It's NOT All About The Rate
Michael Hallett • June 22, 2015
ob-sess(ed):
the act of being preoccupied or fill the mind continually, intrusively and to a troubling extend.
As mortgage consumers we get obsessed with obtaining best rate, we caught in the cross-hairs of lender marketing. Lenders spends millions of dollars annually to pitch their message; some listen and some don't. As consumers we all want make sure we are getting the best value for our money. When entering into the world of purchase and owning real estate, there should be a detailed plan laid out for one to follow. We should make sure all our plans fit the mortgage products we inherently rely on. Would you put a square peg in a round hole?
Along with making sure the mortgage product is suitable there is also an element of competition between friends, family members and even colleagues at work. Consumers thought process goes something like this (...and I was once part of this faculty)..."I need to get the lowest rate so that I supersede the rate that (enter name here) got..." That statement couldn't be further from the true, it's 100% wrong.
We all want to pay as little as possible up front, but never put any thought into life's uncertainties. What if you need to break the mortgage?; to consolidate some debt, require equity for a renovation, moving to another town/city where your current lender does lend, leverage equity to take advantage of some financial planning strategies...the list goes on.
60% or 6 out of every 10 mortgages that originally opt for a 5 year fixed term are changed/broken/altered 38 months into the contract. The act of breaking ones mortgage will yield a penalty on the outstanding balance for 22 months. The penalty will be either an Interest Rate Differential calculation or 3 month interest, whatever is greater. There is so much more to choosing a mortgage rate and term than just the 5 bold characters ?.??% being advertised.
Borrower's have to look past the numbers and educate themselves on the terms of that rate being offered; the fine print!
Depending on the RATE and its terms that penalty can be dramatically different. Lenders all have a suite of various products to fit your the consumers wants and needs. It's up to you and your Mortgage Expert to navigate through the gauntlet of rate sheets and product information to find what works for you and your specific scenario. As Mortgage Experts we have access to a wide range of lenders; major chartered banks, credit unions and investment lenders. At times there could be a difference of 10 to 20 basis point (0.10-0.20%) from lender to lender.
Let's take for example a rate of 2.44% vs 2.64% for a 5 year fixed term. It's obvious which one most borrowers would gravitate to, but is it worth it? What are the pitfalls? These two rates have drastically different penalty structures even though they are offered by the same lender. The 2.44% rate holds a 3% penalty on the outstanding mortgage balance (OSB). The 2.64% rate calculates the Interest Rate Differential (IRD) or 3 months interest, whatever is greater to determine the penalty.
Here is an example of what it would cost to exit these mortgage contracts early. We will use the 60% rule along with a starting balance of $330,000, 25 year amortization and $0 prepayments made to the principal for the first 38 months.
Rate 2.44% 2.64%
OSB @ 38 mos $298,401.05 $299,153.80
Penalty 8,952.03 $2,468.02
Difference $6,484.01
Monthly payment $1,468.45 $1,501.39
Difference over 38 mos $1,251.72
Same term but different mortgage product yields a difference in penalty of $6,484.01. Over that same 38 month term the higher interest will have an 'out-of-pocket' difference of $1,251.72. Now ask yourself, with all of life's uncertainties which would you prefer the 2.44% or 2.64% rate. I would choose the higher rate and pay $5,232.29 less.
This is where having a knowledgeable Mortgage Expert working for you pays off in spades. They will review your plan and recommend the best mortgage product. Make sure you examine all aspects of the mortgage, 60% of 5 year fixed mortgages are altered. Here's yet another reason to always consider variable rate mortgages, much more flexible and only yield 3 month interest penalty on the OSB no matter where you are in the contract timeline.
If you are looking for personalized mortgage advice, contact me anytime!
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One of the most common questions, “how long does it take to get pre-qualified?” My response, “how fast can you provide the information I need.”
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Canadian tuxedo.
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When you’re buying a home, two terms often cause confusion: deposit and down payment . While they’re related, they serve very different purposes in the homebuying process. Here’s what you need to know. What Is a Deposit? A deposit is the money you provide when you make an offer on a property. Think of it as a show of good faith that proves you’re serious about purchasing. How it works : Typically, you provide a certified cheque or bank draft that your real estate brokerage holds in trust. If your offer is accepted, the deposit remains in trust until the deal moves forward. If negotiations fall through, the deposit is refunded. Connection to your down payment : Once the sale is finalized, your deposit becomes part of your total down payment. Why it matters : The amount is negotiable, but a larger deposit can make your offer more attractive in a competitive market. Keep in mind, however, that if you back out after conditions are removed, you risk losing your deposit. What Is a Down Payment? Your down payment is the amount you contribute toward the purchase price of your home when securing a mortgage. Minimum requirement : In Canada, the minimum down payment is 5% of the home’s purchase price. Anything less than 20% requires mortgage default insurance. Sources : Down payments can come from your savings, the sale of another property, RRSP withdrawals (through the Home Buyers’ Plan), a gift from family, or even borrowed funds. Example: How They Work Together Imagine you’re buying a $400,000 home with a 10% down payment ($40,000). When you make your offer, you provide a $10,000 deposit . Once conditions are met, that deposit is transferred to your lawyer’s trust account. At closing, you add the remaining $30,000 to complete your full down payment. The lender provides the rest—$360,000—through your mortgage. The Bottom Line Your deposit shows commitment and secures your offer, while your down payment is what makes the mortgage possible. Together, they work hand in hand to get you into your new home. 📞 If you’d like clarity on deposits, down payments, or any other part of the mortgage process, let’s connect. I’d be happy to walk you through it step by step.
The Bank of Canada announced today that it is holding its target for the overnight rate at 2.25%, with the Bank Rate at 2.5% and the deposit rate at 2.20%. The tone of today's announcement is notably more optimistic than previous months. Here's what's changed and what it means for you.
