30 Mar

Staying out of the Penalty Box

General

Posted by: Karli Shih

When it comes to mortgages, it is easy to focus on rates and your current situation, but the reality is that life happens and when it does, rates won’t be the only thing that matter.

First and foremost, the most important thing to remember is that a mortgage is a contract. That means that there is a penalty involved if the contract is ever broken. This is something that every homeowner agrees to when you sign mortgage paperwork, but it can be easy to forget – until you’re paying the price.

Why break your mortgage?

You’re probably wondering why you would ever break your mortgage contract? Well, you might be surprised to find out that 6 out of 10 mortgages in Canada are broken within 3 years and there are typically nine common reasons that this happens:

  • Sale and purchase of a new home
  • To utilize equity
  • To pay off debt
  • Cohabitation, marriage and/or children
  • Divorce or separation
  • Major life events (illness, unemployment, death of a partner)
  • Removing someone from title
  • To get a lower interest rate
  • To pay off the mortgage

It is always important to think ahead when signing a mortgage agreement, but not everything can be planned for. In that event, it is important to understand the next steps if you do indeed need to break your mortgage.

Calculating penalties

Typically, the penalty for breaking a mortgage is calculated in two different ways. Lenders generally use an Interest Rate Differential calculation or the sum of three months interest to determine the penalty. You will typically be assessed the greater of the two penalties, unless your contract states otherwise.

INTEREST RATE DIFFERENTIAL (IRD)

Fixed rate mortgages can be subject to penalties calculated using an Interest Rate Differential (IRD).  In Canada there is no one-size-fits-all rule for how IRD is calculated and it can vary greatly from lender to lender. This is due to the various comparison rates that are used.

However, typically the IRD is based on the following:

  • The amount remaining on the loan
  • The difference between the original mortgage interest rate you signed at and the current interest rate a lender can charge today

In this case, these penalties vary greatly as they are based on the borrower’s specific mortgage and the specific rates on the agreement, and in the market today. However, let’s assume you have a balance of $200,000 on your mortgage, an annual interest rate of 6%, 36 months remaining in your 5-year term and the current rate is 4%. This would mean an IRD penalty of $12,000 if you break the contract.  Ideally, you will want to be aware of what your IRD penalty would be before you decide to break your mortgage as it is not always the most viable option.

THREE MONTHS INTEREST

For variable rate mortgages, the penalty for breaking your mortgage is simply equivalent to three months of interest. In some cases, fixed rate mortgage penalties may also be subject to just a three months’ interest penalty. Using the same example as above – balance of $200,000 on your mortgage, an annual interest rate of 6% – then three months interest would be a $3,000 penalty.

Paying the penalty

Waiting out your current mortgage term before making a change to your mortgage is the best way to avoid being stuck in the penalty box.  When it comes to making the payment, some lenders may allow you to add this penalty to your new mortgage balance (meaning you would pay interest on it) if you refinance your mortgage prior to the end of your mortgage term. You can also pay your penalty up front.

If do get stuck in the penalty box, do note that, while only calculators can be great tools for estimating penalties, it is best to call your lender and discussing with your mortgage consultant directly for an accurate number.

Original Post Link from DLC Marketing Team

23 Mar

Investment Properties: Rates, Qualifying, and Down Payment

Mortgage Tips

Posted by: Karli Shih

Investing in real estate outside of your principal residence is one way to increase your net worth over time.  A few things to know about buying investment properties:

  • Mortgages for investment properties are typically higher than rates for a principal residence or second home purchase by approximately .10% to .20%.
  • Your income factors into qualifying for a purchase of a home.  The rental income from an investment property assists in qualifying on this type of purchase, and some lenders are more generous than others in applying that income in their qualifying calculations.
  • You can buy a home in Canada for as little as 5% down.  Currently investors can buy investment properties with 20% down.  Lenders typically require this to come from the investor’s own resources.
  • Some lenders also require you to have a minimum amount of liquid assets in addition to the minimum 20% required down payment for the property.
  • The federal government is currently reviewing the 20% down payment policy as part of its Fairness in Real Estate Action Plan to address housing accessibility and affordability for all Canadians. This may mean an increase to the minimum down payment for investment properties is on the horizon.

Reach out to your Mortgage Consultant today to see if purchasing an investment property might be right for you.

16 Mar

Canada Reached Full-Employment in February

General

Posted by: Karli Shih

 

Statistics Canada released the February Labour Force Survey this morning, reporting a much more significant than expected 336,600 net new jobs, with the unemployment rate falling a full percentage point to 5.5%. This is the first time the unemployment rate fell below its pre-Covid level and reinforces the expectation for another Bank of Canada rate hike in April and as many as five more increases this year. Last month’s recovery more than offsets the losses that coincided with the Omicron lockdowns in January and points to the continued resilience of the Canadian economy.

The loonie jumped on the news, as did Canadian government bond yields. 

Other indicators point to an increasingly tight labour market in February. Total hours worked surged 3.6% to a record high, while the employment rate rose 1.0 percentage points to 61.8%. Gains were most notable in the hard-hit accommodation and food services sector (+114,000; +12.6%), and information, culture and recreation (+73,000; +9.9%) industries. Employment increases were widespread across provinces and demographic groups.

Average wages increased 3.1% from February 2020, significantly faster than the 2.4% rate recorded in January. That could signal that inflationary pressures, already intense, continue to build.

Bottom Line 

This Labour Force Survey was conducted in mid-February, before the start of the Ukrainian War. since then, many commodity prices have surged, especially oil, gasoline, aluminum, wheat and fertilizer. This will accelerate CPI inflation worldwide, which dampens consumer and business confidence and reduces family purchasing power. The war has also contributed to continuing supply disruptions, all of which point to increased uncertainty and potentially slower growth. 

The Bank of Canada is likely to hike interest rates when it meets again on April 13 by 25 basis points. Any more than that is imprudent given the risk of an economic slowdown. The outlook for the remainder of this year is more uncertain and likely to be volatile, depending on how long the war lasts. Right now, the likelihood for another five or six rate hikes this year and a few more next year. This, however, is subject to change.

 

Information courtesy of:
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca
9 Mar

5 Reasons to Invest in a Home Inspection

Mortgage Tips

Posted by: Karli Shih

While home inspections might not be the most exciting part of your home buying journey, they are extremely important and can save you money and a major headache in the long run.In a competitive housing market, there can sometimes be pressure to make an offer right away without conditions. However, no matter how competitive a market may be, you should never skip out on things designed for buyer protection – such as a home inspection.

You may have a good eye for décor and love the layout of your potential new home, but what is under the surface is typically where headaches can lie. We have all heard the expression “don’t judge a book by its cover” so why would you make the most important purchase in your life without taking a very close look at it?

In fact, there are five reasons that a home inspection might just be the best $300-$500 you ever spend.

It Provides An “Out”

When buying a new property, it is always best to avoid taking chances. While a house may look great on the surface, hidden structural issues such as a cracked foundation or roof damage can easily turn into expensive repairs. A home inspection can help reveal any large and/or hidden issues, which can often provide an ‘out’ for you from your contract.

If you find something that will cost a considerable amount to replace or repair, you can go back to the seller’s agent and ask for a reduction in the price. A leaky roof may cost a few thousand to replace. Perhaps the seller would split the cost with you? It’s worth asking. If the price cannot be re-negotiated as issues come to light, then it may be best to walk away on the basis the home will cost you too much in the long run.

Confirms Safety And Structural Integrity

Another benefit of having a home inspection is not only to find issues, but also to confirm structural integrity. During an inspection, the inspector will review everything from the attic to the farthest reaches of the basement looking for things like mold, holes in the chimney, saggy beams or improper wiring.

Reveal Illegal Additions Or Installations

Similarly to determining any safety and structural issues, home inspections can also reveal hidden additions or DIY installations that may cause trouble down the road. If the seller wired the house improperly or used substandard materials, it not only could cost in the future but it could even invalidate your home insurance should something happen!

Forecast Future Costs

A home is an ongoing expense, much like a car. Unless it is brand new, regular maintenance and updates will be required to replace things when they become old and inefficient. For instance, water heaters typically last for 6-10 years, the life of a good roof is around 20 years, and furnaces can last up to 25 years. The home inspection report will include an estimate on the remaining life for each of these  items, giving you an idea of future expected costs and providing you time to save for their eventual replacement.

Peace of Mind

Finally, and perhaps most importantly, getting a home inspection is important for your own peace of mind. A home is a huge investment, and one that you will be paying off for 20 or 30 years. It is much easier to feel good about your investment after you have gone through a home inspection and you know the house is safe and that you won’t run into any surprise problems down the road. While a home inspection isn’t free, peace of mind is priceless and a few hundred dollars is certainly worth the expense.

Original post courtesy of the DLC Marketing Team.