The following article is by Robb Nelson from Family Lending, who discusses early mortgage payoff penalties and how they are calculated. You can view Family Lending’s Ontario mortgage rates on RateHub.ca.

The hidden costs of paying down your mortgage

If you’re like most Canadian mortgage holders, chances are you have one goal in mind when it comes to managing your mortgage debt – getting rid of it! According to a 2012 RBC Home Ownership Poll, 14 percent of Canadians have made double-up mortgage payments recently (i.e. their regular payment plus an additional amount equaling as much as one extra payment), while another 13 percent have made a one-time lump sum payment in order to decrease their outstanding mortgage principle.

But what if all your hard work and dedication could end up costing you more money in the long run?

Just when you thought you were done paying the bank for good, they could slap you with a hefty “early payoff penalty,” essentially punishing you for your years of financial diligence. According to the Canadian Bankers Association, early payoff penalties are put in place so that the bank can manage risk and cover costs. However, as per the Financial Consumer Agency of Canada (FCAC), a government body dedicated to educating consumers of their financial rights, banks are far from conservative when assessing this premium penalty. In fact, over the past few years, the Agency has “observed a significant increase in the number of complaints related to mortgage prepayment penalties.”

The difference between an open and closed mortgage

The only mortgage that does not have an early termination charge is an “open” agreement. As such, open mortgage holders have the ability to pay off their mortgage at anytime. Not surprisingly, open mortgages are charged a premium interest rate so that the bank can recoup as much interest as possible during your payment term.

While available, open mortgages are far less common than their closed counterparts. Closed mortgages hinge on an agreement that stipulates the debt cannot be prepaid, renegotiated or refinanced before maturity, except according to its terms. Typically, the wording of these terms will be as follows:

The mortgage penalty will be the greater of three months interest penalty OR the interest rate differential (IRD).

Before you decide to pay down your mortgage early, it’s important that you understand the repercussions of both options.

The three-month itch

Almost all variable rate mortgages in Canada use the three-month interest penalty calculation. This is based on three months simple interest at your current mortgage rate on the principal amount owing at the repayment date.

So, let’s pretend that you have a $400,000 mortgage at 5.75 percent for the last 5 years. Due to great economic circumstances, you’ve been able to pay down half of the principal in this time. Here’s what your early mortgage payoff penalty calculations would look like based on a three-month interest calculation:

• Mortgage value at time of renewal = $200,000
• Amount of annual interest = 5.75 percent x $200,000, or $11,500
• Divided by 12 months = $958.33/month
• As such, your three month penalty would be $958.33 x 3 months, or $2,875

Understanding the interest rate differential penalty

The interest rate differential penalty, or IRD for short, is much more difficult to calculate. This is because every lender seems to use a different formula. In theory, an IRD should be calculated based on the difference between the interest rate on your mortgage contract and the rate at which the lending institution can re-lend that money.

On the surface, this makes perfect sense. When you take out a mortgage you sign a contract with the bank for a specific term. In all likelihood, the lender has “sold off” your mortgage contract to investors who are looking to make a reliable return based on the interest rate. By accelerating your payments, you have rocked the boat and the bank will need to re-lend that money, but at a cheaper rate. The IRD helps the bank recoup some of these costs and prevents mortgage holders from switching lenders any time mortgage rates change to favour the client.

While it’s difficult to calculate an IRD rate, they generally require the difference between the interest rate on your mortgage contract compared to the rate at which the lending institution can re-lend the money. Assuming your mortgage balance is $200,000 at 5.75 percent, with roughly 3 years remaining on your mortgage. Let’s pretend that the current 3-year rate is 3.75 percent. Based on these numbers, your lender will likely calculate your IRD charge in the following manner:

• $200,000 x 36 months x 2 percent (differential between 5.75 and 3.75 percent) / 12 (for months in a year) = $12,000

Remember those terms from earlier, where it stated that the mortgage penalty would be the greater of either the three months interest penalty or the interest rate differential (IRD)? That one phrase (i.e. the greater of either…) can cost you more than $10,000 in fees!

The trick with this calculation is figuring out what the comparison interest rate is. In most cases, this is the current posted rate for the term that most closely matches your remaining term. However, some banks use a discount from the posted rate based on the terms you negotiated for your current mortgage. Not surprisingly, the use of the posted rate can increase your early termination fee greatly.

New rules for IRD fees

Consumer complaints have led the FCAC to formalize a new set of rules designed to help simplify interest rate differential calculations. As such, lenders are now required to provide borrowers with:

• The differences between fixed-rate mortgages and variable-rate mortgages; open and closed mortgages; and long and short-term mortgage rates;
• Ways in which a borrower can pay off a mortgage faster without having to pay an early termination fee
• Ways to avoid prepayment charges (such as porting a mortgage); and
• A listing of actions by a borrower that may result in the borrower having to pay an early payoff charge, such as partially prepaying amounts higher than allowed by the mortgage, refinancing the mortgage, or transferring the mortgage to another lender.

Lenders are also required to post mortgage rate calculators on their public websites so that borrowers can easily determine an estimate of their current prepayment charge.

While early mortgage payoff penalties are a necessary evil, they shouldn’t have to cost you an arm and a leg. When shopping for a best rate mortgage, make sure you ask your mortgage broker about open mortgage options and potential payout penalties. The last thing you want to do is pay the bank more than is absolutely necessary!

Mark Carney to raise the key interest rate?

Not anytime soon thinks Francis Fong of TD Bank. The economist then referenced a stat by CAAMP, who estimated one in five mortgage holders would be in serious trouble with a key interest rate of 3.00% (the current rate is 1.00%). The key interest rate drives the prime rate which is important to variable rate mortgage holders (the current prime rate is 3.00%). Mr. Fong believes Mark Carney has no intention of raising rates to that level anytime soon. However, TD does anticipate a small rate hike, likely 25 to 50 basis points before the end of the year. Though the central bank will likely tread softly until the Eurozone and US economies regain their momentum. It’s not until the end of 2013 that TD forecasts the Bank of Canada moving the key interest rate to 2.0%.

Toronto Housing Market

According to an article by Troymedia, the measures of supply and demand do not indicate over-supply in the Toronto market. The ratio of completed and unoccupied homes to constructions starts actually suggest the inventory of new unsold condo housing in Toronto is normal and declining relative to the level of construction. The article then goes on to state two factors which suggest condo construction in Toronto will remain high: rental vacancy, which is just over 1 per cent, is trending downwards and Toronto mortgage rates which are widely expected to remain low for at least another year.

Where are Canada Mortgage Rates this week?

A 5-year history of weekly 5-year fixed mortgage rates and 5-year variable mortgage rates

Canadian Mortgage Rates 2012

Note:  This is simply a small sample size and does not represent the entire market. It does, however, offer some useful insight.

At the end of the work week, Ratehub will summarize the most notable news, to keep you up-to-date with the latest info from the Canadian mortgage and housing industry. Canada made international noise this past week as we were rated the 7th hottest real estate market in the world as well as dominating the top ten list for the strongest banks in the world.

Canada Ranks 7^th in World’s 10 Hottest Property Markets – MSNBC.com

According to MSNBC, Canada ranks in the top ten of the World’s Hottest Property Markets. Tied with Norway for 7^th, Canada experienced a five-year price growth in housing of 28.7%. National housing starts exeeded expectations this year largely due to a surge in condo construction. The average Canadian home price is $358,261, according to CREA, however, the International Monetary Fund feels that Canadian homes are overpriced by an average of 10%.
China took the top spot with an incredible five-year price growth of 110.9%, followed by Hong Kong and Israel. Asian cities made up half of the top ten.

 

Ottawa to consider further changes to the CMHC – The Globe and Mail

The government is considering further changes to the CMHC as a result of the heated housing market. The corporation is currently under the watchful eye of Canada’s banking and insurance regulator, OFSI, to ensure their decisions will not negatively impact the economy. Ottawa is keeping a keen eye on household debt and Toronto’s heated condo market. Finance Minister Jim Flaherty fears that the rapid development of condos could exceed the buyer rate, resulting in a housing crash. Canadian bank CEOs have told him that ultra-low mortgage rates are largely responsible for the heigthenend household debt.

Costco to push their mortgage campaign in the US – The Montreal Gazette

Costco recently announced a new campaign to promote its financial services, including mortgage products in the US; although they do not plan to make the same push in Canada. However, Canadian Costco members have been able to acquire mortgages through the big-box retailer since 2010.

Condo boom causes housing starts to soar – CBC News

Canadians are crazy for condos! Condo sales have been sky-rocketing, surpassing economist expectations with an annual pace of 244,900 as opposed to the 214,800 that was originally forecasted. The increase in housing starts was due to the high level of condos pre-sales.

Torontonians are leading the craze. In the city alone, Urbanation reports a total of 29,059 new condo units sold over the past year, hitting an all-time record of 6,070 sold in the first quarter of 2012.

Some fear that supply is exceeding demand as the CMHC estimates that 22% of condos are not owner occupied and a quarter of Toronto condos are owned by investors. However, CMHC’s senior market analyst, Sean Hildebrand, assures us that the demand for condos remains strong. Hildebrand, says that it’s still too early to suggest we’re “creating a condo bubble.” He goes on to say, “it’s probably not going to lead to a situation where condo prices need to come down by any sort of considerable amount.”

Canadian banks are better than most  - Investor Place

Here is another reason for Canucks to celebrate: Canadian banks dominated the top 10 list of the ‘World’s Strongest Banks’, conducted by Bloomberg Markets. So what are we doing right? With a banking system that is national in scope, we are protected against regional downturns across the country.

The differences between Canadian and American banking:

• 94% of Canadians use debit cards compared to 70% of Americans. Debit cards are more popular here because of the increased security and protection, as well as the reduced fees when compared to the US
• Canadian banks have been putting aside at least 10% of their total capital to protect against loan losses since 1999 at the request of OFSI
• Canadian banks tend to avoid risk.

Canadians’ appetite for debt weakens – The Wall Street Journal

Canadians are starting to reduce their household debt – and it shows! Consumer credit is crawling at the slowest pace since the early 1990s, while the mortgage market shows early signs of moderation. Total household credit, including consumer and mortgage debt, is rapidly decreasing at just over 5% — its slowest pace since 2002.

Building boom or bust? – CTV News

Fear of a bubble forming in the condo market because the increase in condo construction could lead to over-supply. In an interview with CTV News, Brad J. Lamb suggests that the vertical growth of a city like Toronto is  “sustainable”, because condo construction allows large cities to grow. The real estate mogul made a bold claim by stating ”prices are unlikely to drop.” He does not believe a bubble is forming at all. Lamb ends the interview with words of advice: “People need to realize real estate is a long-term asset. You need to stop counting your net worth right after you purchase.”

When thinking about selling your home and before going through the joys of hiring a realtor and all that fun stuff, there are 5 questions you should ask yourself.  The answers to these questions, and remember to be honest with yourself, will be a great indicator if you’re even ready or willing to sell.

So let’s break it down….

1. Why Am I Selling?

A simple and obvious yet very important question! Are you selling because you NEED to due to a job relocation, changes in your finances or a growing or shrinking family or because you WANT to, to have the home of your dreams with a great location, closer to work and something that will wow your friends and family?

2. Is It The Right Time To Sell?

What are the current market conditions? Is it a buyer’s or seller’s market? You want to receive top dollars for your investment and therefore want to sell in a seller’s market. But this will all depend on your needs vs. wants

3. Is My Home Fit To Sell?

If you were to list your property right now, would it show at its best? Your property might require a bit of TLC before it’s show worthy, a little can go a long way towards selling your home for a great price and receiving the terms and conditions you want.

4. Can I Afford To Sell?

There are other costs besides Realtor fees associated with selling your home. There are lawyer fees to close the deal, Land Transfer Tax to pay on the next property you’ll be buying and it can get quite expensive especially in Toronto. Movers, cleaners, penalties and discharge fees of mortgages, these can start to add up pretty quickly. Also can you afford the time it will take to sell your property? Which brings me to my 5^th and final point…

5. Am I Committed To Sell?

Are you dedicated to the task at hand? This means living like you’re in a model home, constantly cleaning and picking up after yourself, being flexible and confirming all appointments and then leaving your home during showings and open houses. It’s basically making sure that your home is at its best 24/7 as you never know when a showing may be scheduled, even during the day while you’re at work. Remember not everyone has the same work schedule as you.

There are a lot of emotional and physical aspects to consider before placing that “For Sale” sign on your lawn. You want to ensure that you are truly ready on all fronts, so that this process is as least stressful as possible.  The next step will be figuring out how you’ll receive top dollars for your home. Do you hire a Realtor, a discount brokerage, or do it yourself? I’ll leave that discussion for another time!

The following article was written by Aleksandra Oleksak, a sales representative from Right At Home Realty, not only is she a Realtor working in Toronto, she’s a blogger as well and you can find her musing about real estate at www.realtyqueento.com

Don’t forget to follow @RealtyQueenTO on Twitter and ‘like‘ her on Facebook. We already did.

The brand-new Home Buyers app lets homebuyers search over 6,000 new homes and condos in Ontario, view floor plans, calculate mortgage payments, and more.

While there is a wealth of home buying information online, very little of it is tailored to home buyers on the go and mobile search. The Home Buyers app pulls information from NHBN’s well-known website – NewInHomes.com – and presents it in a convenient and easy-to-use format for home buyers using their mobile device.

“Today’s new homebuyers are technically savvy and on the go, or even outside the country,” says Sam Reiss, President and CEO, New Home Buyers Network Inc. “If they’re out and about and see a development they like, they want to find out about it right then and there – so we built an iPad app to let them do that.”

Homebuyers can view floor plans, save things they like, share listings and create notes around the new homes and condos that interest them. The app also allows users to connect directly with builders with their questions and sign up to receive updates on new construction projects, buying opportunities and incentives ahead of the general public. To round out the experience, the app has a mortgage payment calculator and other useful information about the home purchase and ownership process.

Get the app from the Apple store here.

Contestants will automatically be entered into the draw after completing a free sign-up process within the app. The contest closes May 30, 2012.

Vancouver Housing Market

“Although April sales were below what’s typical for the month, we continue to see…a balanced relationship between buyer demand and seller supply” – Eugen Klein, REBGV President

Vancouver, Canada’s most expensive city to purchase a house saw a major drop in home sales activity this April. According to MLS numbers, total sales dropped 13.2% year-over-year. The number of sales for the Greater Vancouver Region was the lowest monthly total since 2001 and 17% below the 10-year average. Residential home prices have climbed 3.7% (year-over-year) to $683,800.*

Due to the sky-high prices for detached homes, a large majority of Vancouverites seek condo buildings as living options because they represent the most affordable choice for home buyers.

Persistent low mortgage rates in Vancouver have made it possible for home buyers to get cheap mortgage financing.

Collateral Charge Mortgages

Many Canadian mortgage brokers will be discussing collateral charge mortgages and what they mean to the market in an upcoming Mortgage Summit. An important issue lies with lender disclosure. Banks such as TD and ING Direct register all their mortgages as collateral charges which can be problematic since a majority of mortgage consumers aren’t aware of the differences between collateral and traditional mortgages. There is a benefit however, as collateral charge mortgages make borrowing future equity in your home very easy. Although, it hinders a mortgage owner’s ability to secure a second mortgage against their property since the collateral charge is registered as 125% of the value. It also makes changing lenders during renewal very difficult for the home owner. The Mortgage Summit will take place May 31 to June 1 and will be attended by over 300 brokers, lenders and financial planners.

Where are Canada Mortgage Rates this week?

A 5-year history of weekly 5-year fixed mortgage rates and 5-year variable mortgage rates

Canadian Mortgage Rates 2012

*numbers from REBGV

Ratehub not only aggregates mortgage rates in Canada, but mortgage and housing news from across the nation as well. Every Friday we sum up the most interesting headlines to keep you in-the-know.

Scotiabank to use NHL partnership to lure new customers - The Financial Post

Richard Waugh, CEO of Canada’s third largest bank – Scotiabank, is expecting their new marketing partnership with the NHL to bring in one million customers. Scotiabank scored success with their Scene movie campaign that is now used by 3.5 million Canadians. The Big Five are no strangers to leveraging sports sponsorships for marketing and branding. RBC was heavily involved with the Vancouver Winter Olympics and the PGA, while TD has purchased the naming rights to two NBA teams, Boston and formerly Orlando. Scotiabank has placed a lot of resources into their hockey marketing strategy in hopes of scoring a hat trick in customer acquisition – credit cards, debit cards, and mortgages.

Different life stages require different housing and financing options – Vancouver Sun

The type of housing you need is largely impacted by where you stand in life, whether you’re a young professional looking for your first home or a recent empty-nester. Statistics Canada observed that the age of home ownership peaks in the 40s and plateaus til the age of 65. After retirement age, home ownership declines.

Canadians banks are among the strongest in the world – The Financial Post

According to Bloomberg Markets Magazine, Canadian banks make up some of the strongest in the world. Canada’s conservative banking regulations helped shield our banks during the financial crisis of 2008. Often times, Canadian banking regulations will exceed the requirements used by the international community such as how much capital should be in equity.

Boomberg Markets’ second annual ranking of the world’s strongest banks:

                1. OCBC (Singapore’s Oversea-Chinese Banking Corp.)
                2. BOC Hong Kong Holdings
                3. CIBC
                4. Toronto-Dominion Bank
                5. National Bank of Canada

First National Bank shows large mortgage market share gain – Newswire

First National, which as recent as February, had the seventh most mortgages on the books in Canada. The bank just released their first quarter results and showed an incredible 12% gain in year-over-year growth ($60.9 billion). Their mortgage originations also increased from $2.4 billion to $2.5 billion.

Albertans expect to be mortgage-free by 53 – The Calgary Herald

According Harris-Declma’s poll for the CIBC, Albertans are expecting to be mortgage-free at 53, unlike most Canadians who believe this will likely happen at age 55. So are Albertans idealistic or just better mortgage planners than the rest of Canada? The poll finds that 53% of Canadians who have paid off their mortgage attributed their success to budgeting and avoiding excessive spending; 49% reduce extra spending; 38% cancelled vacations. Other factors that contibuted to being mortgage free included making annual lump sum payments and increasing the amount and frequency of their regular mortgage payments.

The following article is by Family Lending’s Robb Nelson, who discusses how borrowers can accelerate their mortgage payments and become debt-free faster. You can view Family Lending’s Ontario mortgage rates on RateHub.ca.

Accelerating your mortgage payments is the easiest way to build equity and pay down your debt faster. So what are you waiting for? Today’s low mortgage rates offer the perfect opportunity for Canadian homeowners to speed up their payments and tackle a larger chunk of their mortgage principle – without taxing their current budget.

The time is now

Five years ago, Canadians were tripping over themselves to lock in a well-discounted five-year fixed mortgage at 5.79 percent. Back then, the housing market was hot, housing prices were high and interest rates were climbing steadily higher.

Then the U.S. bubble burst, causing Canadian interest rates to drop to near-historic lows. Homeowners who had opted for a fixed five-year rate were left high and dry while their neighbours proceeded to take advantage of some of the nation’s lowest ever mortgage rates.

However, the time has come for these budget-savvy individuals to accelerate their pay down by making the most of their current mortgage payments.

How to get ahead without cramping your budget

If you’re one of the many Canadian homeowners who will renew or refinance their mortgage this year, congratulations – you’re about to save a boatload of money!

How? It’s all in the differential.

Let’s say you’re coming up on the end of a five-year fixed rate mortgage with an amortization of 30 years. If your house was roughly $300,000 that means you’ve likely been paying close to $1,745 a month as your mortgage payment. At the end of your five-year period you will have whittled away close to $22,000 off your mortgage principle.

If you renew your mortgage today and lock in a current best rate five-year fixed mortgage, your monthly payments will be nearly $400 less than they are currently. Now, you could decrease your payments and pocket the differential. Or, you could keep your payments where they’ve been for the past five years, rolling the differential directly onto your mortgage principle. Leaving your payments where they aren’t won’t strain your budget (you’ve been making due for the last five years, after all) and the best part? By 2017 you’ll have shaved an additional $25,000 directly off your mortgage.

Make the most of your pay down

You don’t have to be in the market to renew your mortgage in order to take advantage of an accelerated pay down program. All you need is a budget and a schedule. Here’s a quick look at how you can fast-track your mortgage:

Step 1) Talk to Your Lender or Mortgage Broker

The first step is to sit down and review your current mortgage payment plan. Talk to your lender and see if paying a little extra on top of your regular mortgage payment will help you reduce your principle faster. If you’re extremely disciplined, try and commit to $50 or $100 every payment. You’ll be amazed at he impact this will have on your mortgage term.

 Step 2) Make More Frequent Payments

Biweekly payments will help shorten the amortization period of your mortgage loan immensely. The shorter your amortization period, the less money you’ll spend on interest charges. Paying your mortgage weekly will offer even bigger returns.

 Step 3) Put Down a Lump Sump

If you’ve received a bonus or inheritance recently, consider putting at least a portion of it towards your mortgage principle. Just remember to talk to your lender first. Most banks allow you to make a large lump payment once a year, and normally there’s a limit to how much you can prepay.

 Step 4) Refinance Your Mortgage with a Shorter Term

Crunch some numbers – if it makes sense to refinance, go for it. If possible, try and shorten the term of your mortgage at the same time. This will mean higher monthly payments, but in the end, you’ll own your home sooner.

Remember, the faster you can chip away at your mortgage principle, the more money you’ll save over the lifetime of your mortgage. From extra payments to lump sump deposits, there are a number of ways you can accelerate your mortgage and own your home sooner.

At the beginning of the month, we shed some light on the rise of 5-year Government of Canada (GoC) benchmark bond yields over the last few months. This time, we’ll highlight 3-year GoC benchmark bond yields which have also seen a steady incline since the beginning of the year. Tracking bond yields are important because they help drive fixed mortgage rates; in this case, 3-year GoC bond yields drive 3-year fixed mortgage rates.

This week in mortgage and housing news, Canada’s Finance Minister announced a change for the CMHC which should lead to a tightening of mortgage credit. Also, we are seeing record levels of condo activity in a city other than Vancouver and Toronto.

New Mortgage Changes From Jim Flaherty

Canada’s Finance Minister, Jim Flaherty made headlines this week when he announced that Ottawa would once again step into housing market regulations in an effort to cool the market.

The Canadian Mortgage and Housing Corporation (CMHC), which was formerly under the jurisdiction of the minister responsible for Human Resources and Skills Development Canada, will now fall under the high standards of the Office of the Superintendent of Financial Institutions (OFSI). Originally, the CMHC was intended to assist social housing, but according to Mr. Flaherty, “[they] evolved into a key pillar of Canada’s overall housing market, providing government backing to lenders…on high leverage mortgages.”

Initially, the CMHC guarantee was to help stabilize the housing market during the financial crisis in 2008 and 2009 by encouraging the banks to keep lending. But that same measure that helped Canada through the credit squeeze is now contributing to today’s overheated housing market. The Toronto Star reports that the CMHC now insures nearly 50% of Canada’s mortgage industry – that’s $550 billion in outstanding residential mortgage credit.

The big question is: Will this work?

Having OFSI oversee the CMHC’s jurisdiction isn’t exactly a ground-shaking move, but according to The Financial Post, the government’s moves are designed for a soft landing as opposed to a hard-stop with direct economic consquences.

“The idea is that by gradually tightening up lending standards around CMHC insured mortgages, the ‘froth’ will be removed from the market and equilibrium will return.”

However, they contend that the Canadian housing market is anything but normal. Nonetheless, Ben Rabidoux for Macleans writes, “Putting CMHC into OSFI hands may well represent a greater tightening of credit than Flaherty could have done by shortening amortization lengths or increasing down payments.“ He believes significant changes will happen.

Other news:

Should you hire a real estate agent? – Moneyville

What happens if you don’t use a real estate agent? When a seller decides to do without one, he/she is prone to the following gaffes: absurd listing prices, lack of or poor home staging, reduced availability times for prospective buyer showings, unpreparedness to evaluate offers and of course, greed.

Condo construction at record levels in Montreal – The Montreal Gazette

Toronto and Vancouver receive a lot of attention for their over-heated condo markets, but another Canadian city has quitely been experiencing a windfall of condo activity – Montreal. Many investors entered the Montreal condo market after prices in Vancouver and Toronto become unfavourable (i.e. priced too high). Only 10% of condos in Montreal are used as rentals versus 25% and 22% for Vancouver and Toronto respectively.

Canadian debt growth is slowing – The Ottawa Citizen

Scotia Capital Markets economists feel that the Bank of Canada should not raise rates because of growing household debt concerns. According to them, debt levels are already slowing including inflation-adjusted mortgage debt growth which is increasing at its weakest year-over-year pace in the last ten years, on par with the 1990s.