This past Tuesday the Bank of Canada had their first meeting of 2012 to discuss any changes they were going to make to the overnight lending rate.  Low and behold … no change.  This came as no big surprise to Canadians and the overnight rate remains steady at 1 percent.  FYI the next meeting is scheduled for March 8^th, 2012.

How does this impact the mortgage industry exactly?

Well, the overnight lending rate (the rate at which banks lend money to each other) has a direct influence on the prime lending rate (the rate at which banks lend money to consumers).  Think of the prime lending rate like the sun in the variable mortgage rate’s solar system since all variable rates revolve around prime.  Bottom line, no increase in prime means no increase in variable rate mortgages and no increase in monthly mortgage payments.

Release the HOUNDS!

Talk about some hot competition!  Last Friday, BMO announced a special 2.99 percent 5 year fixed rate.  RBC quickly responded by offering the same 2.99 percent but only for a 4 year term.  TD matched RBC’s 2.99 percent 4 year fixed and ING is now offering a 3.99 percent not on a 4, not a 5 but a 10 year fixed (wow)!  After mulling over and digesting what this might mean for their market share and presence in the competitive mortgage market over the weekend, Scotiabank announced their 2.89 percent 3 year fixed offer on Monday.

The Three Little P’s (no, not piggys)

Given the super low rates that hit the market over this past week, it’s even more important for consumers to know what other details they need to consider before signing on the dotted line.  Think about the 3 P’s: pre-payment privileges, portability and penalties.  These options could make or break that perfectly low mortgage rate.

1. Pre-Payment Options

According to a survey conducted by CAAMP, 17 percent of mortgage holders made lump sum payments in 2011 and those who did prepaid an average of 7.8 percent.  For this to be you next year you should ensure that your ability to make lump sum payments coincides with the option to do so.  Generally speaking, pre-payment privileges are around 15-20 percent of the original principal amount, but sometimes “no frill” mortgages will offer a lower pre-payment privilege at a lower rate.

So before you get enticed by that really low mortgage rate, check out the pre-payment options.  If the low mortgage rate limits your ability to pay down your mortgage faster, it may cost you more in interest in the long run. On the same note, make sure you are not paying a higher rate for a mortgage feature that you are not taking full advantage of.

2. Portability

Really love that low 10 year fixed rate but think there is a chance you could move in the next 10 years?  If the mortgage you have is portable, you’re in good shape!  Portability can save you money down the road if your rate (a.k.a. today’s historically low rate) is lower than the rates at the time you move in the future.  A portable mortgage allows you to transfer your mortgage to a new property (subject to a credit approval and sometimes a property appraisal), avoiding any penalties of breaking your mortgage.

Not to worry if the new mortgage you need is larger than the remaining balance on your existing mortgage, you can actually apply for a larger amount and your rate will be a weighted average between your old rate and the current rates offered.

3. Penalties

Your dream house just went up for sale and after years of working for the man, it is actually in your budget!  But you didn’t have this helpful blog to read when you first shopped for a mortgage and now you realize your mortgage doesn’t have a portability option.  Oops!  The good news is you can break your mortgage and get a whole new one for your dream home.  The bad news is it’s going to cost you a mortgage penalty, likely the greater of 3 months interest or the interest rate differential (IRD).

Before you commit to any mortgage product make sure you have an understanding about what it will cost you if you need to break the contract and get out early.

Today’s Mortgage Shopper

If you’re currently in the market for a mortgage, consult with a mortgage professional before making a decision and don’t be ashamed to ask a lot of questions.  You shouldn’t only consider the lowest possible rate when searching, look at the product details as well.  Also, it’s not just about finding a mortgage that meets your needs today, but also in 1, 3 and 5 years time.  Yes the 5 year rates are great, but if you’re home is only a stepping stone and you can’t port the rate later you may want to consider a shorter term.  A custom mortgage for a custom home.

In the US, interest on mortgages is tax deductible. It’s a financial boon many of us wish we could have here.

However, it’s a double-edged sword. Last year it was reported that Canadians have an average of 70% equity in their homes while Americans run around 45%. Many people think this write-off helped contribute to the mortgage meltdown in 2009. Think about it: if your mortgage is a deduction, why pay it off?

You can actually achieve a similar tax break here in Canada by pulling what’s known as the Smith Manoeuvre. It was created in 2004 by BC financial strategist Fraser Smith, and uses existing, legitimate tax rules.

As a benefit, this move encourages you to pay off your mortgage faster — unlike the US rule — and gives you a tax break on the thousands of dollars you pay in interest over the lifetime of your mortgage. (On a $300,000 mortgage rate at 5% for 25 years, making monthly payments, you pay an astonishing $223,443.02 in interest!)

But on the downside, it’s a complex scheme that requires a good grasp of the financial system and a hardy stomach for investing.

Here’s what you do: sign up for a so-called readvanceable mortgage. This is the kind of mortgage that has a line of credit attached to it, the idea normally being you use the credit line for other needs, usually renovations. And every time you pay down the principal of your home, the credit limit on your line of credit goes up. Most Canadian banks have these mortgages: I have the RBC Homeline Plan. BMO has Homeowner ReadiLine and Scotiabank has the Scotia Total Equity Plan (STEP).

So you take one of these mortgages and get as large a line of credit attached as possible. You take that line of credit money and invest it. Why? Because if you borrow money to invest, you can deduct the interest on that loan from your income tax. The money must be invested in a dividend paying stock or investment property, not an RRSP or TFSA (tax free savings account).

Then, you take your tax savings and your dividends and you use them to pay off your mortgage — along with your regular payments. Every time you eat away at the principal of your mortgage, you gain more space in your line of credit. You use that additional space to make more investments, socking away more money and increasing your tax write-off.

So, long before your 25-year mortgage is complete, you will have paid off the principal on your main mortgage. And you’ll have a considerable nest egg of investments accumulating more wealth. Once that mortgage is paid, you can use your investment savings to pay off the line of credit all at once, or gradually, depending on your situation. In theory, you should have more than enough money in your investment accounts to do this, and there will be no penalties for making lump sum payments. Mind you, some doing this move keep the loan, as it continues to be a write off.

I like that this is called a manoeuvre because it really does feel like a complex thing to pull of. It’s only for investment savvy folks who know the market and are comfortable moving money around. When the market dips, you can panic. You also need to have great equity in your home and a stable income to withstand the risk.

If you’re still interested in learning more, you might want to pick up Smith’s book Is Your Mortgage Tax Deductible.

Or, you can do what many experts suggest: forget the deduction, just pay down the mortgage as fast as you can. That $300,000 mortgage I mentioned above? If you were to pay your mortgage on an accelerated weekly program, you’d end up shelling out $185,471.03 in interest over the life of the mortgage and have paid it off in 21 years. Or if you put down an extra $100 each month, you’d spend $165,130.04 in interest and be finished in 19 years. As long as your mortgage plan sees you saving money and building equity, it’s a good plan.

Diane
Writer for RateSupermarket.ca

My partner and I have recently started talking about making the transition from renters to first-time homebuyers. While the idea is really exciting, it is also somewhat frightening. Are we ready for all that comes with homeownership?

As a renter, your worries are few. Your landlord will take care of maintenance and repairs at no additional cost to you. Often, utilities are included, as are some perks, such as laundry facilities, Internet and cable. With a lease, your commitment is never more than one year, so mobility and freedom aren’t impeded. Renting requires little more than a deposit, often one month’s rent, which makes the initial costs much lower.

My partner and I are currently renting half of a house in the country. The house is over 150 years old and was in need of some definite TLC when we moved in. The wallpaper was old, yellowed and peeling. The hardwood floors were worn and tired looking. There were minor repairs needed on things that the landlord had deemed unnecessary. We spent weeks stripping layers of wallpaper, mudding, sanding and painting each room. We waxed the floors and made repairs. The transformation was awe-inspiring. Although the renovations made our space much more attractive, the cost of these amendments came out of our own pockets, and they weren’t cheap.

We were proud of all that we had done, but realized that our hard work had increased the value of our landlord’s home, not ours. Each month, the money we give to our landlord goes directly toward his mortgage payments. Whereas his money goes into equity, ours will never be seen again.

Our rental agreement came with a set of rules. We could have a BBQ by the side of the house, but we had nowhere to sit outside. We were limited in the amount of noise we could make, and were asked to give advance notice if we wanted to have company. Although we have two cats, we were told that we could not have a dog. While these rules aren’t particularly unfair, we’re at the point where we want to make our own rules.

Renting may no longer be the more desirable option, but it has helped us in a number of ways. We have learned how to better manage our finances and we have been able to explore different types of homes in different communities. Finally, renting has allowed us, as a couple, to test our relationship before making a major financial commitment together. Now that we’re ready to move forward, there are new considerations to be made.

Buying a Home

Since your new home will likely be the largest purchase you’ll ever make, the more prepared you are beforehand, the better. Here’s how to calculate whether or not you can afford a mortgage.

According to a mortgage broker, your total debt service number (TDS) should not exceed 42 per cent of your gross monthly income. Your TDS number is the percentage of gross annual income required to cover payments associated with housing, as well as your other debts, including car loans and credit cards. Your gross debt service number (GDS) should not exceed 32 per cent of your gross monthly income. Your GDS number is the percentage of gross annual income required to cover payments associated with housing, including mortgage payments, property taxes, and interest. It sometimes includes expenses such as condo fees. In order to calculate what you can afford as a monthly mortgage payment, simply multiply your gross income for the year by 32 per cent and divide it by 12.

Buying a home is much more complicated than renting. Expect to pay upfront costs, including the down payment (usually 5 per cent of the purchase price) and closing costs, which can amount to thousands. Closing costs include the lawyer’s fees, land transfer taxes and insurance.

My partner and I have discussed what we want in a home and have been out looking at what’s on the market. We’re really looking forward to the freedom that comes with homeownership. Once we’ve settled into our chosen community, it will be nice to entertain guests whenever we want. We will no longer have to live by our landlord’s rules, and can design our home to our personal tastes. The renovations that we make will raise the value of our property, increasing its resale value. Most importantly, the money we put towards our home will go into equity. We like to look at them as scheduled monthly savings, but understand that this is only true if our home maintains its value.

Homeownership certainly isn’t for everyone. A better understanding of the process and the costs involved will help make the transition from renter to homeowner both easy and successful – and, hopefully, profitable. As Karen Kinsley of the Canada Mortgage and Housing Corporation said, “It should be your home first and an investment second.”

Melanie
Writer for RateSupermarket.ca

Mortgages often stretch out for 25 years or more and many homeowners only scratch the surface of their debt in the first couple of years, paying off mainly the interest before tackling the principal. But this doesn’t always have to be the case. Several options are available to you and can be selected depending on your personal and financial situation. But why wouldn’t you want to enjoy a mortgage-free lifestyle sooner rather than later?

As Frank Torchia, a mortgage specialist with Mortgage Alliance Lending Superstore states, “Especially in an unstable economy, accelerated payments can act as forced saving; planning for your future and increasing your equity by paying down your mortgage more quickly.”

How do accelerated mortgage payments work? Instead of making payments once a month, you make payments every two weeks or every week. So, with an accelerated bi-weekly mortgage payment, over the course of a year, you end up making 26 ‘half’ payments which is the equivalent to 13 ‘full’ payments. If you were on a monthly repayment schedule, you would only make the standard 12 ‘full’ payments. You therefore reduce the payment schedule and save a lot on interest by paying off an extra month a year.

For example, on a $250,000 mortgage at 4% interest, amortized over 25 years, traditional monthly payments would be $1315.05. However, by simply switching to accelerated bi-weekly payments (every two weeks) with payments of $657.52, you could pay your mortgage off within 21 years rather than 25 and save $20,454 in interest! Even better, weekly payments of $328.76 will save $20,680 in interest, and you will be mortgage free in the 20th year.

While accelerated bi-weekly mortgage payments do prove to pay off your mortgage a lot sooner than traditional monthly mortgage payments and saves you thousands of dollars in interest, it may not be for everyone. What works for one person doesn’t always work for another, therefore it is important to look at all of the options available before signing up for one.

What’s the difference between accelerated payments and other mortgage repayment options? Below is a description of the repayment plans available:

Monthly Mortgage Payments

Traditionally, mortgage payments are made monthly. Unless otherwise arranged, monthly mortgage payments involve making the same payment on the same day each month. These payments include both the principal and the interest and the amount of interest being paid off is determined by the interest rate. This is usually the most expensive option as you do not save money on interest fees.

Semi-Monthly Mortgage Payments

With semi-monthly mortgage payments, you make two equal payments on the same day each month. This equals to 24 payments a year. While this option does benefit interest payments, it does not make much of a difference in terms of paying off your mortgage in less time and accumulating less interest compared to making monthly mortgage payments.

Accelerated Bi-Weekly Mortgage Payments

Bi-weekly mortgage payments, or as most often referred to as accelerated bi-weekly mortgage payments, allow you to pay your mortgage off sooner compared to monthly or bi-monthly payments. By making your mortgage payments bi-weekly, you end up paying 26 times in a year as opposed to 24 times in a year. This in turn results in one month extra mortgage payment per year, paying off your mortgage in less time and saving a lot of money in interest. In addition, by making payments on a bi-weekly basis, you can more easily coordinate your payment schedule with your employment pay periods, making payments easier to follow.

Accelerated Weekly Mortgage Payments

Weekly mortgage payments are similar to bi-weekly payments, as you are making more payments throughout the year. With weekly payments, you end up saving yourself thousands of dollars in interest and paying your mortgage off in less time than you would with a traditional monthly mortgage payment plan.

*The chart below further explains the different types of payment plans and the interest you save with each one. (Please note, this chart is based on estimates only. Speak with your mortgage specialist to obtain latest mortgage rates.)

Purchasing a home is the biggest investment you will ever make; an investment towards your future. With accelerated mortgage payments, you are quite literally accelerating to a future of living mortgage free and enjoying financial freedom.

Caroline
PR@RateSupermarket.ca