The Mortgage Checklist – Variable Rate Mortgages (Part 5)

October 30th, 2013

If you’re applying for a mortgage, there are some things you will need to know. As a result, we have created a mortgage checklist, so you can ask your lender/broker the right questions. Here is part 5 of 9, featuring questions about VRMs.

Variable-rate Mortgages

24. Does your variable rate mortgage have any restrictions?

Some variable-rate mortgages prevent you from porting or blending your rate, prevent increases and have fewer prepayment privileges.

25. Can I fix my payment so that it doesn’t move if rates increase?

If so, and rates rise, more of your payment goes to interest. If rates fall, less of your payment goes to interest. Note that most fixed payment variable mortgages have “trigger rates.” If prime rate increases so much that it exceeds the trigger rate, the lender will boost your “fixed payment.”

26. How fast does the lender increase rates when prime rate rises?

Some lenders, like ING, adjust their variable rates every three months, which keeps your rate lower longer. (This delay works against you if rates drop)

A few lenders offer capped-rate variables with a ceiling on how high your rate can go. These are usually a bad deal if you do the math.

27. Can I convert my variable rate to any of the lender’s fixed rates, at any time?

Remember, you’ll rarely get the best fixed rate when you convert. Moreover, it’s impossible to successfully time interest rates over the long run. For those reasons, do not go variable to save money in the short run, hoping to lock in “at the right time.” Variables are a long-term strategy.

28. If I convert my variable rate to a fixed rate, will I get the absolute lowest rate the lender offers for that term?

Typically you won’t. Lenders know you’d have to break your mortgage and pay a penalty. Most use that as leverage to offer merely average rates on conversions.

The Mortgage Checklist – Refinancing (Part 4)

October 28th, 2013

If you’re applying for a mortgage, there are some things you will need to know. As a result, we have created a mortgage checklist, so you can ask your lender/broker the right questions. Here is part 4 of 9, featuring questions about refinancing.

Refinancing

19. Is there any restriction on when I can refinance?

20. Can I increase my mortgage at any time, at fully discounted rates, and without paying any penalty?

This is vital if you need to refinance or buy a more expensive home.

Some lenders have a policy of charging penalties, or not giving you the best rates when you increase your mortgage.

21. Can I extend my mortgage term at any time without penalty, and at fully discounted rates?

This is useful if rates drop and you want to blend your rate with the new lower rate (which lowers your payment). It’s also key if you’re past the middle of your term and you want to mitigate the risk of higher rates at renewal.

Beware of lenders that let you “blend and extend” but then bake a prepayment charge into your new mortgage rate.

22. Is your mortgage readvanceable?

Readvanceable mortgages let people with at least 20 per cent equity re-borrow principal that they’ve previously paid off. This feature usually involves a credit line linked to your mortgage. Readvanceables are good low-cost sources of funds for investment opportunities, a small business, renovations and so on. Readvanceables also let you pre-pay your mortgage without the fear of not having cash on hand in an emergency. Some people even use them as an alternative to a contingency fund.

There are two types of readvanceables: manual (where you must apply to re-borrow paid-down principal) or automatic (where every principal payment is instantly available to you if you need it).

23. Can I roll in my refinance or switch costs to the new mortgage?

The Mortgage Checklist – The Penalties (Part 3)

October 25th, 2013

If you’re applying for a mortgage, there are some things you will need to know. As a result, we have created a mortgage checklist, so you can ask your lender/broker the right questions. Here is part 3 of 9, featuring questions about the penalties.

Penalties

12. Can I break my mortgage any time I want?

Most lenders let you pay a penalty and get out of a closed mortgage early. Some no-frills lenders only let you out if you sell your property. Some don’t let you discharge your mortgage at all, until the term is up.

You’ll almost always pay a rate premium for an “open” mortgage with no penalties. If you plan to keep the mortgage for more than six months, you’re often better off choosing a lower rate and paying the penalty to get out early (if needed).

13. If a mortgage penalty applies, how do you calculate it?

Fixed rate penalties are usually three months of interest or the interest rate differential (IRD), whichever is more. Variable-rate penalties are typically three months of interest based on your current rate.

Penalty calculations based on posted rates (i.e. rates higher than the rate you actually pay) can sometimes be several thousand dollars more expensive. This method is common at most large banks, and is their single greatest weakness. If you want to compare penalties, try some sample calculations using each lender’s online penalty calculator.

Some lenders get tricky. For example, instead of a standard three-month interest penalty based on your current rate, some lenders charge three-month interest penalties based on posted rates. Others charge interest rate differential penalties when three-month interest charges normally apply. A few even ding you with 12-month interest penalties or penalties equal to three per cent of your balance. Avoid such mortgages unless the rate savings is significant.

14. Can I port my mortgage to a new property to avoid penalties?

Don’t underestimate your odds of moving. Look for good porting flexibility, especially if you’re young, need job mobility and/or have a growing family.

Some lenders let you port, but not increase. That forces you to pay a penalty if you buy a pricier house and need more financing.

Note that credit unions typically prevent porting across provincial lines–a problem if you move out of province.

If you have a line of credit attached to your mortgage, make sure you can easily port it as well and keep your rate.

15. How long do you give me to port my mortgage?

The longer the better. At least 60 days is preferable. Some lenders make you close your old property and new property on the same day, which can be unrealistic.

16. Do you deduct interest from my penalty rebate if I port my mortgage and my old and new house don’t close on the same day?

17. If I break the mortgage early, can I use my unused prepayment privileges to lower the penalty?

Some lenders restrict you from using your prepayment options for this purpose, if you do so within 30 days of discharging the mortgage. Some lenders, like RBC, automatically apply unused prepayment privileges to lower your penalty when refinancing–a cost-saving feature.

18. If the mortgage includes cash back, how much of that cash do I have to repay if I break the mortgage early?

Usually it’s a pro-rated amount but some lenders make you repay 100 per cent of the cash back, even if you break the mortgage one day early.

Have your mortgage adviser calculate your “effective rate,” including the cash back. That tells you how much of a rate premium you’re paying for the cash.

The Mortgage Checklist – Extra Payments (Part 2)

October 23rd, 2013

If you’re applying for a mortgage, there are some things you will need to know. As a result, we have created a mortgage checklist, so you can ask your lender/broker the right questions. Here is part 2 of 9, featuring questions about extra payments.

Extra Payments

8. How much extra can I prepay each year without penalty?

Standard “closed” mortgages offer annual “lump-sum” prepayment options ranging from 10 to 30 per cent of the original mortgage amount.

Don’t pay for more prepayments than you need (only 18 per cent of Canadians use lump-sum prepayments in any given year). But, just as importantly, don’t underestimate the prepayment options you’ll need. Prepayment flexibility can help you reduce a mortgage penalty, or it can save you interest in the event of a cash windfall.

9. When can I make these prepayments?

The best lenders allow you to make prepayments any time during the year, in multiple instalments.

10. How much can I increase my ongoing payments each year?

Most mortgages let you increase your ongoing payments by 15 to 20 per cent each year. Some go up to 100 per cent and/or offer double-up payments.

11. What payment frequencies do you have?

Examples include monthly, bi-weekly, weekly, and semi-monthly.

Accelerated payments (like “accelerated bi-weekly”) are the equivalent of making one extra monthly payment per year. RBC Mortgage Specialist Jennifer Bissonnette notes: “A 25 year amortization can be reduced to 22 years simply choosing accelerated bi-weekly payments instead of monthly.” Being mortgage-free three years sooner will cost you just $59 more every two weeks, she adds. That’s on a $300,000 mortgage at 3.69 per cent with a 25-year amortization.

Mortgage Checklist – The Rate (Part One)

October 21st, 2013

If you’re applying for a mortgage, there are some things you will need to know. As a result, we have created a mortgage checklist, so you can ask your lender/broker the right questions. Here is part 1 of 9, featuring questions about the rate.

The Rate

1. Is the rate you’re quoting me the lowest I can possibly get, given my qualifications and mortgage preferences?

2. If I find a lower rate for a similar product elsewhere, will you match it?

3. How many other lenders did you check when shopping around my mortgage? Which major banks and credit unions did you not check?

4. How long will the lender hold my rate, once I apply?

5. If I get approved and rates drop, how will I know? Will the lender automatically adjust my rate lower? Will I get the lender’s very best promotional rates if its rates fall?

6. Can I get a pre-approval at this rate?

7. Do you offer fully discounted rates up front at renewal? Or do you send me an inflated rate in a renewal letter and hope I sign it?