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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Spotted a ski-bunny today @kirstinjhallett so I trapped ‘er. 📸 credit @troy.hartley
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This is a great start to the day!
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Wood to wood gap in Whistler.
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Canadian tuxedo.
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Does anybody need or want any firewood? It’s free...you come pick it up.
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If you’re new to the home buying process, it’s easy to get confused by some of the terms used. The purpose of this article is to clear up any confusion between the deposit and downpayment. What is a deposit? The deposit is the money included with a purchase contract as a sign of good faith when you offer to purchase a property. It’s the “consideration” that helps make up the contract and binds you to the agreement. Typically, you include a certified cheque or a bank draft that your real estate brokerage holds while negotiations are finalized when you offer to purchase a property. If your offer is accepted, your deposit is held in your Realtor’s trust account. If your offer is accepted and you commit to buying the property, your deposit is transferred to the lawyer’s trust account and included in your downpayment. If you aren’t able to reach an agreement, the deposit is refunded to you. However, if you commit to buying the property and don’t complete the transaction, your deposit could be forfeit to the seller. Your deposit goes ahead of the downpayment but makes up part of the downpayment. The amount you put forward as a deposit when negotiating the terms of a purchase contract is arbitrary, meaning there is no predefined or standard amount. Instead, it’s best to discuss this with your real estate professional as your deposit can be a negotiating factor in and of itself. A larger deposit may give you a better chance of having your offer accepted in a competitive situation. It also puts you on the hook for more if something changes down the line and you cannot complete the purchase. What is a downpayment? Your downpayment refers to the initial payment you make when buying a property through mortgage financing. In Canada, the minimum downpayment amount is 5%, as lenders can only lend up to 95% of the property’s value. Securing mortgage financing with anything less than 20% down is only made possible through mortgage default insurance. You can source your downpayment from your resources, the sale of a property, an RRSP, a gift from a family member, or borrowed funds. Example scenario Let’s say that you are looking to purchase a property worth $400k. You’re planning on making a downpayment of 10% or $40k. When you make the initial offer to buy the property, you put forward $10k as a deposit your real estate brokerage holds in their trust account. If everything checks out with the home inspection and you’re satisfied with financing, you can remove all conditions. Your $10k deposit is transferred to the lawyer’s trust account, where will add the remaining $30k for the downpayment. With your $40k downpayment made, once you sign the mortgage documents and cover the legal and closing costs, the lender will forward the remaining 90% in the form of a mortgage registered to your title, and you have officially purchased the property! If you have any questions about the difference between the deposit and the downpayment or any other mortgage terms, please connect anytime. It would be a pleasure to work with you.
Chances are if you’re applying for a mortgage, you feel confident about the state of your current employment or your ability to find a similar position if you need to. However, your actual employment status probably means more to the lender than you might think. You see, to a lender, your employment status is a strong indicator of your employer’s commitment to your continued employment. So, regardless of how you feel about your position, it’s what can be proven on paper that matters most. Let’s walk through some of the common ways lenders can look at employment status. Permanent Employment The gold star of employment. If your employer has made you a permanent employee, it means that your position is as secure as any position can be. When a lender sees permanent status (passed probation), it gives them the confidence that you’re valuable to the company and that they can rely on your income. Probationary Period Despite the quality of your job, if you’ve only been with the company for a short while, you’ll be required to prove that you’ve passed any probationary period. Although most probationary periods are typically 3-6 months, they can be longer. You might now even be aware that you’re under probation. The lender will want to make sure that you’re not under a probationary period because your employment can be terminated without any cause while under probation. Once you’ve made it through your initial evaluation, the lender will be more confident in your employment status. Now, it’s not the length of time with the employer that the lender is scrutinizing; instead, it’s the status of your probation. So if you’ve only been with a company for one month, but you’ve been working with them as a contractor for a few years, and they’re willing to waive the probationary period based on a previous relationship, that should give the lender all the confidence they need. We’ll have to get that documented. Parental Leave Suppose you’re currently on, planning to be on, or just about to be done a parental leave, regardless of the income you’re now collecting, as long as you have an employment letter that outlines your guaranteed return to work position (and date). In that case, you can use your return to work income to qualify on your mortgage application. It’s not the parental leave that the lender has issues with; it’s the ability you have to return to the position you left. Term Contracts Term contracts are hands down the most ambiguous and misunderstood employment status as it’s usually well-qualified and educated individuals who are working excellent jobs with no documented proof of future employment. A term contract indicates that you have a start date and an end date, and you are paid a specific amount for that specified amount of time. Unfortunately, the lack of stability here is not a lot for a lender to go on when evaluating your long-term ability to repay your mortgage. So to qualify income on a term contract, you want to establish the income you’ve received for at least two years. However, sometimes lenders like to see that your contract has been renewed at least once before considering it as income towards your mortgage application. In summary If you’ve recently changed jobs or are thinking about making a career change, and qualifying for a mortgage is on the horizon, or if you have any questions at all, please connect anytime. We can work through the details together and make sure you have a plan in place. It would be a pleasure to work with you!
