. “The charge isn’t negotiable,” he says.
While the penalty may seem like an arbitrary sum, it’s not a cash-grab, he says.
The lender takes mortgage funds from money invested in GICs and other products and then it pays investors interest on those investments.
The idea is to match a five-year mortgage with a five-year GIC, so investors can get paid back at the same time as the mortgage comes due.
If a mortgage is broken, the lender needs to come up with money to fill the gap between the investment coming due and the mortgage ending. Hence the fee. The lender then takes that lump sum and invests it, so it can pay investors back when its GIC comes due.
The penalty is calculated two ways: you either pay 90 days of interest or what’s called an interest-rate differential, which is a penalty based on your old rate and a new rate based on a shorter term.
For example, let’s say you wanted to exit your 5 per cent five-year term with three years left to go. The lender would look at the current three-year term rate, which, say, is 3 per cent, and then charge you interest on the difference, 2 per cent, for 36 months. The sum also depends on how much money you still owe the bank.
However it’s calculated, the payment can be huge.
Darick Battaglia, a mortgage broker and owner of Dominion Lending Centres’ Barrie location, says that while it may seem as though people have to empty their bank account to pay the penalty, ultimately, by paying the lower rate, they’re getting that money back in mortgage savings.
Whether you’re moving houses, or just want to break a mortgage to take advantage of a lower interest rate, people often pay the penalty so they can free up more disposable income.
“It can help people get into a better financial position, because they have more disposable income,” says Battaglia. “They may find that it’s better to invest that money in an RRSP.”
If you’re moving, there are strategies to help reduce the penalty or even not pay it at all.
Almost all mortgages allow people to put a certain percentage of money down on a house every year; I was allowed to pay 20 per cent of my balance every 12 months.
In some cases, lenders will allow you to designate the first 20 per cent — it could be less or more depending on your lender — of the proceeds of a sale of a house towards the prepayment in order to pay down the outstanding balance and so reduce the mortgage penalty.
Battaglia has dealt with many lenders who refuse to honor this type of arrangement. They want two checks: one for the prepayment and one to pay off the mortgage.
My own lender refused to let me make one payment; I had to borrow money from my broker, who paid my prepayment three days before closing. I had to pay him back with some of the proceeds of the sale. It was a major hassle. But I did save about $1,500.
Porting a mortgage to a new house is another way to avoid the fee.
Let’s say you have $100,000 left on a mortgage with a 4 per cent rate, but you need $200,000 more for the new house. The bank will give you the additional money at the new rate, which could be 3 per cent. You’d keep the same term or extend it and now you’d pay a blended rate, in this case 3.5 per cent on $300,000.
“There are no penalty costs, because you’re still honouring the original contract,” says Veselinovich.
Most people will have to open their wallet when they break a mortgage.
While I did get my penalty reduced by making a prepayment before closing, I still had to write a cheque for about $8,000. It was painful at the time, but now that I’m in my new house, paying a new mortgage at a much lower rate, I don’t think about the penalty anymore.
Coming soon: higher interest rates
- refinance – or re-do your mortgage – and get today’s rates for another 5 years,
- roll in some higher interest payments – like LOC -Line of Credit or credit cards or,
- buy your first home before rates go up or,
- finally get that summer/ ski vacation cabin.
Call for a free 5-minute mortgage check-up while there is still time. (That may be 2 or 3 weeks from now as the bond market will smell this coming inflation pretty quickly.)
Let’s start with a little tutorial (no, please keep reading, it will be brief) and then we’ll talk about why this week’s economic data changes everything, more or less.
The Bank of Canada sets the benchmark overnight rate (the rate at which banks lend to each other). That in turn affects market interest rates on everything from mortgages through to business loans. At present, the overnight rate is at 1 percent, following three hikes of 25 basis points each last year.
The tutorial is on the ‘output gap’ which is one of the major tools that the Bank of Canada looks at to set monetary policy. Here goes.
The ‘output gap’ refers to the difference between the actual output of the economy and the potential output. Potential output basically refers to the maximum that could be produced if all inputs (like the labour force, technology, capital, factory space and all that) were used to the fullest extent that they can be without triggering inflation. That last little bit is key: when the bank says ‘potential’ they don’t mean full potential, they mean ‘potential without forcing prices higher’. It is a similar concept to what economists mean when they say ‘full employment’. In that case it does not mean everyone working, it means everyone working that can be working without wages being forced higher.
The Bank of Canada monitors the output gap as best they can, first by estimating what potential output is in any period of time, then estimating how close to potential the economy looks to be. A positive output gap means the economy is operating above potential, and that inflation is a risk. A negative gap means there is excess supply (for example, too many unemployed workers) and that inflation is not a risk, or at the extreme, that deflation is possible.
The Bank of Canada adjusts policy to try to get keep things in balance and the output gap closed – sort of a ‘not too hot, not too cold’ thing. Based on their most recent calculations, their latest estimate (which was contained in last week’s Monetary Policy Review) was that the output gap would close by the middle of 2012.
Everybody still with me? Good. Here’s the thing: as well as looking at the output gap itself, the Bank also looks at a bunch of economic indicators to see how close to capacity the Canadian economy is running. Things like industrial production, the unemployment rate, unfilled manufacturing orders – and inflation.
That last one is probably the most important, and it is the one that seems to be running most out of sync with where the Bank of Canada thought it would be. In the Monetary Policy Report, the Bank said that the overall inflation rate (which they target to be 1 to 3 percent) would peak at 3 percent in the second quarter. This week, we got the March inflation report, and we find out that the inflation rate was 3.3 percent as of March – which is decisively in the first quarter. Ouch.
So what does this mean? It means something has to change to keep the Canadian economy from overheating. That something is likely to be Canadian interest rates, and when I say ‘change’ I mean ‘go higher’.
If rates do not go higher, then the output gap is at risk of going into positive territory, which means inflation takes off even more. No way is the Bank of Canada going to let that happen.
There are other things to take into account too – the spiky Canadian dollar is an important one – but it does not take away from the big picture.
Big picture? A rate hike by July, and maybe more to come after that. And yes, watch the loonie soar in the meantime.
Bank “mortgage specialist” tells lies about mortgage brokers
Below is the short version of a mortgage broker insider tsunami. A RBC mortgage specialist wrote and handed out a sheet of complete lies about how mortgage brokers work and what we do. She, and RBC, are in a very tight spot as we all knew that non-brokers spread lies as their only way to compete.
The best way to sum up what we really think is this reply taken from the internal comment board of the Canadian Mortgage Broker website:
ExRBC Mortgage Specialist on 19 Apr 2011 11:41 PM
Most so called RBC mortgage specialists have little in the way of any credit training, if any. They usually come from the ranks of side counter staff who are well known for their lack of knowledge. RBC Mortgage specialists have no ongoing training requirements unlike the AMP’s, and they certainly have no Ethical training.
There is an old saying in sales:”Only show what you know”. In this case (she) shows that she knows next to nothing about credit, her market or her competition.
She might as well have said: “If you want the best rate , go to a broker.”
I see this a great platform for mortgage professionals to have excellent conversations with clients and referral sources about the difference between us and the bank! There is no doubt about the advantages of using a broker, and I welcome this opportunity to talk about it!
RBC to brokers: We apologize
By Vernon Clement Jones | 19/04/2011 9:36:00 AM | 31 comments
With multiple statements, RBC moved to distance itself from the controversial flyer of one of its mobile mortgage specialists – apologizing for its unflattering and inaccurate depiction of brokers.
The ‘thrill’ of buying a house
You walk into the open house, take one look and say to yourself: This is it. It’s the house I have to live in. Where do I pay? A bidding war? I’m in.
Over my years of buying houses, I never bought one that did not have that frisson moment, that thrill of finding a place so suited to my wants. Indeed, I have in the past decided that I wanted to buy a house in what seems, in retrospect, to be nanoseconds. (By contrast, I’ve taken weeks to decide on the right pair of shoes.)
It is no way to make an “investment,” to be sure. But, as I’ve previously discussed in this space, buying a house is perhaps the most uninvestment-like of investments.
Just about anyone who’s purchased a property or thought about purchasing knows that it is much about gut-feel, in which the senses can conspire to trump sense.
Now, as the major real estate selling season gets under way, along comes a survey commissioned by BMO Bank of Montreal to give statistical weight to the notion that intuition carries a particularly heavy weight in the house-buying process.
The survey by Leger Marketing found that more than two-thirds of Canadians cited a “good feeling” toward the property as a reason to buy. Meantime, though, good sense is not thrown out of that gorgeous bay window and into those manicured flower beds. More than 90% of house-hunters value affordability and location over resale value.
So, the axiom that there are three important things in real estate – location, location and location – might reasonably be replaced by the Three Ps: Price, place and personality.
Nevertheless, that resale value is not a big concern to these surveyed house-hunters – people between 25 and 45 who plan to buy a home within two years – is a telling sign of the real estate times.
With some dips here and there, Canadian house prices have been rising strongly for more than a decade. Indeed, even the recession created just a downward blip in the chart of ever-growing values, with the average national price rising 8.9% last month from the previous March (but just 4.3% excluding Vancouver).
As a result, most of the house-hunters surveyed might never have been aware of a housing market that was not rising. I suspect many in this 25-to-45 demographic believe house prices basically keep going up forever, that though they downplay resale value in the survey, the expectation for solid gains is, well, a given. (Any significant drop in prices would surely shake that belief.)
In recent times, investors have been asked if they are stocks or bonds. If you’re a stock, you are prepared to take on more investment risk. If you’re a bond, you are not.
Perhaps, though, many people are probably houses when it comes to investing. A home is both partly a stock and a bond – and somehow neither.
It is a bond because over the long term it will likely produce modest returns through the enforced savings required by paying down the mortgage. It is a stock because the gains could be outsized if the investor were to buy and sell at propitious entry and exit points for market-timing gains.
And it is neither because it is an “investment” with many moving parts and frictional costs. You don’t live in a stock or a bond, but when the house leaks, it costs money and cuts into the investment. Meantime, the costs associated with buying and selling a property are becoming more daunting in many jurisdictions, with some observers reckoning that a house is often a mediocre investment at best.
But most young first-time buyers and mover-uppers are not fazed by such commentary. Home ownership is a cornerstone of our culture, with 70% of the population owning properties and many of the other 30% looking to join the majority.
And the real estate industry has become far more adept at marketing and selling than in the days decades ago when I was in the market. Today, houses are often professionally “staged” to produce that frisson moment. Prices are sometimes set artificially low to produce that exciting bidding war and that extra frisson of “winning.”
A house, it is said, is not a home. And a home is not strictly an investment. But does a stock have granite counters? Does a bond have stainless steel appliances?
Financial Post
Real estate: A ‘secret’ tax shelter
By Jason Heath
TFSAs have been a welcome addition to the tax shelter landscape in Canada, but they leave something to be desired for those with substantial assets and maxed out RRSP and TFSA room.
Film limited partnerships have disappeared, charitable donation tax shelters were flawed from the start and the investment tax credit for flow-through shares may or may not be extended in the next budget.
Real estate is often overlooked in the quest for tax reduction and deferral, let alone income generation and inflation protection. If real estate is all of these things, why doesn’t everyone own a rental property? The answer is simple – money.
It’s not that investors don’t have the money to get into the rental property market, because this can be easily accomplished with leverage and minimal monthly carrying costs. The problem is there is simply no money to be made by financial professionals when it comes to rental real estate. The result is that rental real estate is a secret tax shelter that few people ever consider.
Investment advisors sell stocks, bonds and mutual funds. Insurance agents sell insurance policies. Accountants sell tax preparation services. Real estate agents sell real estate, but they tend to sell real estate from a vendor to a purchaser to be used solely as a principle residence.
So rental real estate ends up being a golden goose, elusive, yet attractive.
According to Harvard professor Niall Ferguson in The Ascent of Money, “The original property game we know today as Monopoly was actually invented back in 1903 to expose the unfairness of a social system where a small minority of landlords [took advantage of] the majority of tenants.
“What the game of Monopoly tells us, contrary to its inventor’s intentions, is that it’s smart to own property.”
First, a lesson in rental real estate taxation. Rental income is taxable and rental expenses, including mortgage or line of credit interest, are tax-deductible. In many cases, if a property is financed, it will run at a loss for tax purposes creating a tax deduction against all other sources of income and therefore, a tax refund. In the meantime, real estate values grow tax-deferred until an eventual sale. Even if a property runs at positive cash flow for tax purposes, depreciation can be claimed to wipe out some or all of the taxable income inclusion.
Rental real estate has been described by some as the equivalent of a super-charged RRSP. What is a traditional RRSP? It’s a tax-deferred savings vehicle; contributions are tax-deductible; it provides a future income stream; and it’s an investment asset. Rental real estate incorporates all of these features, plus there’s no pre-determined maximum tax deduction limit like with RRSPs; withdrawals aren’t forced at age 71 like with RRIFs; contributions can be financed and the interest can be deducted, unlike RRSP loans; and the taxes paid on selling a rental property are at the 50% capital gains tax rate, unlike RRSP withdrawals which are fully taxable.
The Harvard and Yale endowment funds have more than 50% of their assets invested in non-traditional asset classes, like real estate. The Ontario Teacher’s Pension Plan, the largest single-profession pension plan in Canada, has 18% of their pension assets invested in real estate. Maybe Harvard, Yale and the OTTP know something the mainstream investment community doesn’t know.
Jason Heath is a fee-only Certified Financial Planner (CFP) for E.E.S. Financial Services Ltd. in Markham, Ontario.
Alberta’s raw materials will fuel small real estate boom
Comment – this is what caused the inital boom – high inter-province relocations to Calgary. Why? Do you know that Ft. Mac has the world’s largest oil reserves that are not government owned!
Kevin Usselman
The world wants what Alberta has an abundance of; namely energy, food, fertilizer and lumber.
Cutting Edge Research President Don Campbell has been tracking Canadian real estate for 19 years and he says the province is in a good position to cash in.
Campbell says vacancy rates are again on the decline while job creation numbers are on the rise.
He says Alberta’s economy is going to act like a magnet in the next 18 to 24 months and people need places to live.
Subsequently, Campbell has a rather bullish economic and housing forecast for the province and for Calgary in particular.
He doesn’t believe Calgarians are going to see another housing boom like the one experienced back in 2006-2007, but thinks sales and prices could rise anywhere from seven to 12 per cent by 2013.
Campbell is also glad to see the city moving forward with major transportation projects like the west leg of the LRT, although he’s disappointed more efforts aren’t being made to address the secondary suite issue.
Lower Canadian Mortgage Rates – should have happened a month ago
Here is some bank-spin b.s. in full display. Bank mortgage rates should have come down 3 weeks or a month ago like the broker rates did. Banks intentionally left their rates higher to keep their profits up. So it is supposed to be a big deal now that the Big 5 banks have a 5 year at 4.09% when we have been at 3.89% for the last month?
Always use a mortgage broker to take care of your interests! And the banks pay us so there are normally no fees to you for our services!
Global instability leads to lower mortgage rates in Canada
Global instability, highlighted by turmoil in Libya and Japan, has caused Canadian banks to drop their mortgage rates.
Just as changes to mortgage rules coming into effect Friday were likely to make borrowing for a new home more difficult, the latest drop in interest rates has helped potential new borrowers in the short term find a more affordable price.
The Royal Bank of Canada (RBC), along with the Bank of Montreal, slashed its rates on various fixed rate mortgages. Other lenders are also expected to follow suit.
After heightened confidence led to mortgage rate increases last month, banks are now following the cue of declining bond rates, according to the Globe and Mail.
For the RBC, the country’s largest bank, its residential mortgage special fixed rate was unchanged at 3.2% for one-year closed mortgages, but its four-year special fixed rate for closed mortgages was reduced 0.15% to a rate of 4.19%.
The same rate, 4.19%, now applies to five-year special fixed rate closed mortgages, which are down 0.1%, while 5.1% applies to a seven-year closed special fixed rate, which is down 0.2%.
Prime to be at 4% by 2012
BoC rate to reach two per cent by year end: RBC
By | 11/03/2011 2:00:00 PM | 0 comments
As part of its economic outlook for 2011, RBC projects that the Bank of Canada overnight rate will rise from one per cent to two per cent by year-end.
The gradual pace of rate increases combined with anchored inflation expectations will result in less upward pressure on long-term interest rates, added the Economic Outlook released by RBC Economics.
On the back of solid net exports in the final quarter of 2010, Canada’s economy finished the year on a high note recording stronger than expected gains. The biggest support for the economy came from net exports, which added a full 4.5 percentage points to the quarterly growth rate. Continued consumer spending also played a vital role in driving overall GDP, marking the fastest increase in spending since late 2007.
RBC expects real GDP to increase at 3.2 per cent in 2011, as U.S. demand for Canadian exports increases. Growth in 2012 is forecast to rise by 3.1 per cent.
The report also stated labour market conditions will remain firm in 2011and disposable income is expected to post a 4.1 per cent gain that will provide continued support to consumer spending.
“Consumers’ earlier confidence in taking on increasing amounts of debt was based on a combination of lower interest rates, a strengthening labour market and a 4.6 per cent rise in disposable income,” explained Craig Wright, senior vice-president and chief economist, RBC Wright. “An expected slowing in the housing market, rising interest rates and tightening mortgage lending standards all add up to a levelling out in consumer debt relative to income.”
At the provincial level, RBC forecasts Saskatchewan will lead the country in growth this year. Alberta is expected to return to a top three placing, closely trailing growth in Newfoundland and Labrador. Ontario and Manitoba will hover close to the national average while both Quebec and British Columbia will fall slightly below. Nova Scotia, New Brunswick and Prince Edward Island are still projected to lag behind at the lower end of the scale for 2011.
Info your banks would prefer you didn’t know
What your Bank doesn’t want you to know
| Monday, 28 February 2011 22:47 |
A list of some pertinent information your banks would prefer you didn’t know:
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ALBERTA HOUSING MARKET MOST AFFORDABLE IN CANADA: RBC ECONOMICS
TORONTO, Feb. 24 /CNW/ – Alberta’s housing market officially became the most affordable in Canada in the fourth quarter of 2010, according to the latest Housing Trends and Affordability report released today by RBC.
Thanks to lower mortgage rates and further softening in home prices, RBC’s Affordability Measures for Alberta fell yet again in the fourth quarter, by 1.0 to 2.4 percentage points, extending their long strings of declines since late 2007.
“Alberta saw a notable downswing in demand for housing last spring and early summer, giving buyers the upper hand and pushing prices down,” said Robert Hogue, senior economist, RBC. “Alberta’s reign as the most affordable housing market may be short lived, however. Demand has shown more vigour in recent months, alongside a provincial economy that is gaining more traction, and Alberta’s market has become better balanced. We expect that this will stem price declines this year and erase a potential offset to the negative effect of a projected rise in interest rates on affordability.”
The RBC Housing Affordability Measures for Alberta, which capture the province’s proportion of pre-tax household income needed to service the costs of owning a home, eased across all housing categories in the fourth quarter. The measure for the benchmark detached bungalow moved down to 30.9 per cent (a drop of 2.4 percentage points from the previous quarter), the standard condominium to 20.3 per cent (down 1.0 percentage points) and the standard two-storey home to 34.4 per cent (down 2.2 percentage points).
The RBC report notes that gradual and steady improvements in Calgary’s housing demand have recently started to bolster market conditions as home resales increased appreciably since June which helped trim down the slack that kept buyers in the driver’s seat.
A return to more balanced market conditions in Calgary, however, did not succeed in reversing the tide in the fourth quarter of 2010 as home prices continued to weaken for the most part in the fourth quarter. Nonetheless, this contributed to further material improvement in affordability. The RBC Measures for Calgary again fell the most among Canada’s largest urban markets, declining by 0.9 to 3.1 percentage points.
“Affordability in the Calgary area is now the best in almost six years and this attractive level of affordability will support further increases in demand as the local economy picks up steam in the year ahead,” added Hogue.
Elsewhere in the country, a majority of provinces saw improvements in affordability in the fourth quarter. Only the standard two-storey benchmark became less affordable in Ontario and Quebec, as did the standard condominium apartment in Quebec and the Atlantic region.
The RBC Housing Affordability Measure, which has been compiled since 1985, is based on the costs of owning a detached bungalow, a reasonable property benchmark for the housing market in Canada. Alternative housing types are also presented including a standard two-storey home and a standard condominium. The higher the reading, the more costly it is to afford a home. For example, an affordability reading of 50 per cent means that homeownership costs, including mortgage payments, utilities and property taxes, take up 50 per cent of a typical household’s monthly pre-tax income.