Choosing the Best Mortgage Term

General Victor Anasimiv 11 Aug

Selecting the mortgage term that’s right for you can be a challenging proposition for even the savviest of homebuyers, as terms typically range from six months up to 10 years.


By understanding mortgage terms and what they mean in dollars and sense, you can save the most money and choose the term that is best suited to your specific needs.


The first consideration when comparing various mortgage terms is to understand that a longer term generally means a higher corresponding interest rate. And, a shorter term generally means a lower corresponding interest rate. While this generalization may lead you to believe that a shorter term is always the preferred option, this isn’t always the case. Sometimes there are other factors – either in the financial markets or in your own life – that you will also have to take into consideration when selecting the length of your mortgage term.


If paying your mortgage each month places you close to the financial edge of your comfort zone, you may want to opt for a longer mortgage term, such as five or 10 years, so that you can ensure that you will be able to afford your mortgage payments should interest rates increase.

 

By the end of a five- or 10-year mortgage term, most buyers are in a better financial situation, have a lower outstanding principal balance and, should interest rates have risen throughout the course of your term, will be able to afford higher mortgage payments.


If you’re shopping for a mortgage for an investment property, you will likely want to consider choosing a longer mortgage term – depending, of course, on your overall plan. This will allow you to know that the mortgage payments on the property will be steady for a long time and enable you to more accurately project your future income from the property.


As well, if you know you will not be staying in the same home for the next five or 10 years, opting for a shorter term can save you significant fees when it comes to early payout penalties!


Choosing the right mortgage term is a unique decision for each individual. By understanding your personal financial situation and your tolerance for risk, I can assist you in choosing the mortgage term that will work best for your situation.

Appraisal Versus Home Inspection

General Victor Anasimiv 11 Aug

Both an appraisal and a home inspection are important steps of the home-buying process, so it’s well worth your effort to distinguish the differences between them and how they can uncover detailed information about the home’s value and condition.  


Appraisal
Essentially, home appraisal is a survey activity performed by a professional in order to develop an expert opinion on the market value of a real estate property. Home appraisal is usually done for a lending company or a bank as a prerequisite for the approval of a mortgage application by a homebuyer.

The essential elements of a home appraisal report include information and data related to the overall condition of the property, the neighbourhood, variables that contribute to the sale of similar homes and the time spent in selling similar properties. The appraisal report

may be presented as a comparable sales analysis or a cost assessment of value.


Home Inspection
A home inspection is not used to determine property value, but will provide an assessment of the physical condition of a property. A well-trained home inspector will perform a comprehensive visual inspection to determine the condition of the building and all of its major systems (roof, structural, heating, plumbing and electrical systems, etc).

While an appraisal is intended to provide the lender with sufficient information to decide on mortgage financing, a home inspection will hopefully reveal to a potential homebuyer whether the building and its systems are in sound working order.

If there are outstanding issues, a good inspector will provide the potential purchaser with a schedule outlining the estimated costs and a timeline detailing when these repairs will need to be completed.

The Power of Mortgage Prepayments

General Victor Anasimiv 8 Jun

Canadians seeking a sure-fire investment return should look no further than their mortgage. Paying it down as quickly as you can will, in most cases, result in a stellar return on your investment.

Prepayment options are worth exploring because paying down even a small amount of principal (the true cost of the mortgage loan minus the interest) has huge benefits over the life of a mortgage.

Mortgages are front-loaded when it comes to interest meaning, in the early years, most of the money you pay goes toward paying the interest on the amount you borrow as opposed to the principal.

For instance, if you borrow 95% of your home’s value, you’re paying $3 of interest for every $1 of principal you pay. So, by paying an extra $1 of principal, that’s $3 less you’ll have to pay in interest, at least in the early stages of a mortgage.

Range of Prepayment Options
There are a variety of ways to make prepayments work to pay down your mortgage faster. We can discuss your specific needs, but following are some general rules.

Most lenders allow you to make a lump-sum payment of anywhere between 10% and 25% of the value of your mortgage per year. The lump-sum payment is based on either the original amount you borrowed or the amount currently outstanding. Since mortgages decrease with each payment, it’s best to negotiate a lump-sum payment option based on the original amount you borrow. That way, if you come into an

 

inheritance, a big bonus or save a large sum of money, you can pay down the largest amount possible.

Another factor to consider is when you can make a lump-sum payment. Some mortgages allow prepayments during the year, while others permit it only on the anniversary date. Still others allow you to make prepayments on the day you make your regular payment.

If you can’t pay the maximum prepayment amount, it’s still worth your while to at least make some extra payment, even if it’s a few thousand dollars each year. That will still save you thousands of dollars in interest payments.

Another prepayment option involves taking advantage of flexible payments. Most lenders allow you to increase your regular payment up to a set maximum, such as 15%, while others allow you to double up your payments.

If, for instance, you have a $1,000 per month mortgage payment and increase it by 15% to $1,150, you could shave off as much as five-and-a-half years on a $200,000 mortgage.

You can also pay off your mortgage faster by moving to a different payment schedule. Instead of making monthly payments, make them biweekly or even weekly. Using an accelerated mortgage – where you make payments every two weeks as opposed to twice a month – you actually make one extra payment in the calendar year. By paying more and paying faster, you reduce your principal earlier, which lowers the amount of interest you pay.

Another option is to round up your mortgage payment from, say, $766 to an even figure such as $800, because any extra little bit goes toward the principal.

Stability in the Canadian Mortgage Market

General Victor Anasimiv 8 Jun

A spring consumer report released recently by the Canadian Association of Accredited Mortgage Professionals (CAAMP) reveals that Canadians are displaying confidence by paying down their mortgages and using home equity to make improvements or investments. 

The report, Stability in the Canadian Mortgage Market, which was compiled by CAAMP Chief Economist Will Dunning, also includes information on consumer borrowing behaviour and an outlook on residential mortgage lending.

Following are some key statistics uncovered in the report:

  • Canadians currently have $855 billion in mortgages on principal residences and $215 billion in home equity lines of credit (HELOCs)
  • Equity takeouts amount to $26 billion annually, with funds most frequently used for renovations ($9.4 billion), followed by investments ($5.0 billion)
  • The average down payment for a home purchased in the last 12 months was 30%, up from 26% for homes purchased two years ago
  • Among all borrowers, 63% have fixed-rate mortgages, 30% have variable-rate mortgages and 6% have a combination of both fixed- and variable-rate mortgages
 
  • Less than a quarter (22%) of all borrowers have amortization periods longer than 25 years
  • The average time to pay off a mortgage is 7.4 years less than the original amortization
  • 34% of those who most recently renewed or renegotiated their mortgages did so before their terms expired.
  • 200,000 Canadian homeowners paid off their mortgages in the last 12 months
  • The average mortgage interest rate discount is 1.44% for those who chose a five-year fixed-rate mortgage in the last 12 months, with the average mortgage rate being 4.04%
  • Of those who renewed their mortgages in the last 12 months, 65% are paying lower rates than previously
  • 66% of all mortgage borrowers can tolerate a monthly mortgage increase of $300 or more

Canadians’ appetite for home buying has returned to pre-recession levels, following a slide over the past three surveys. Almost 60% of respondents thought that now was a good time to buy. Optimism is returning to the market with almost half (46%) of those questioned saying that they expect prices to rise.

Bank of Canada Highlights From Their April 12 Meeting

General Victor Anasimiv 13 Apr

  • “[There is] an environment of material excess supply in Canada.”
  • “…the global economic recovery is becoming more firmly entrenched”
  • “In the United States, growth is solidifying, although consolidation of household and ultimately government balance sheets will limit the pace of the expansion.”
  • “…global financial conditions remain very stimulative and investors have become noticeably less risk averse.”
  • “The persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation”
  • “…recent economic activity in Canada has been stronger than the Bank had anticipated”
  • “Overall, the Bank projects that the economy will expand by 2.9 per cent in 2011.”
  • “The Bank expects that the economy will return to capacity in the middle of 2012”
  • “…underlying inflation is subdued”
  • “Core inflation…is expected to rise gradually to 2 per cent by the middle of 2012”

New Mortgage Rules as of March 18, 2011

General Victor Anasimiv 5 Feb

On January 17th, Finance Minister Jim Flaherty announced adjustments to the rules for government-backed insured mortgages that will come into force March 18th, 2011.

The new measures will:

  • Reduce the maximum amortization period to 30 years from 35 years for new government-backed insured mortgages with loan-to-value (LTV) ratios greater than 80%

  • Lower the maximum amount Canadians can borrow in refinancing their mortgages to 85% from 90% of the value of their homes

Additionally, on April 18th, 2011, the government will withdraw its insurance backing on lines of credit secured by homes, such as home equity lines of credit (HELOCs).

By paring back the maximum amortization from 35 years to 30, qualification will become harder for some borrowers – particularly first-time homeowners – as mortgage payments will increase. It’s hard to imagine that, not so long ago, Canadians could amortize their mortgages up to 40 years with zero down payment mortgages.

This is the second time in less than a year that the refinancing maximum was reduced –

 

meaning Canadians can access less of their home equity. The first reduction from 95% of the value of your home to 90% came into force in April 2010. Now, as of March 18th, 2011, the second reduction will bring maximum refinance levels down to 85%.

This change will mean that fewer borrowers can consolidate high-interest debt such as credit cards and other unsecured loans into their mortgage at today’s low rates.

With these two reductions in the maximum refinance amount (totalling 10%) in less than a year, on a $300,000 home, that’s a difference of $30,000 homeowners can no longer access.

With interest rates sitting at all-time lows – with nowhere to go but up – and looming mortgage rule changes, now is the perfect time to act to refinance your mortgage to pay off bills or free up more cash flow, or purchase a new home.

Now more than ever it’s important for Canadians to practice financial responsibility, as options for reducing high-interest debt payments are increasingly being limited.

As always, if you have questions about refinancing or other mortgage-related questions, I’m here to help!

Five Tips to Boost Your Credit Score

General Victor Anasimiv 4 Aug

Following are five steps to a speedy credit score boost:

1) Pay down your credit cards. The number one way to increase your score is to pay down your cards to 30% of their limits. Revolving credit like credit cards seems to have a more significant impact on your score than car loans, lines of credit, and so on.

By paying down your cards to 30%, you are leaving a big gap between what your limit is and what you owe – a move that is very favourable to increasing your credit score.

2) Limit the use of your cards. Racking up a large amount and then paying it off in monthly instalments can hurt your credit score. If there is a balance at the end of the month, this affects your score – credit formulas don’t take into account the fact that you paid it all off the next month.

By being more accountable of your spending on a daily or weekly basis through the use of a budget, you can keep those cards below the magic 30% mark.

3) Check your limits. If your lender is slow to report your monthly transactions, this can have a big impact on how another lender may view your file. Make sure everything is up to date. Old bills that have been paid can come back to haunt you.

Some financial institutions don’t even report your maximum limits. As such, the credit bureau is left to only use the balance that’s on hand. The problem is, if you consistently charge the same amount each month – say $1,000 to $1,500 – it may appear to the credit-scoring formula that you’re regularly maxing out that card.

You could go on a wild spending spree to raise the limit, but a more sensible solution would simply be to pay your balance down or off before your statement period closes.

When making payments online, do so about a week before the period closing date printed on your latest statement to ensure the payment is received on time – it can take up to five business days for a payment to be received.  This won’t raise your reported limit, but it will widen the gap between your limit and your closing balance, which should boost your score.

4) Keep your old cards. Older credit is better credit. If you stop using those older credit cards, the issuers may stop updating your accounts. As such, they will lose their weight in the credit formula and, therefore, may not be as valuable – even though you have had the card for a long time. Use these cards periodically and then pay them off.

5) Don’t let mistakes build up. Dispute any mistakes or situations that may harm your score. If, for instance, your cell phone bill is incorrect and the company will not amend it, you can dispute this by making the credit bureau aware of the situation.

As always, if you want to talk about your credit score or consolidating debt, I’m here to help.

50/50 Mortgage aka The Hybrid Mortgage

General Victor Anasimiv 4 Aug

Hybrid mortgages – also known as 50/50 mortgage products – include an equal mix of fixed-rate and variable-rate components within your single mortgage. This means you get the best of both worlds – the security of fixed repayments with the flexibility of a variable rate.

Although there was a time in recent years when mortgage experts considered a variable rate mortgage as the obvious choice to save mortgage consumers money over the long term, with fixed rates remaining near historic lows, a 50/50 mortgage may be a great alternative for you.

In essence, since it’s extremely difficult to accurately predict rates over the long term, a 50/50 mortgage offers interest rate diversification, which can help reduce your level of risk.

If you opt for the Dominion Lending Centres 50/50 Balanced Mortgage, half of your mortgage is locked into a five-year fixed rate and half is at a five-year variable rate. You can lock in your variable-rate portion at any time without paying a penalty. As well, each portion of the 50/50 mortgage operates independently – like two separate mortgages – yet the product is registered as only one collateral charge.

 

 

The 50/50 mortgage product is well-suited to a variety of borrowers, including those who:

  • Would normally go fully variable but are afraid prime rate is at its bottom
  • Aren’t comfortable being locked into a fully fixed rate
  • Can’t decide between a fixed or variable mortgage

Some features of the 50/50 mortgage include:

  • 20% annual lump-sum pre-payment privileges
  • 20% annual payment increase ability
  • Portability (the option to transfer your existing loan amount to a new property without penalty)

As the 50/50 option is a fairly new offering, according to a recent study by the Canadian Association of Accredited Mortgage Professionals (CAAMP), 5% of Canadian mortgage holders have 50/50 mortgages compared to 28% with variable-rate mortgages and 68% with fixed-rate mortgages. But many experts believe the 50/50 mortgage is quickly gaining momentum.

If you have any questions about the 50/50 mortgage product and whether it’s right for you, feel free to give me a call so we can discuss your options.

Mortgage Amortization

General Victor Anasimiv 4 Aug

Selecting the length of your mortgage amortization period – the number of years it will take you to become mortgage free – is an important decision that will affect how much interest you pay over the life of your mortgage.

While the lending industry’s benchmark amortization period is 25 years, and this is the standard that is used by lenders when discussing mortgage offers, and usually the basis for mortgage calculators and payment tables, shorter or longer timeframes are available – to a maximum of 35 years.

The main reason to opt for a shorter amortization period is that you will become mortgage-free sooner. And since you’re agreeing to pay off your mortgage in a shorter period of time, the interest you pay over the life of the mortgage is, therefore, greatly reduced.

A shorter amortization also affords you the luxury of building up equity in your home sooner. Equity is the difference between any outstanding mortgage on your home and its market value.

While it pays to opt for a shorter amortization period, other considerations must be made before selecting your amortization. Because you’re reducing the actual number of mortgage payments you make to pay off your mortgage, your regular payments will be higher. So if your income is irregular because you’re paid commission or if you’re buying a home for the first time and will be carrying a large mortgage, a shorter amortization period that increases your regular payment amount and ties up your cash flow may not be the best option for you.

I will help you choose the amortization that best suits your unique requirements and ensures you have adequate cash flow. If you can comfortably afford the higher payments, are looking to save money on your mortgage or maybe you just don’t like the idea of carrying debt over a long period of time, we will discuss opting for a shorter amortization period.

Advantages of longer amortization
Choosing a longer amortization period also has its advantages. For instance, it can get you into your dream home sooner than if you choose a shorter period. When you apply for a mortgage, lenders calculate the maximum regular payment you can afford.

 

They then use this figure to determine the maximum mortgage amount they are willing to lend to you.

While a shorter amortization period results in higher regular payments, a longer amortization period reduces the amount of your regular principal and interest payment by spreading your payments out over a longer timeframe. As a result, you could qualify for a higher mortgage amount than you originally anticipated. Or you could qualify for your mortgage sooner than you had planned. Either way, you end up in your dream home sooner than you thought possible.

Again, this option is not for everyone. While a longer amortization period will appeal to many people because the regular mortgage payments can be comparable or even lower than paying rent, it does mean that you will pay more interest over the life of your mortgage.

Still, regardless of which amortization period you select when you originally apply for your mortgage, you do not have to stick with that period throughout the life of your mortgage. You can always choose to shorten your amortization and save on interest costs by making extra payments when you can or an annual lump-sum principal pre-payment. If making pre-payments (in the form of extra, larger or lump-sum payments) is an option you’d like to have, I can ensure the mortgage you end up with will not penalize you for making these types of payments.

It also makes good financial sense for you to re-evaluate your amortization strategy every time your mortgage comes up for renewal (at the end of each term of your mortgage, whether this is three, five, 10 years, etcetera). That way, as you advance in your career and earn a larger salary and/or commission or bonus, you can choose an accelerated payment option (making larger or more frequent payments) or simply increase the frequency of your regular payments (ie, paying your mortgage every week or two weeks as opposed to once per month). Both of these features will take years off your amortization period and save you a considerable amount of money on interest throughout the life of your mortgage

As always, if you have questions about which mortgage amortization is best for you or how you can pay off your mortgage faster, please give me a call to discuss your options.

Tips To Pay Down Your Mortgage Faster

General Victor Anasimiv 4 Aug

With interest rates at an all-time low, many Canadians are taking advantage of the savings by refinancing their mortgages to consolidate debt, make home renovations, invest in real estate or other ventures, or moving up the property ladder.

Following are ways to take even further advantage of this excellent rate environment by paying down your mortgage faster.

Tip #1

Prepay early in the mortgage

Make extra payments as early as you can after getting a mortgage because the loans are interest-heavy upfront and the faster you pay down your principal, the more interest savings you will accumulate over the long run. Within the first five to seven years of your mortgage is where the largest portions of interest payments are contained. This not only will save you thousands of dollars in interest payments, but it will also increase the speed at which you are accumulating equity in your property. Many mortgage products allow you to make up to 20% more in payments per year.

Tip #2

Make an annual lump sum payment

Whether you use your tax refund, receive an inheritance or get a Christmas bonus, you should apply as much as possible directly to your principal. Most lenders allow you to pay 20% in lump sum payments per year without penalty. I can help you determine exactly how much you can prepay and what maximum percentage of your principal you are allowed to pay without penalty each year.

Tip #3

If your payments go down, don’t lower the payment amount

If you are on a variable-rate mortgage and the rates go down your payment will also often go down. Instead of making the lower mortgage payments, however, it’s best to call your lender and let them know that you would like to

 

continue making payments for the original amount. I can help you determine if there is a charge for making the extra payment. Even with the charge, in most cases, it is still worth it and will help you pay down your principal faster.

Tip #4

Round up your payments even if it’s just a little

If your monthly mortgage payment is $776.22 and you were to round up your payment an extra $23.78 a month to $800 – that’s less than a dollar a day – you would effectively reduce your mortgage amortization from 35 years to just over 32 years right away or from 25 years to just over 23 years.

TIP #5

Increase your payments with your pay increases

If your income increases, try not to keep your mortgage payments the same. Although the disposable income is a joy to spend on unnecessary luxuries in the short-term, the long-term benefits of being mortgage free faster and saving those interest payments will far outweigh the short-term joys. Pretend that your income did not increase and maintain the lifestyle that you are currently living.

Tip #6

Increase the frequency of your payments

You can also change the way you make your payments by opting for accelerated bi-weekly mortgage payments. Not to be confused with semi-monthly mortgage payments (24 payments per year), accelerated bi-weekly mortgage payments (26 payments per year) will not only pay your mortgage off quicker, but it’s guaranteed to save you a significant amount of money over the term of your mortgage. Basically, with accelerated bi-weekly mortgage payments, you’re making one additional monthly payment per year.

As always, if you have any questions about paying your mortgage down faster, I’m here to help!