Monthly Archives: October 2010

Bank of Canada does not increase prime rate

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At today`s scheduled interest rate announcement the Bank of Canada has left the prime rate unchanged. This is great news for homeowners in a variable rate mortgage, as prime will stay at 3.00% and variable mortgage rates can be found as low as 2.20%.

A look at the prime lending rate in 2010
Jan-May 2010        2.25%
June 2010             2.50%
July 2010              2.75%
Sept 2010             3.00%
For historical prime rates see the Bank of Canada.

In its official statement, the Bank of Canada “expects the economic recovery to be more gradual than it had projected” which is driven by “a more modest global recovery. The inflation outlook has been revised down..and core inflation is expected to hit 2% by the end of 2010.”

Those in variable rate mortgages will enjoy the extended period of low variable rate mortgages. However, with fixed mortgage rates at all time lows, it looks like all homeowners will sleep better tonight.

The hidden costs of refinancing your mortgage

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Refinancing your mortgage can be an excellent source of financing to consolidate debt, complete a home renovation or to send your children to post-secondary education. In Canada, you can refinance your mortgage up to a loan-to-value ratio of 90%. Loan-to-value ratio is the total mortgage amount divided by the home value.

For example

Current mortgage:       $150,000
Home value:                $200,000
Current loan-to-value:   75%

Maximum mortgage:  $200,000 * 90% = $180,000
Additional mortgage:  $180,000 – $150,000 = $30,000

Though refinancing may be cost-effective it’s important to consider and understand all of the costs involved. To determine if refinancing is the most financially viable option, you must consider the interest rate and other costs involved and compare this to other financing options such as a line of credit.

Mortgage breakage penalty
When you terminate a mortgage contract before the end of the term you will come across a mortgage penalty. This is normally calculated using interest rate differential (IRD) or three months interest. Speak with your current provider to understand and calculate your penalty.

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What is the difference between the term and amortization of a mortgage?

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Whether a first-time home buyer or experienced mortgage shopper, when it comes time to finding the best mortgage rate, you will have to make important decisions about the term and amortization of your mortgage.

If a friend has just decided on a 5-year variable rate for a mortgage that will take them 25 years to pay off, the 5-year period refers to the term, and 25-year period refers to the amortization of their mortgage. The term is related to the specific mortgage rate, while the amortization period determines how long it will take a homebuyer to pay off their mortgage. Let’s now look at both in more detail.

A term is the length of time you commit to the rules, conditions and interest rate with a specific lender. Though a term can last anywhere from 6 months to 25 years in Canada, 62% of Canadians select a term lasting 4 or 5 years.
Let’s look at an example:
Currently BMO is offering a 5-year fixed mortgage rate with a 3.59% interest rate. If you select this, you will pay 3.59% for the next 5 years. You must also follow the rules and conditions of the mortgage such as 10% prepayment options and refinancing restricted to BMO only.

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