Versus (vs) – as compared to or as one of two choices; in contrast with.

At least once a day I get asked, what’s the difference between ‘this’ and ‘that’? With this in mind I put together some content that will hopefully provide some clarity in regards to  a few of the more commonly asked questions.

Lawyer vs Notary

Most real estate deals are fairly straightforward, both a lawyer and notary can and will prepare the documents for you. If you are buying a home, they will: conduct a title search, obtain tax information and any additional information to prepare the Statement of Adjustments. Then they will prepare closing documents, including a title transfer, mortgage, property transfer tax forms and forward them to the seller’s lawyer/notary for execution. After you sign your papers, the lawyer or notary will register the transfer, mortgage documents and transfer funds to the seller’s lawyer/notary. Sometimes there are more complicated transactions, at this point one would need to decide LAWYER or NOTARY?

If something were to go wrong with your transaction, a notary cannot represent you in court of law, unlike a lawyer. Nor can the notaries represent and guide you through a dispute process. Notary also cannot advise you on legal matters, for example, if you go to a notary to convey a real estate file and you were to ask a legal question, such as, “I think my neighbour’s fence is on my land, what should I do?” the notary cannot give you advice on what your recourse is.

With regard to the fee structure, there isn’t much of a different these days. If you are unsure of which one to use, it’s always a good idea to phone a notary and a lawyer to describe the services you need and then decide from there.

Guarantor vs Co-signer

A co-signer is a co-owner that is registered on the title and is equally accountable for payments, while a guarantor personally guarantees the payments will be made if the original applicant defaults. However, the guarantor has no claim to the property as they’re not registered on the title. Typically a co-signer is added to a mortgage application to increase the income, which will assist with reducing the debt service ratios. Whereas a guarantor will be utilized if the applicant(s) has received past credit blemishes and needs to strengthen the file.

Title Insurance vs Survey Certificate

These two are slightly different but work in conjunction with one another. Title insurance is an assurance as to the state of title of any given property. In practical terms, it protects lenders and purchasers against loss or damage suffered due to survey problems, defects in title and other matters relating to title fraud. A survey certificate will typically show the lot boundaries, improvement locations and often the locations of any rights of ways or easements registered against the property. This will also assist a purchaser in determining whether any of the improvements on the property encroach on a neighbouring property or if there are improvements from an adjacent property that encroach on the subject property.

Joint Tenant vs Tenant in Common

When a property is held in joint tenancy, the situation is what I refer to as “the last man standing.” When one joint tenant dies, the entire property belongs to the remaining, surviving joint tenant(s). Only that last person can use his or her Will to give the property to someone else. Tenants in common is a different story. In this arrangement, each person owns a percentage that is registered in their name. They can then leave their share to someone in their Will or sell it (never mind the logistical problems of trying to sell one third of a house).

Switch/Transfer vs Re-finance

To switch/transfer one’s mortgage, it involves moving your current mortgage from one lender to another without changing anything except for the term and interest rate, amortization remains the same. If switching lenders within the term, there will likely be a penalty for breaking the mortgage, though often the savings in moving to another lender with a better rate will substantially outweigh the penalty. Doing a switch at the end of your mortgage term will allow you to completely avoid the penalty.

In re-financing a mortgage, the borrower is also likely taking advantage of lower rates whilst at the same time accessing equity. The reasons for this could range from; debt consolidation, renovation, purchasing a vacation home, post-secondary education, investment planning and so on… Two other major differences are when one wants to re-finance, the maximum loan is 80% of the market value whereas a switch/transfer lender can surpass the 80% mark as the mortgage amount does not change. And finally, with re-financing the mortgage will need to be disbursed and re-registered with the lender (or new lender) therefore a fee will be charged. With a switch/transfer, there is a possibility that there will be no extra fees charged.

Accelerated Bi-weekly vs Bi-weekly Payment Frequency

Nobody wants a mortgage and everyone that has one wants to pay it off faster, or at least they should. Payments are income streams that lenders blend a principal and interest amount into one payment with the goal to pay more principal than interest. As one gets further through the term the inevitable shift happens from paying more interest to paying more principal (P&I).

The bi-weekly payment is basically 12 monthly payments spread out over 26 installments or every other week. For example, if your monthly payment is $2,000 your total yearly mortgage payment will be $24,000. The bi-weekly or 26 payment equivalent is $923.08 ($24,000.08), the net amount remaining unchanged. To speed up the inevitable P&I shift, one might want to opt for accelerated bi-weekly payment frequency. This is the key to shortening or reducing the life of the mortgage (amortization). The accelerated repayment plan takes a 24 payment cycle and adds on 2 more payments of the same size, for a total of 26 payments or 1 extra payment every 12 months to total 13 payments. So you are paying slightly more each year, thus reducing the life of the mortgage. Using the same example from above, if your monthly payment was $2,000, adding two extra payments to the grand total, one’s yearly mortgage payment would be $28,000, with each payment now being $1,076.92.

Obviously if you have questions, we here at Dominion Lending Centres would love to answer them for you.

Courtesy of Michael Hallett, AMP – DLC Producers West Financial 

I know you know today is Election Day. How could you not with all the election signs and non-stop commercials!

I’m not here to ask you to vote for a specific Party, rather, I just want to encourage you to vote. We live in a GREAT country and we can only make things better when we get involved. Sadly, many of us don’t get involved, and in fact, over the last 10 years or so we are voting less and less.

The lowest voter turnout in Canadian history was in 2008, when voter turnout fell to only 58.8%. Voter turnout in the last Federal election was 61.4% – the third lowest in Canadian history. Yikes!

The voting stations are open for 12 hours today – typically 7am to 7pm. If you have not already voted, please take an hour and make your voice heard.

Get more information from Elections Canada Including what ID you need and where to vote.

Thank you!

Courtesy of Gary Mauris, President and CEO, Dominion Lending Centres

Whenever interest rates drop or housing values jump, a refinancing frenzy follows. Whether you are looking to trim your mortgage payments, eliminate credit card debt or renovate, experts say you should fully understand all the options available to you before deciding to refinance. Here are some common pitfalls that consumers can avoid when refinancing:

1. Check interest rates to see if your new rate will pay off the penalty for leaving your present mortgage. It is best to decrease your interest rate by at least .75% to 1%. This would save you $100.00 a month on a $150,000 mortgage.

2. Know what your costs are – Check with your bank to find out what the penalty would be for an early payout.. It may be 3 month’s interest or more.. Don’t tell them you are moving your mortgage or they will pass you on to a high pressure salesperson who will try to talk you into coming into the branch to discuss the issue. It’s easier to say you are thinking about paying out your mortgage early.

3. Be sure to compare apples to apples- Make certain the rate you were quoted over the telephone was for a similar product. Comparing 3 year rates at one lender to 5 year rates at another is like comparing apples to oranges.

4. Overvaluing your Home – pride of ownership sometimes overshadows our common sense. You may expect the value of renovations to be equal to the cost of labour and materials. While return on investment for new carpeting or new paint jobs is close to 100%, it can be as low as 15% for a granite entranceway. Some people use their tax evaluations which may be too high or too low. Consider checking with your realtor or someone who recently sold their home on your street.

5. Not considering future plans – getting locked into a 10 year fixed rate when your kids will be leaving for college in 3-5 years may not be a smart move. If you are planning on buying a vacation home or an investment property why not plan for it now? You might be able to get it sooner than you expect.

6 Don’t let low interest rates or catchy slogans stop you from shopping around. Often the lower rates come with unattractive conditions: they may not be portable to a new home, the interest rate may only be available in one province, or you may be tied to the mortgage unless you have a bonafide sale of the home.

7 Finally don’t go to your present bank first. If you don’t know the rates you won’t get the best rate. The major reason people go to their present lender is convenience. There is comfort in “being known” and a belief that they should receive special treatment. The reality is that all lenders are under pressure trying to process the unprecedented volume of refinances. They have to set priorities. And you would be a low one as they already have your loan. They may lower your present rate from 3.99% to 3.79% to pacify you but if you shopped around you might find that other lenders are offering 3.19% at this time.

In conclusion, be a good consumer. Consult with your Dominion Lending Centres mortgage professional who can review the best options with you. We can help you make an informed decision on your finances.

Courtesy of David Cooke, AMP – DLC Westcor 

Today, with the Internet, we all have an abundance of information literally at our fingertips. Despite the information available many homeowners have limited knowledge about the mortgage process and products. Their lack of knowledge can turn out to be costly. Homeowners should know the difference between a conventional mortgage and a Home Equity Line Of Credit (HELOC).

A conventional mortgage is a registered charge against your home. There is a set term – 6 months to 10 years and an interest rate can be either a fixed or variable rate. Payments include principal and interest. Many homeowners choose a fixed rate as it is easier to set budgets knowing the interest rate won’t change during the term chosen. Variable interest rates will change as Prime changes. With a solid strategy in place, choosing an interest rate will be simple. If you have less than a 20% down payment (equity) the maximum amortization is 25 years. More than 20% down and a 30 year amortization is available. You can purchase a home with as little as 5% down (maximum purchase price $999,999).

A HELOC is a secured line of credit also registered as a charge against your home.  This charge can be in first position but generally is added after the fact behind a conventional mortgage. Some lenders will not permit another charge on title. Like any line of credit, a HELOC is fully open and you can borrow and re-borrow. The interest rate is tied to Bank Prime and may fluctuate. Government regulations stipulate that a HELOC cannot exceed 65% of the value of your home, unless in second position, in which case you can borrow to 80% of the value and qualifying must be done using the 5 year posted rate (4.64%) with a 25 year amortization. Payments can be as low as interest only but that is truly the never-never plan for repayment. Any spikes in interest rates can throw off the most dedicated budgeters!

If used responsibly and with a sound strategy, a HELOC can have many advantages. Purchasing investments with a HELOC creates a tax deduction for interest paid. Renovating your home with a HELOC allows you to draw from it when you need it, only paying interest on the money used. Your children’s education, buying a boat or the down payment for a recreation property can all be facilitated with a HELOC. A HELOC can be a great tool for investments, renovations and short term financing needs. Anything longer term, however, is often cheaper to choose a conventional mortgage with a variable rate. The difference in the lower interest rate outweighs the flexibility of the HELOC.

Most people when buying a home take a conventional mortgage with a fixed term and rate. The astute homeowner understands the power of a conventional mortgage combined with a HELOC. Understanding your needs together with a strong financial strategy can turn your largest debt into your greatest asset!

 Courtesy of Jeff Ingram, AMP – DLC Canadian Mortgage Experts

I have something shocking to tell you. Ready? Canadian banks are a business like any other. Gasp and shock! This is nothing less than the truth. They are mandated to produce profits and provide their shareholders with a dividend at the end of the year. This is accomplished by charging us service fees and interest on loans and in a wide variety of other ways. Given that the Canadian banking system is one of the strongest in the world, which in turn benefits our economy as a whole, I certainly do not begrudge them their right to a profit. So why am I drawing attention to this you may ask, well I will tell you.

As a mortgage professional I am often told that people would rather stay with their bank because their bank has been so good to them or because the family has been with that particular bank for generations and I am genuinely baffled by the prevalence of this attitude. Of course your bank is good to you! You are a good person who pays your bills on time, has an account, or several, which generate a monthly service fee, and when you have borrowing needs you go to them and they lend you the funds at a reasonable rate. When it comes to a mortgage though, the loyalty you feel to your bank and the assumption that they will take care of your best interests can come with a high cost if you don’t understand the fine print. Let’s look at some of the things you need to be aware of, shall we?

1. Best Rates – I see this so often. Clients come in with their bank’s best offer, which is considerably higher than the going market rate, only to be told the bank is able to match after they spend a pile of time rate shopping. Your mortgage rate determines your payment and affects your family’s budget. Make sure you get the best rate you can.

2. Prepayment Penalties – In Canada there is no set standard as to how the banks and other mortgage providers have to calculate the penalty if you break your mortgage. A mortgage is a contract after all. The banks have a right to expect a certain rate of return on the loan they have made to you but life happens and a major event can cause you to need to break your mortgage, so make sure your penalty will be calculated reasonably. I have seen this amount vary from $4,200 to over $10,000 given the policy of the lender involved on the exact same mortgage amount and time remaining in the term.

Lenders are required to disclose the calculation to you but you need to be aware that some banks will calculate your penalty in a way that is most lucrative to them.

3. Collateral Mortgages – Many of the banks now register your mortgage differently. Say your mortgage is $250,000 but your home is worth $300,000. In this instance the bank would register a charge on the title of the home for the higher amount. The reason is so that if down the road you wish to get a home equity line of credit, you do not have to pay the legal fees again to do so. That can be a useful tool. The flip side is that this type of a mortgage is trickier to switch to a new lender at renewal. You may not be able to take advantage of today’s’ crazy low rates in a fee free switch if you have this type of a mortgage.

Placing your mortgage with your own bank does not all of a sudden turn it into a chocolate covered treat or make it any more prestigious. It can actually be very costly in the long run to choose one lender over another without educating yourself on their policies. Make sure you are choosing the best overall mortgage so that you are ready for anything life throws at you. Call us at Dominion Lending Centres – we can help!

Courtesy of Anne Martin, AMP – DLC Neighbourhood Financial

Let’s face it, getting a mortgage is hard, but repaying a mortgage is harder. What is the best way to go about repaying? You say, as quickly as I can and with the least amount of interest! Good answer! Statistics tell us most folks repay their mortgage in less than 20 years. Okay how do we do that? First let’s look at how interest is calculated. Many folks think interest is calculated upfront in advance. Not true. Interest is paid in full each time you make a payment and starts accruing the next day until you make another payment. Your payment arrangements could be interest only, principal plus interest or most likely and by far the most common – principal and interest otherwise known as blended payments.

Let’s look at an example:

Let’s say you borrowed $100,000 at 3% interest and agreed to repay over 25 years with equal annual payments of $4,000 per year plus interest. At the end of year one you would pay $4000 plus $3000 interest ($100,000 @3%). At the end of year two you would pay $4000 + $2880 interest ($96,000 @ 3%). At the end of year three $4000 + $2760 ($92,000 @ 3%). This would continue each year until your final payment at the end of year 25 of $4000 + $120 interest ($4,000 @ 3%).

So it is clear that interest is calculated every time a payment is made and more importantly that interest is reduced directly in proportion to the reduced mortgage balance. These are important points as you can use this knowledge and apply to your own mortgage. The earlier you can make principal reductions in the life of the mortgage, the less interest you will pay in the long run. Every little bit helps. Let’s say you make an extra payment of $1,000 in the first year of the mortgage. That is $1,000 you will never have to pay interest on again!

How to pay extra:

The most common method and one heralded as the magic wand is the “accelerated bi-weekly” payment. It is true, it is possible to shave about 3 years off your 25 year mortgage using it. This is a good method and one that should be used, but what if you are not paid bi-weekly? I tell clients they should match up cash flows. Mortgage payments should match up to when you get paid. If paid bi-weekly then b/w payments. Weekly, weekly payments. Twice a month, semi-monthly payments. Monthly, monthly…you get the idea. So Len, how do I take advantage of the “accelerated bi-weekly” strategy if I’m not paid bi-weekly? Ah ha, simple, it’s in the math. Paying bi-weekly is the equivalent of making 13 full monthly payments in the course of 12 months or 1 year.

Let’s look at an example:

You have a mortgage payment of $1000 per month.

$1,000 per month x 12 months = $12,000 per year. We want 13 payments or $13,000 per year.

Therefore:

Bi-weekly accelerated: $13,000/26 = $500 b/w

Weekly accelerated: $13,000/52 = $250 weekly

Semi-monthly accelerated: $13,000/24 = $541.67 1st and 15th of each month

Monthly accelerated: $13,000/12 = $1083.33 monthly

NOTE: It is not how often you pay, it’s how much that counts!

Question: Len, what is a “bi-weekly non-accelerated” payment?

Answer: in the above example, it is the equivalent of paying $12,000 per year, so;

Bi-weekly non-accelerated: $12,000/26 = $461.54 b/w

Weekly non-accelerated: $12,000/52 = $230.77 weekly

Semi-monthly non-accelerated: $12,000/24 = $500 1st and 15th of each month

Monthly non-accelerated: $12,000/12 = $1000 monthly

In this case, you are not paying anything extra towards the mortgage, but you are matching cash flows.

By the way, monthly is the default option for all mortgages. If you were to examine your property title and the corresponding mortgage lien document registered against it, you would see that it is registered with monthly payments. Other payments are options offered by lenders to borrowers “in good standing”.

As always, get independent professional advice on which strategy and options are right for you. Your local independent Dominion Lending Centres Mortgage Broker can help.

Courtesy of Len Anderson, AMP – DLC Origin 

There seems much angst and concern from Government regulators over a first time buyer with less than 20% down taking longer than 25 years to pay off an appreciating (or at least historically stable) asset.

Also an occasional cry for ‘higher rates’ from the odd pundit as a way to bring debt levels down.

While there has been a drop in Mortgage rates, there has been no relative corresponding drop in consumer debt interest rates. Nor is there much room for consumer debt rates to rise without running afoul of usury laws.

I leave you to ponder this question: How is debt financing depreciating assets (like particle board furniture) or fleeting experiences such as a dinner out, a vacation, or a simple latte over a 235 year time period not a larger topic?

Courtesy of Dustan Woodhouse, AMP – DLC Canadian Mortgage Experts

The general consumer will be hard pressed when left to their own devices to shop on their own for their next mortgage, especially if they visit with one of the BIG banks. Typically they will talk about their most popular and profitable product, the 5 year FIXED rate mortgage. If you don’t know to ask for anything different, that is what they will recommend for you.

Working with a professional mortgage broker, the insight and value we can provide will help you not just get a mortgage, but build a personal home loan strategy to help you get farther ahead down the road, to better reflect you future needs and goals.

So here are the TOP 4 reasons why you need to look at a variable rate type mortgage product.

1) It’s always a cheaper interest rate: The current GAP between the Best in Market (BiM) fixed rate and BiM variable rate mortgage is a difference of = 0.60%— for the Average Canadian Mortgage Balance ($310K), that’s a savings of $159.57 that you don’t have to pay to the BANK for interest each month. Over the full 5 year term, you have saved over $9.5K in interest  – should nothing change in the prime rate (breaks down to just $29.70/month for every $100K borrowed).

2) It’s always a better monthly P+I repayment distribution which helps YOU pay down your mortgage loan balance quicker, and in effect, again pay less interest to the banks.

So –  which product’s monthly payment do YOU want to pay for principal? 59.32% of the lower payment’s monthly amount to principal or 51.15% of the higher payment’s monthly amount to principal?

3) More flexible contract terms, and cheaper to get out of if you need to. To break this type of mortgage contract the penalty calculations are SIMPLE– just 3 months interest calculated on the balance remaining, for the term remaining.

The average Canadian will do something with their contracts after the 3 yr mark so if you owed $281K after 36months of this contract, then your penalty to break about $1,500.

Whereas the FIXED is a very complicated math equation, with fine print, and potential claw backs on the discounts given up from. In the opening contractual terms, you agreed to pay them the full interest of $38,612. After 36 months, you may have paid the majority of that to them, but they will want the rest to full term – it is this calculation that can be quite severe.

YOU can always do a SWITCH into the remaining term fixed as well, should you wish to take that route – with additional costs. Most VRMs are portable, meaning if you don’t need any new money for your next purchase. You can take that existing contract with you to your new property.

4) Banks are NOT going to increase your VRM payment severely…. MYTH— you will have a legal contract term outlining the math equations associated with the Bank of Canada overnight prime lending rate. Most banks have a similar prime. Right now, (as of the last announcement BoC announcement on September 19, 2015) prime is 2.50% and holding…. most internal bank prime rates are now 2.70%. The discount associated with their prime is what they are in control of for the mortgage variable rate offering… BUT once you sign your five year contract that math equation WILL NOT change in the term. The only thing that MAY change is the Federal Government’s Regulated BoC Prime lending rate, and that is capped to a max of a quarter of a point (0.25%) as to not trigger a negative effect in the larger economy. A 0.25% increase (or decrease as we have seen twice this year) for every $100K borrowed is just a change of $12.24/month, which is manageable. Most lenders take up to 90 days to do the administration to change your interest portion of your monthly payment, which gives you enough time to speak with your mortgage agent to help decide if you want to SWITCH to a fixed. (no costs to do that)

Since 2005, the Bank of Canada Rate hasn’t changed much. Back then, it was 2.50%, and lenders had same as their internal prime rate. The Federal Government promised to keep rates low, and from June 2007 to July 2009, they froze that rate to a ZERO increase. We have only seen two increases since then, bringing the prime up to 3.00%, and on December 2010, the Feds again froze the rate, which resulted in NO adjustments until January 2015, when they opted to DECREASE the rate by 0.25%, down to 2.75 and again a second decrease in July 2015 to where we are now. The September 19 announcement has said they will keep rates at a zero increase for some time to come.

Knowing it’s an election year, it’s not likely that the politicians are going to mess around with people’s money — they want their votes… and frankly after the election, whoever the new minister will be…. will take some time to get up to speed in their new duties of that portfolio… so don’t expect much change for the next year. This was reiterated by Dominion Lending Centres’ Chief Economist, Dr. Sherry Cooper, at our most recent conference.

Conclusion: Overall effect of using the variable rate contract is this:

More flexible product, with a lower monthly expected payment; better redistribution of that payment to principal, resulting in a lower end balance to renegotiate in five years time (should nothing happen to the Prime in that term) AND if you want to be conservative, and have a set payment for your household budget then… why not use the lower VRM product and make the FIXED payment.

EVERY additional dollar you put down per month – is now all principal – reducing our overall loan, and now reducing the overall interested they CAN charge you in term.

… or… better yet… why not set that monthly payment difference aside into a TSFA account, and once a year, make a decision to either invest it, or pay down your mortgage balance, or do both.

Working with Dominion Lending Centres is not just about shopping for the BEST rate… it’s understanding the variety of products that are offered, and how best they can assist you in your own goals.

Courtesy of Teresa Martin Grier, AMP – DLC Home Capital Solutions 

Okay so you have a mortgage. Let’s face it, it’s a contract with terms, conditions, rights and obligations for both you and the lender. However, now for whatever reason you need or want to break the contract before the end of the term. Many mortgage lenders will allow this provided they are compensated. You have a rate of x.xx%, the best they can lend to someone else right now is 1% less so they want the difference, known as Interest Rate Differential or IRD. Seems fair right? Right. However, as is often the case, the devil is in the details. It is the method of calculating IRD that borrowers should be aware of as not all mortgages are created equal.

Let’s look at a couple of methods commonly used with what we Mortgage Brokers call “A” business. A or AAA business is where everything on the file makes sense, good credit, documented income and a normal residential type property. This is the vast majority of mortgage business on the books in Canada.

Method A – Posted Rate Method

This method uses lender posted rates to arrive at the formula to calculate the penalty. Posted rates are generally used by major Banks and some Credit Unions. These are the mortgage rates you will see on their websites and you will recognize them because the rates will not appear reasonable. They subtract a discount from these rates to arrive at the actual lending or contract rate. Nobody pays posted rates. Let’s say the posted rate for a 5 year term is 4.90% but you are savvy, able to negotiate a discount of 2% and come away with an actual mortgage rate of 2.90%.

Everything is rolling along great for 2 years when, for whatever reason, you need to exit the contract. What will my penalty be you ask, hopefully of the lender, while silently begging for mercy? The answer; the greater of 3 months interest or IRD. Okay 3 months interest sounds good but IRD sounds scary! It can be scary as it is subject to a formula over which you have no control and can be easily manipulated. You have 3 years left on your contract, the lender says their “Posted Rate” for 3 year terms is 3.40%. You think great! My rate is 2.90% your rate is higher at 3.40%, no difference just 3 months interest and I’m outta here! Wait a minute…remember that 2% discount you negotiated? That’s right, it gets subtracted from the posted rate to arrive at the rate that will be used to calculate your penalty. So 3.40% – 2% becomes 1.40%. Who lends at 1.40%? No one. However, your contract rate is 2.90% – 1.40% equals a IRD difference of 1.50%, times 3 years left on the contract equals a penalty of 4.50% of your mortgage balance. Gulp! On a mortgage of $300,000 that is a $13,500 penalty.

The main underlying problem with this method is the fact the posted rates and /or the discounts, can be easily manipulated depending on the interest rate curve, to favour the lender. What happens in today’s interest rate environment with a gently sloping curve is that posted rates decrease from long term to short term however, so do the discounts. For example, a 2% discount on a 5 year fixed term is close to actual nowadays however, you would never get a 2% discount from posted on a 3 year term. Less than 1% would be more realistic.

Let’s look at another common and more favourable method.

Method B – Published Rate Method

This method uses lender published rates which are close to actual lending rates but do not include unpublished rates, which may only be available to Mortgage Brokers or Quick Close specials, among others. Generally these rates are used by Wholesale lenders, many of whom acquire all or most of their business from Mortgage Brokers. You will see these rates on the lender websites and will recognize them because the rates will appear reasonable. Let’s look at an example using the info above but let’s assume at outset you chose a Method B lender as opposed to a Method A lender and compare. Let’s assume your rate is 2.90%, which was the published rate at the time or a special your Mortgage Broker obtained for you. You want to exit the mortgage at the same 2 year point in time. What will my penalty be you ask, hopefully of the lender, while silently begging for mercy? The answer; the greater of 3 months interest or IRD. You have 3 years left on your contract, the lender says their “Published Rate” for 3 year terms is 2.60%. You think great! My rate is 2.90% your rate is 2.60%, not much difference…and you would be right! No discounts involved, just a straight up comparison. Your contract rate is 2.90% – 2.60% equals a difference of 0.30% times 3 years left on the contract equals a penalty of 0.90% of your mortgage balance. On a mortgage of $300,000 that is a $2,700 penalty. Much easier to swallow than $13,500!

Think these numbers sound too far apart to be real? Not at all. In the above examples I have used rates fairly close to actual. This means that in the time frame covered, above rates are and have been essentially flat or slightly declining. So even though rates are/have been roughly the same for the lenders at the time origination vs time of exit, which means there cannot be much harm accrued to the lender, one method produces a very punitive penalty. Doesn’t seem fair does it? The Government recently stipulated that lenders must better disclose their methods, be more transparent and use plain language. However, the Government did not mandate which methods are to be used. So it is buyer beware! As always, get independent professional advice. We here at Dominion Lending Centres can guide you through the maze.

Now the caveat: having said all that, we do in fact support the major banks and credit unions and send billions of dollars of mortgages their way each year. Why? Well, they have by far the widest product selection available in the marketplace. Mortgage products and structures that you simply cannot get anywhere else. This is important because the first question I am asked by a borrower is “can I get approved?” All else is secondary. When it comes to penalties, forewarned is forearmed! Best to know going in. A Mortgage Broker can advise what best options exist and will know which lenders use which methods or variations of them.

Moral of the Story: As always, get independent professional advice on which lender and options are right for you. Your local independent DLC Mortgage Broker can help.

Good to know tidbits:

A closed mortgage also works in your favour, after all, as long as you are not in default, the lender can’t call you up and say, listen we found someone else who is willing to pay a higher rate than you have and we want out, we would like you to repay us ASAP. Gasp!

Variable rate mortgages generally charge a penalty of 3 months interest, no IRD. However, this is not true of all. Again, get independent professional advice.

By law, if you have a mortgage term longer than 5 years and you exit after 5 years have elapsed, the maximum penalty is 3 months interest.

Courtesy of Len Anderson, AMP – DLC Origin 

First, let’s start with a definition of each.

Mortgage Terminology

Rate-Hold: a rate-hold is simply that. The financial institution holds a rate for a specific term and for a certain number of days. In Canada we typically hold rates for 120 days. You must close your mortgage on or before that date to secure the held rate. In addition, in the event that rates go up over that period of time you don’t have to worry, you have your rate guaranteed. If rates lower, then your rate lowers as well.

Pre-Approval: if you are house shopping then a pre-approval can help you shop with confidence. A pre-approved mortgage certificate outlines how much you qualify for and will also hold a rate for you. Unlike just the rate hold, a pre-approval is looked over by an underwriter working for the particular financial institution. The underwriter will look at all the data provided in the application, along with a credit history report, to determine credit worthiness. If the underwriter has not been given upfront documentation, for example employment and down payment information, then the pre-approval will come back with “conditions”. Essentially saying, yes, based on the info you provided we are ready to extend credit to you once you satisfy the following conditions. This can also be called pre-qualification.

Should you wish with absolute surety that you will not be denied credit, then it is best to submit your paperwork upfront.

In our fast paced society clients receive rate-holds, not pre-approvals. So please make sure you know what you are getting based on what you need.

Almost done. If you are putting less than 20% down on your home you will have to obtain mortgage insurance from CMHC or Genworth. Both of these institutions will not look at your file unless it is a “real deal”, and they can sometimes over-rule an approval from the financial institution. I’ve completed many mortgage transactions and while I have not seen this many times, it has happened if you are in the higher risk category, for example, your employment is just less than one year or credit history is not very long. If you are not in the higher risk category, then a pre-approval should give you the confidence to look for a house without worry.

Remember to always place a financial clause in your agreement of purchase and sale. Give yourself the time and the peace-of-mind.

Courtesy of Sandra Tisiot, AMP – DLC Smart Debt