Choosing A Term You Can Live With
What term should you take? That's a good
question. Before you look at the issue or term specifically,
there are things you should consider managing your mortgage
to your best advantage.
When you're looking at term and interest
rates, look also at what you can live with in terms of payment
amounts, because trying to predict where interest rates are
going is a tough job. There are many forces that affect Canadian
interest rates - economic, political, domestic, and international.
Even the best economists cannot pinpoint this, so how can
we. You can twist yourself into knots worrying what will happen.
When the rates dropped in 1992 to their lowest in 35 years,
no one thought that they will get that low again. They dropped
even further. Since then we have enjoyed low rates and we
don't think of rates going in the double digits again. That's
wrong to assume as well. Who would have thought in 1978 that
rates only 3 years later would go as high as 21.5%? Please
check the graph below for a historical account.
Predicting interest rates is very much a
gamble and one should be prepared to keep a close eye on the
Here's a suggestion: If you feel that rates
are at a point you can live with and you want to guarantee
that rate as long as possible, go with a long term (5 years,
7 years, and 10 years). If interest rates appear to be rising,
take advantage of the lower rate for as long as possible,
and remember, if you sell your property, you can take the
mortgage with you to the new property or have someone assume
the mortgage. It could prove to be a great selling feature
if you have an assumable mortgage at very low rate.
If rates appear to be falling, you can
choose a shorter term (6-month convertible or variable-rate
mortgage) that offers the flexibility to lock-in to longer
term at any time, just in case the rates start going the other
We would be pleased to make some recommendations
to your specific needs. Simply contact us by e-mail at
or call 416-696-9866 or toll free 1-888-588-6666.
Fixed vs. Variable Rate Mortgages
With a fixed-rate mortgage, the interest
rate is set for the term of the mortgage so that the monthly
payment of principal and interest remains the same throughout
the term. Regardless of whether rates move up or down, you
know exactly how much your payments will be and this simplifies
your personal budgeting. In a low rate climate, it is a good
idea to take a longer term, fixed-rate mortgage for protection
from upward fluctuations in interest rates.
A variable-rate mortgage (also called adjustable-rate)
provides a lot of flexibility, especially when interest rates
are on their way down. The rate is based on prime and can
be adjusted monthly to reflect current rates. Typically, the
mortgage payment remains constant, but the ratio between principal
and interest fluctuates. When interest rates are falling,
you pay less interest and more principal. If rates are rising,
you pay more interest and less principal, and if they rise
substantially, the original payment may not cover both the
interest and principal. Any portion not paid is still owed,
or you may be asked to increase your monthly payment. Make
sure that your variable-rate mortgage is open or convertible
to a fixed-rate mortgage at any time, so that when rates begin
to rise, you can lock-in your rate for a specific term.
Closed and Open Mortgages - What's the
An open mortgage allows you the flexibility
to repay the mortgage at any time without penalty. Open mortgages
are available in shorter terms, 6 months or 1 year only, and
the interest rate is higher than closed mortgages as much
as 1%, or more. They are normally chosen if you are thinking
of selling your home, or if expecting to pay off the whole
mortgage from the sale of another property, or an inheritance
(that would be nice).
A closed mortgage offers the security of
fixed payment for terms from 6 months to 10 years. The interest
rates are considerable lower than open, and if you are not
planning on any one of the above reasons, then choose a closed
mortgage. Nowadays, they offer as much as 20% prepayment of
the original principal, and that is more than most of us can
hope to prepay on a yearly basis. If one wanted to pay off
the full mortgage prior to the maturity, a penalty would be
charged to break that mortgage. The penalty is usually 3 months
interest, or interest rate differential (I.R.D. - please refer
to glossary for detailed explanation).
Buy first or sell first?
Which comes first--the purchase or the sale--is
the greatest dilemma facing homeowners planning to move-up.
If you choose to buy first, make sure the
offer to purchase is conditional on selling your current house.
That way, if you sell your house, both deals proceed; if not,
the deal is off, and you won't be stuck with two homes. Selling
first though will give you considerable peace of mind.
Knowing how much money you'll get on the
sale will help you establish a price range for the new house.
Selling first allows you to negotiate the purchase more vigorously,
too, since unconditional offers carry a lot more weight with
Market conditions are another important consideration
in deciding which route to follow. In a seller's market, you'll
probably do better selling after you've bought, but in a buyer's
market, it makes more sense to sell.
A little-known benefit of CMHC-insured mortgages:
When interest rates fall, many borrowers want to renegotiate
their mortgages but a few have the right to do so, unless
their mortgages are fully open. But if you obtained a longer-term
mortgage, insured by CMHC, you can prepay it on payment of
3 months interest penalty - a lot cheaper than the Interest
Rate Differential (IRD), which is the difference between the
mortgage rate and current rates, on the outstanding balance,
for the rest of the mortgage term. For example, if the difference
in the interest rate was 2%, and the outstanding mortgage
amount was $100,000 (which is locked in at 8%) and it had
2 more years to go until maturity, the IRD penalty would be
approximately $4,000, whereas the 3 months' bonus would be
$2,000. (To help you with the payment of the penalty, we have
"cash-back programs" that will give you up to 3%
of the mortgage amount).
Also, if you obtained an insured mortgage
after April 1'st, 1997, the premium you paid on the mortgage
is now portable to another property (if you closed before
this date, it is not portable, meaning that if you bought
another home and your mortgage needed to be insured, you must
pay the applicable premium again.
The Amortization Period is the number of
years it would take to repay the entire mortgage amount based
on a set of fixed payments. The longer the amortization, the
more interest is paid over the life of the mortgage. Therefore,
when choosing the amortization period, careful planning should
be done to meet your cash flows. Remember, the amortization
can be easily shortened after the closing, but once registered,
can only be increased with the aid of a lawyer and a few hundred
MORTGAGE FEATURES - To Help You Become
Monthly, bi-weekly, or weekly payments?
Once you have the mortgage amount, rate and
amortization period, your monthly payment can be calculated.
Now is the time to decide how often you want to make your
payments, because by selecting the right payment frequency
could literally mean thousands of dollars in savings. For
example, on a $100,000 mortgage at 8% interest, amortized
over 25 years, the monthly payments would be $763.21. However,
by simply switching to bi-weekly payments (every two weeks)
with payments of $381.61 (half of the monthly payment), there
would be a saving of $30,484 in interest! Weekly payments
of $190.80 will save $30,839 in interest, and you will be
mortgage free in the 19'th year.
You notice that there is very little difference
between weekly and bi-weekly payments, however. If you have
other payments throughout the month, bi-weekly may be less
stressful and easier to budget. If you are self-employed or
commissioned, and your income varies greatly from week to
week, it may be easier to pay monthly and use your prepayment
privileges to knock the amortization period. Also, not all
weekly and bi-weekly payments work the same as above. Let
the mortgage specialists at Homefund show you how to manage
your mortgage to your best advantage.
Prepayments - Extra Payments against
This is one of the most important features
to look for when you are getting a mortgage. Having the prepayment
privilege that works to your specific needs could mean a difference
of thousands of dollars over the life of your mortgage. Although
all financial institutions offer some form of prepayment privilege,
the amount and how it can be applied varies from one to another.
Some offer only up to 10%, once per year, and on the anniversary
date. Then there are others that offer as high as 20% per
year, and prepayments can be done throughout the whole year
as long as the total does not exceed 20%. Ideally, you should
work your prepayment privilege as often as possible throughout
the year. Saving aside to make that big prepayment is not
the best strategy. We have found that the small, regular prepayments
will get you quicker to that mortgage burning party (I hope
(TIP: Put your tax refund to good use. The
average tax refund for Canadians in 1995 was $1,000. Even
this amount will pay large dividends over the life of the
Often times most mortgage shoppers are only
looking at rates and overlooking this interest saving feature.
That is why it is important to have a mortgage specialist
at homefund.com make some recommendations for your specific
needs. Not only can we find you the lowest rates, we can also
get you the features that will work to your advantage.
Increase Your Regular Payment
The secret to borrowing is borrow early in
your life. The reason is that the future value of the dollar
decreases. Why we are bringing this fact is that when you
borrow early, your payments are set. As time goes, our incomes
increase (hopefully), but our mortgage payments stay the same,
provided you locked-in to a long term, fixed mortgage. Therefore,
in the future we may be in a position to increase our payment
on the mortgage, regardless if you are paying weekly, bi-weekly,
or monthly. Any increase in payment is directly going to pay
down the mortgage, thus saving you thousands down the road
due to the effect of interest not compounding on that amount
for the life of the mortgage. Neat little feature.
Again, this feature varies from bank to bank.
Some allow increasing payment up to 10%, and others as high
as 25% per year, some up to 15% only once in the term of the
mortgage. If you increased your payments, should the need
arise, you can go back to the original payments as well. A
mortgage specialist at homefund.com will run a "Mortgage
Reduction" model for you and make some recommendations.
Double-Up on Payments
A few lenders will allow you to double-up
on your payments, and the extra payment goes directly in the
principal. If you double-up once in the year, you have just
achieved the benefits of the weekly or bi-weekly mortgage.
This is a neat little feature for someone who prefers the
monthly payments but wants the results of the weekly and bi-weekly
payments. And some lenders allow you the flexibility to skip
a payment if you have made a double payment previously. This
defeats the purpose, but when times are tough, a neat little
feature to have.
Early Renewal Option
This is a great feature to have when interest
rates are on a rise. If you are locked-in to a term and the
mortgage will be maturing in months or years down the road,
and the mortgage rates are on a rise, you can renew your mortgage
before the maturity and lock-in the low rates for a new term.
You may not even have to pay anything out of pocket and still
save over the term, especially if rates move up considerably.
If you want to take your mortgage with you
when you move, you can if your mortgage has a clause that
allows you to do that. This option allows you to continue
your savings on your lower rate if the going rates are higher,
as well as avoid any penalties if you were to break that mortgage.
If you need a larger mortgage for the new property, your existing
mortgage amount can be increased. As for the associated costs,
since a new mortgage document must be registered on title,
legal fees and normal appraisal fees would be applicable.
Before you do anything, talk to a mortgage specialist at homefund.com
to find out your options.
If you are moving and don't want to take
your mortgage with you, or you are selling and not buying,
an assumable feature will allow the buyer(s) of your property
to take over the mortgage, providing they meet the lender's
qualifying criteria. By doing so, you will not pay any penalties
as you are not breaking the mortgage contract. In fact, if
your interest rate is lower than those available at the time,
your assumable mortgage suddenly became a great selling feature
for your property.
A word of caution here: Just because someone
assumes your mortgage does not necessarily mean you are off
the hook for the responsibility. You must get a release from
the Mortgage Company to ensure that you are no longer liable
for it. Some mortgage companies automatically offer a release,
but with others, you must make the request, and do it through
Rate Guarantee Periods for Maturing Mortgages
When the mortgage is about to mature, most
lenders will mail out their renewal agreements around 30 days
before the mortgage matures. Often, this causes a lot of grief
for many people, especially if rates start to climb just before
the mortgage comes due. At homefund.com, we can guarantee
your rates up to 120 days (4 months) before your mortgage
comes due, and this service is free and with no obligations.
Just this protection could and has saved thousands of dollars
for our clients. Let' get it working for you, too.
Mortgage Life Insurance (optional)
Since your home is likely your single largest
investment, you may want to protect that investment. Many
financial institutions offer mortgage life insurance at an
affordable and competitive price, and the requirements for
eligibility are usually quite simple to meet. If you or your
co-borrower (if you choose joint coverage) die, the insurance
company will pay off your mortgage. Also, some institutions
now offer job-loss and/or disability insurance to borrowers.
The best thing to do in making a decision about how to insure
your mortgage is to have an insurance agent work out the figures
for a private term insurance and mortgage life insurance.
For your personal specific needs, feel free to contact the
people in the Links
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Are You Thinking Of Moving To Canada
If you are planning to move to Canada or
simply want to invest in Canadian real estate, our "WELCOME
TO CANADA" mortgage program, with lenders from coast
to coast, could be the one for you. We could also help you
if you require additional services of professional realtor,
lawyer, and others. Buying a home is Canada has never been
To find out more, simply E-MAIL us at
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at 416-696-9866 and ask to speak with Mike.