This month's Dominion Lending Centres Blog with Cameron Mackie.
At Dominion Lending Centres #Ontariolend we strive to provide you with the best information so you can take confident steps in home ownership. In this blog, we will discuss the reasons why you should complete a mortgage checkup and items to be aware of. With the industry changing, it is always best to make sure your most expensive asset is performing at it’s best. The topics are, Time for a mortgage check-up, Using your prepayment privileges, locking in or staying variable, breaking your mortgage easy, renewing your mortgage, the art of leveraging, and finally, what can kill the mortgage process.
Is it time for a mortgage check-up?
It’s most likely been another busy year for you; when is it not right? While there’s so much to do, there is never a bad time to reflect on your finances, more specifically your mortgage. Maybe you’ve had your mortgage for a couple years and it’s not top of mind. But things have not only changed in the mortgage industry but also likely your own finances.
If you’re paying more than four percent on any debts, now’s the time to look and possibly refinance the debt into your mortgage.
Mortgage Brokers work on so many files where people don’t realize their consumer debt is handcuffing and limiting them on what they’re able to do.
Their clients are concerned they’ll pay a penalty to refinance or lose their rate, but they don’t look at the long-term picture and realize how much they can save.
Yes, it’s gotten harder to refinance with all the government regulations and stress tests, but it can be done and it might save you money. Just remember, if you do decide to get rid of the consumer debt, like your credit cards or lines of credit. If you are consolidating your debt then you need to take proactive steps to ensure you don’t go down the “debt” hole again.
Once you’ve consolidated, look at your trade lines and keep what you need, not what you want and change spending behaviours where you can.
If you’re feeling good about your financial situation and have a little extra cash each month, consider your payment privileges.
If you do have prepayment privileges, accelerated payments are fantastic if you use them.
These are just a couple ways a mortgage checkup can help save you some money and get you on the right path for this year and years to come.
Using your prepayment privileges
You could say a mortgage has a personality. While it might seem like an unusual way to describe what is basically a financial transaction, it’s actually apt. Mortgages do have personalities. That’s because there are so many details and aspects to any mortgage. And if you’re about to sign on the dotted line, it’s important to get to know the personality of the mortgage before you do.
One feature of a mortgage is accelerated payments or prepayment privileges.
Before we get into all the great things that can come from accelerated payments, you need to know that not every mortgage will have prepayment privileges. It comes back to the mortgage personality; no-frill mortgages that have super low rates may seem tempting, but you probably won’t get other benefits, like prepayment privileges. You need to make sure your mortgage broker explains all the personalities of your mortgage.
If you do have these prepayment privileges, accelerated payments are fantastic if you use them.
A full-frill mortgage product could have a number of prepayment privileges. This could include accelerated payments of up to 20 percent of your monthly payment, double monthly payments, and annual payments of up to 20 percent of the full loan amount.
You might be surprised how much time you can knock off your mortgage by accelerated payments.
For example, on a 30-year mortgage, a one-time 10 percent increase on your monthly payment can shave four years off your mortgage. If you bumped up your payment by 10 percent each year, you would be mortgage free in 13 years. If 10 percent is too high, five percent gets you mortgage free in 18 years.
Making a double mortgage payment once a year can also cut four years off your mortgage.
Don’t forget, anything you put down also goes directly to the principal of the mortgage rather than the interest.
If you’re signing on to a new mortgage, you might be thinking of a short amortization period, like 10 years, because you don’t want to be making mortgage payments well into your golden years. No one really does. But that’s where accelerated payments can pick up the slack.
Instead, it’s worth considering taking that 25 or 30-year mortgage and using accelerated payments to make up the difference.
If life throws you a curveball and you’re in a short amortization period like 10 years, you may find yourself stretching to make payments.
Rather than setting a shorter amortization and a payment you’re contracted to make, use prepayment privileges and accelerated payments to get the amortization you can control, rather than the payments controlling you.
While the benefits are literally in front of your face, statistically, not many people will choose to make accelerated payments once the mortgage gets going. If you really want to take advantage, set up accelerated payments the day you sign your mortgage.
Your mortgage broker can give you all the details you need to make the best decision.
Should I lock in, or stay variable?
If you follow the news closely, there would appear to be a lot of turmoil and uncertainty around interest rates. Lately, the Bank of Canada held the overnight rate, suggesting it was closely watching inflation and wage growth.
“The Bank will also continue to monitor the economy’s sensitivity to interest rate movements and the evolution of economic capacity. In this context, the Governing Council will remain cautious with respect to future policy adjustments, guided by incoming data,” the BOC said at the time.
The Bank of Canada raised the rates a quarter point twice last year. Many economists are betting the bank will do the same before the end of the year.
If you’re a conservative homeowner and have locked into a fixed rate, the speculation of an increase isn’t likely keeping you up at night. You can rest easy for the next few years.
But if you’re like many Canadians who chose to go variable, these creeping increases are probably getting you a little nervous. While mortgage brokers don’t have a crystal ball to tell you where rates are going. There are all kinds of tea leaves economists are trying to read to get a handle on where the rates will go. While that’s what they get paid to do, increases have real-world consequences on your bottom line.
So now the question you may be asking is, should I lock into a fixed rate, or ride out my variable?
And like many financial questions, there’s no easy answer.
First, you’ll tend to find most first time homebuyers are a little skittish at going variable anyway. While someone in their second or third mortgage may have an appetite for a little more risk.
If you’re kept wide awake at night in fear of a rate increase, you may want to lock in. There is something to be said for peace of mind, and locking in your rate can certainly give you that.
But it’s also important to look at the big picture. If we assume the pundits are right and the rate goes up about a couple more quarter points, you still need to look at what that variable rate saved you over the term.
The rates have been historically so low, there’s a pretty good chance if you’ve been in a variable for a few years. The math will prove you still saved money over the five years, even with an increase. Depending on your risk appetite and your financial situation, staying in the variable could still pay off in the long run even with a few more increases.
Another consideration is if you are thinking of cancelling your mortgage early, you are better off staying in a variable rate.
Statistics show 60% of Canadians cancel their mortgage before their term is up for renewal.
A variable rate cancellation fee is usually lower than a fixed rate cancellation fee, so your best option is to remain in your variable term.
But these decisions are best not made alone. Speak to a mortgage professional if you have any questions about locking in or not and they can help you make the best decision.
Breaking up with your mortgage can be hard to do
It’s hard to look past what’s right in front of you. That can be said for a lot of things in life, including a mortgage.
So it should come as no surprise that roughly six-in-10 homeowners with the standard five-year fixed rate mortgage break their terms within three years. And as brokers, we’ve heard all of the reasons. Some are good and some are less fortunate. There are those who want to leverage recent large increased in property value for investment terms, or they want to get some equity out of their home to do some renovations. In other cases, it can be life events like divorce, new relationship, the kids going off to college, or just paying down some built up credit card or consumer debt. Some people are lucky enough to be in a position to pay off the mortgage early.
In fact, if you’re reading this and have had a mortgage long enough, one of the things listed above has probably come into your life. But they all come at a cost. So as you sit down to either renew or get a new mortgage, take some time to think about the future. Not five months ahead, but five, seven or even 10 years ahead.
If you’re really not sure what the future that far away is going to look like, you need to consider some options before you sign on the dotted line. It could save you money.
If you’re a fixed-rate person, it’s important to understand how your lender is going to calculate the penalty when you break the mortgage.
Big banks calculate penalties based on the discount they gave you off of their posted rates at the time you first got your mortgage. They take their new posted rate for the amount of time you have left in your mortgage (3-years, 4-years etc.), apply the same Discount they first gave you and then calculate how much interest they would lose as the difference between the two for the rest of the term calculated on your current balance. That is your penalty and it can be quite hefty.
But other lenders like credit unions will use the interest rate differential or three-month interest penalty.
What can you do? You could sign on for a fixed-year rate for a shorter term, like three years. That just obviously shortens the length of the mortgage. Or you can also consider a variable rate since the penalties to break the term are much lower.
While it may be tempting to just stick with the big bank, you’ll want to talk to a mortgage broker first. Mortgage brokers have access to all kinds of lenders from credit unions to monolines and institutions. A mortgage broker can arrange better terms if you do need to cancel your mortgage early.
Renewing your mortgage at the end of term
It can come as a pretty surprising statistic. About 60 percent of mortgages don't make it to the end of the term. That means a large majority of homeowners for various reasons are ending their mortgages early. But it also means there are still a lot of people out there who will keep their mortgage until it’s time to renew. And if you’re in the second boat, you might be asking yourself what this process is going to look like, and perhaps, what should you do?
For starters, most lenders, especially the big banks will send you a renewal letter when there are about three months left on the term. Sometimes that letter could come with six months left. Typically, the lender will offer you a rate at that time and all you’ll have to do is sign at the bottom line to roll over your mortgage.
But beware, lenders often offer a higher rate than a new client because they’re hoping the ease of renewal will keep you from seeking out a new lender and lower rate.
Before you sign, it’s always best to call a mortgage broker. A good broker will consider your situation and advise you of the best course of action.
In some cases, it may be best to just sign and roll over your mortgage. There are a few things to consider. If you decide to change lenders, you’ll basically have to go through an approval process again. That entails getting all your documents, lawyer’s fees, and a possible appraisal.
You’ll have to ask yourself, is it worth the effort to save a few basis points off your rate or a few hundred dollars over a term to make the switch?
For some, it won’t be. But, if a switch can lead to saving thousands of dollars, it would certainly be something to consider. While everyone’s situation is different, the larger the mortgage, the bigger the savings will be if you can find a lower rate.
Often, homeowners will just use a bank their parents recommend for their first mortgage. But they might find themselves not happy with the service or terms of the mortgage and may just want to switch to a different lender as the mortgage comes up for renewal.
If that’s a situation you find yourself in, you have options, and a mortgage broker can help you make the best decision.
The art of leveraging
For some people, just owning one property and having a single mortgage is enough to handle. But for others, homeownership can be a gateway to owning multiple investment properties. You might be thinking: there’s no way I can turn the value of my modest home into a real estate empire. Ok, maybe not an empire, but you can take the equity of your home and, with the right investment, get a return far greater than a stock portfolio.
Most people are trained to stay out of debt and don’t want to consider using the equity in their home to buy an investment property. But they haven’t realized the art of leveraging.
If you’re using equity from your primary residence to buy an investment property, keep in mind that the interest you’re using is tax deductible. Consider you’re also buying an appreciating asset, and if you put a real estate portfolio to a stock portfolio side-by-side, they don’t compare.
Who is a good candidate? You might be surprised to learn you don’t need to make six figures to get into the game.
Essentially, you just have to be someone who wants to be a little smarter with their down payment.
Before you go down that road, there are some quick things you need to know. With investment properties, the minimum down payment will jump to 20 or 25 percent from five percent. Rental income from the property can be used to debt service the mortgage application, while some lenders will have a minimum liquid net worth requirement outside of the property.
Most lenders also limit the number of mortgages in a portfolio. Usually, after five mortgages, you’ll be considered a commercial file. However, a mortgage broker can work with other lenders to increase the number of investment properties.
Typically, when you’re considering a mortgage, you’re looking at the rate. But the rate is less important compared to your cash flow and future equity position. If it all sounds like a bit much, consulting a mortgage professional with an understanding of investment financing is the best way to start.
Most people who get into investment real estate think they’ll only end up buying one property, but that’s not usually the case. A broker will prep you for a 10-year plan of purchasing property and position you accordingly. A broker will also have a good understanding of the alt-side of lending and how you can benefit from that type of financing.
A mortgage broker with the right experience and understanding of financing rental properties can be an invaluable resource.
Ways to kill your home financing
Finally, we would like to discuss the problems that can arise during the mortgage process. We do make the mortgage process easy and hold a high level of integrity with every mortgage. In order to achieve this level of award-winning success, we must always keep you informed on what you can not do during the mortgage approval process.
Does this situation sound familiar? You’ve found your forever home, you’ve been approved and completed all your mortgage paperwork. You think you’re done and now you want to buy a whole bunch of furniture for the new abode. Or, perhaps you’ve been eyeing a new car or even a new job at the same time. It seems pretty reasonable to make a life change or purchase, after all, you’ve been approved. What could go wrong you ask? You could sink your mortgage faster than a leaky boat.
People mistakenly believe once they’ve been pre-approved or approved by a lender it’s all done. But they don’t realize that a lender may pull their credit 30 days prior to close. They also don’t realize lenders can request updated documents in that time.
And if some of the original information that got you the mortgage approval in the first places changes - and for the worse - you could lose your financing.
Here’s a short list of changes that could kill your mortgage.
1. DON’T HAVE YOUR CREDIT PULLED BY ANOTHER BROKER OR LENDER – the lender will often pull your credit again right before financing. If the lender sees that other brokers or lenders have pulled your credit the lender views this a credit seeking and can put your funding in jeopardy.
2. DON’T APPLY FOR NEW CREDIT – the lender calculates your debt based on the amount of credit you have. If you are applying for new credit, the obvious assumption is that you are planning on using it. Don’t get any new credit until the closing date is passed.
3. DON’T CLOSE ANY OLD CREDIT ACCOUNTS – Credit is not a bad thing…. unless you are having a hard time managing it. Old credit shows a long history of being able to handle credit. Lenders like that.
4. DON’T MOVE YOUR MONEY AROUND WITHOUT A PAPER TRAIL – When you settle with the bank on the contract of the mortgage, the lender will require bank statements showing your saved money. They look at the history along with the balance. If there are any unusual deposits, you will need to explain where the money comes from. Be prepared to show a paper trail.
5. DON’T INCREASE YOUR DEBTS – The lender always looks at your debt to income ratio. If you increase your debt, you can risk going over the maximum amount of debt compared to your income.
A good mortgage broker will remind you of the pitfalls that can happen if you change your financial situation before closing, but ultimately it’s in your hands. You have to take responsibility and use common sense when they’re in the closing process.
From a first time buyer all the way to retirement, we are the most honest mortgage broker you will ever encounter. We are one of the largest and fastest growing Dominion Lending Centres franchises in Canada with over $1 Billion in mortgage volume each year. If you want the BEST, click here and call now.