This is a guest post from Jeff Burton with Royal Bank. Jeff is a Mortgage Specialist and can be reached anytime at 709-685-4816
With spring just around the corner, many people contemplate selling their home. There are many variables to consider. A commonly asked question is; “if my mortgage is not up for renewal, can I sell my home?” or “if I sell my home before it is up for renewal, will there be a pre-payment charge or most commonly referred to as a penalty?”
The good news is, you have options.
Your mortgage may be portable and/or assumable. If your mortgage is not up for renewal and you sell your home, then most likely there will be a pre-payment charge if you do not avail of one of the previously mentioned options. The amount of this pre-payment charge will vary depending on a number of factors and best answered one on one by a mortgage professional.
Porting your mortgage refers to transferring your mortgage from one property to another. By taking advantage of this option, you will avoid the pre-payment charge since the financial institution does not loose your business. Most often a blended rate will occur. This is when the financial institution looks at your current rate (and the time remaining in that term) and blends it with the closest term (to time remaining) and its rate to calculate a blended rate. Normally you have a 90 day period to port your mortgage. So from the sale date of your existing home to the purchase of your new home, it should be within 90 days. It is possible to port your mortgage anywhere in Canada. Again this is best discussed one on one with a mortgage professional.
If you are selling your existing home but not buying a new property within the 90 day period or you are moving outside of the Canada, you may avail of having someone assume your mortgage. In short, an assumable mortgage means someone can take over your mortgage. Since the financial institution still maintains the mortgage, this will allow you to move forward in your plans and avoid the pre-payment charge. There maybe be underlying conditions if your mortgage is assumed, again this is best discussed with a mortgage professional.
Don’t worry if you didn’t understand every point made above. The important thing is being aware of the options available. This allows you to make an informed decision that is right for you. Ask questions. Re-ask if you are unsure of the answer. This is your future and you deserve to know what is available to help you accomplish your goal.
The Canadian Government is making it tougher for home buyers to obtain a mortgage and with good reason. Starting October 15 of this year, the new rules will take effect.
We are all familiar with the sub-prime mortgage meltdown in the States the past year but while Canada is not even close to this disaster the government still feels it necessary to secure and maintain a strong mortgage and housing market.
The changes include:
- Cutting the maximum amortization period to 35 years from 40.
- Requiring a minimum down payment of five per cent, whereas loans for 100 per cent of the price are possible now.
- Establishing a requirement for a consistent minimum credit score.
- Introducing new loan-documentation standards.
The people effected are the purchasers with less the 20% downpayment for a property as they are the people that require mortgage insurance with the purchase of real estate.
Mortgage insurance protects lenders (ie Royal Bank, Scotia Bank etc) when a borrower (the Purchaser) defaults on the loan if the sale of the property doesn’t cover the debt.
I for one am in agreement with this change. The zero down, 40 year mortgage that was introduced a couple years ago allowed home buyers the ability to purchase a home yet become heavily in debt. There was a lot of buyers that entered the real estate market in Canada during this time and probably shouldn’t have.
It will be interesting to see the public’s reaction to these changes.
Read the Globe and Mail Article – Ottawa tightens mortgage rules to avoid ‘bubble’
Read the CBC News release – Ottawa tightens mortgage insurance rules
Norm Fishers Saskatoon Blog Article – Canadian Government Says, “No More 40-year Mortgage for You!”
Edmonton Real Estate Blog – No More Zero Down, 40 Year Mortgages
Canadians who have recently purchased real estate plan on paying off the mortgage as quickly as possible according to an annual mortgage consumer survey released Wednesday by Canada Mortgage and Housing Corp.
Seventy-eight per cent of respondents said they wanted to pay their mortgages off as fast as possible and one-third said they had made a lump-sum payment toward that end.
Eighty-four per cent of homeowners who are making weekly or biweekly payments on their mortgages are doing so at an accelerated rate in order help to shorten their amortization period, according to the mortgage insurer.
The fact that new homeowners are working to pay down principal early and are accelerating payments is a good indication that this responsible behavior will continue throughout the life of their mortgage.
More Canadians are becoming aware that, since mortgage interest is not tax-deductible in Canada, (as it is in the US), you are making mortgage payments of both principal and interest with money that you’ve already paid tax on “after tax dollars”. This makes it even more important to pay down your mortgage as soon as possible!
The Bank of Canada just cut the key interest rate by 50 basis points (or 1/2 percent) to 3.50%. Chances are throughout the week, those with a variable mortgage (currently at 5 per cent) will see this reflected at their respective banks. For those mortgage shopping, this can lead to a very attractive scenario. Based on a 25 year mortgage at $200,000, it can save you approximately $58 per month. Remember that the variable rate mortgage is not directly related to the fixed rate mortgage so you may not see the 4 and 5 year term mortgage rate drop by 50 basis points. Your personal loans and lines of credit will also be reduced by 50 basis points.
The reason: the Bank of Canada based the decision around its January projection for inflation which has shifted to the downside. They also noted clear signs that the U.S. economy is likely to experience a deeper and more prolonged slowdown than had been projected. With inflation measures already showing a sharp slowing – the core CPI inflation rate dropped to 1.4% in January from 2.5% last June – the Bank decided to act aggressively and trim the overnight rate by 50 basis points to offset the downside risks facing the economy.
Why not put your rent money into an appreciating asset instead of in your landlord’s pocket?
Do you cringe every month when it’s time to write that monthly rent cheque? Like many other renters, you probably wish that your hard earned money was being put towards something that has potential payback but haven’t explored your options because you don’t think homeownership is within your reach. If you are currently renting you may be surprised to learn that there have been recent mortgage product innovations such as a minimal down payment (0%-5%) and extended amortization that can make owning your first home more than a pipe dream.
This is a great time to get into the St. John’s housing market. House prices are expected to appreciate by 12% in 2008 according to Remax. 2-apartment homes and condos are in demand but when it comes to first time buyers, many renters hesitate because they are concerned about two things. The first is that they may not have enough for a down payment. The second is that they are afraid that they may not be able to carry their monthly mortgage payments. Today, these concerns can be addressed with the minimal down payment and extended amortization options that are available to first time home buyers. Renters can now buy their first home with very little down and also not have to worry about high mortgage payments.
With minimal or zero down payment products, many financial institutions will provide you with 100% financing for the purchase price of the house. Some lenders may also let you borrow close to 100% in financing and offer you a small percentage back as cash. You are able to borrow 95% of the purchase price to put towards your down payment, closing costs, or other costs associated with purchasing a home. Do keep in mind that with minimal down payment you will most likely need to purchase insurance and also have to commit to a longer mortgage term.
Remember that if you do have money set aside for a down payment or have RRSPs you should still consider putting a larger down payment because this does lower your total mortgage amount and ultimately the amount you will pay in interest.
If on the other hand you are concerned that you will not be able to make your mortgage payments, then you should consider extended amortization products that lower your monthly payment amount. This is done by having the mortgage paid back over an extended period of time. Your monthly payments on a 35 or 40 year mortgage will be lower than the payments on a traditional 25 year mortgage.
You should note that with extended amortization products, you will be paying more interest over the long run but there are definite benefits to getting into a hot housing market early. Plus, you always have the option of decreasing your amortization period by exercising your prepayment options or by increasing monthly principal and interest payments.
A valuable resource for information on homeownership is the Canada Mortgages and Housing Corporation (CMHC) website. You will find publications such as Bringing Home Ownership Within Reach.
Given the availability of these new options and the resources to support tomorrow’s homeowners, it’s easy to see why many renters may be switching their rental payments to equity building mortgage payments within the next year.
Last week both the United States and Canada dropped their interest rates, 0.75% and 0.25% respectively. With the recent subprime mortgage fiasco in the U.S, people have been asking was the rate reduction due to this? Will Canada follow the same fate? And most importantly….what exactly is a subprime mortgage?
Here is my interpretation of the subprime mortgage:
A subprime mortgage refers to a mortgage offered to a borrower that is higher risk than the normal home buyer. They do not receive a lower interest rate. It’s actually the complete opposite. Potential home buyers who have poor credit scores make them candidates for a subprime mortgage and they typically pay much higher mortgage rates.
The problem was that the lenders offered an introductory rate which was comparable and at times lower than the prime mortgage rate to attract clients. You can begin to see the bigger picture forming.
The introductory rates were only temporary and after a year or two they expired and the interest rate on a subprime mortgage increases. This resulted in many, now home owners, who once had a low introductory mortgage rate paying interest rates in the double digits.
Remember, they were high risk from the start with “special” introductory offers. When the rates jumped to double digits, the subprime meltdown began.