Mortgage Penalties

One of the biggest questions people need to ask when getting a mortgage is what will be my penalty if I break the mortgage.

This is so huge, seriously even more important then the interest rate you receive.  Within reason.

The mortgage penalty you receive if you break your mortgage can be calculated in many different ways.  Unfortunately our Minister of Finance, Jim Flaherty is not looking at protecting consumers, just protecting the big 5 banks. 

Below is a basic explanation between IRD (interest rate differential) and a three month interest penalty.

Let's take a quick look at 3 most popular ways on how mortgage penalties are calculated, imagining you are 2 years into a 5 year term with a 3.29% rate with a balance of 300k on your mortgage.  The lenders best current rate is 3.49%, bond yields are at 1.49% and posted rate at 5.29%.

• Lender A:  Your current rate compared to the posted rate.  Posted rate at 5.29% - 3.29% = 2.00%, so basically your penalty will be 2% amortized over the remaining three years, or to put it in reality $17,102.37 IRD plus discharge and/or re-investment fees $300 to $1,000.  Ouch!
• Lender B:  Your current rate compared to bond rate.  Your rate 3.29% - 1.49% bond rate = 1.80%, so your penalty will be 1.8% amortized over the remaining period which will work out to $15,379.94 IRD plus discharge and/or reinvestment fee.  Shitty!
• Lender C:  Your current rate compared to the lenders best discounted rate.  Your rate being 3.29% and the banks discounted rate at 3.49%.  You can see that if you broke your mortgage the bank will actually be able to lend that money out at a higher rate so the penalty will simply be 3 months interest or $2,445.46 plus discharge and/or reinvestment fee.  Much better!

Now let's just say you can get a lower rate and a Lender C.  That's a good deal plus if rates do drop you have a lower rate that a IRD will calculated on.  If rates go up your penalty will simply be 3 months interest. 

Rate is important but if you look at Lender A, is having a good rate going to benefit you if you break your mortgage and rates go up?  NO!!  It will make matters worse as the gap between posted and your discounted rate is bigger.  It should be illegal.  The bank is double dipping by charging you a massive penalty then lending that money out at higher rate.

With lender B markets would have to increase significantly before the spread between your rate and the bonds will be eliminated.  In the world we have now I would not be expecting that to happen.

Let's look at one more thing.  Let's say your favourite bank offers you a rate that another lender can't match.  (FYI, I'll always beat it.)  There is a difference 0.10% which works out to $15.61 a month, over the two years you have had your mortgage that is a total of $374.64 you would have saved.  But you decided to go with Lender A for the cheaper rate but life threw a curve ball at you and you have to break your mortgage.   Sorry, you are screwed, literally.  Me personally I would look at the higher amount as an insurance premium protecting myself.

You never know what life will throw at you.  There are many reasons mortgages must be broken, unexpected job loss, unexpected child or expected, could be work relocation, money needed for medical, a bigger home needed.  Whatever.  Most people say they will not move or break their mortgage but 75% of 5 years terms are broken within the 1st three years.

The best scenario is the best rate and terms, that is why you call me.

PROTECT YOURSELF AND FAMILY, talk to someone who is truly looking out for your best interest and wants referrals from you and your family and is looking for clients for life.

Let me know if this was helpful, thanks.

Till next time, have a great day.

Ron Miller


905-667-0699
1-855-684-8326
ron.miller@butlermortgages.com
YouTube Hamilton Broker
@HamiltonBroker

Divorce and Mortgages

The purpose of this post is to inform consumers that you can refinance up to 95% in a divorce situation if one spouse wishes to buy out the other from the matrimonial home.  The relationship could also be common law, you do not have to be legally married. 

It is a process that not many lenders are willing to do with the new mortgage rules maxing refi's at 80%.  In fact most people in the industry do not even know it can be done.  There has been a provision put in place by the family law act allowing one spouse to take over the home from the other.  Because of the 80% refinance rule families were forced to sell their home in order to split up the equity, which is really unfair especially if children were involved.  With this new rule it can make the transition for children much easier.

There must be a legal separation agreement in place in order to do this.

Any equity that is left over can be used to pay off the other spouse if that is in the agreement. 

Of course you have to fully qualify on your own with acceptable credit and income.  Alimony and child support do qualify as acceptable income.

The existing equity is used as the down payment and closing costs.

It is expensive enough getting seperated or divorced especially if you have to pay huge real estate fees.  Average commission in selling a home is 5% + HST, it is much cheaper if one of you can keep the home.

If you are in this situation and would like to know more feel free to contact me which ever way works best for you.  You can also fill out the mortgage application if you wish to get started right away, I will contact you immediately, provided I am not golfing.  If you prefer doing things in person I have an office in Mississauga as well as Hamilton or I can meet you at your home.

There is no charge from me on this type of mortgage provided we can use an "A" lender and a minimum 5 year term is used.  There may be an appraisal required, not always.  Also a lawyer must handle the transaction.  We walk you through the whole process, it is actually quite simple. 

I can only service clients in Ontario Canada.  If you are in another province feel free to ask for a mortgage agent in your area and I will do my best to find one.

Till next time, have a great day. 


Ron Miller

905-667-0699

1-855-684-8326
ron.miller@butlermortgages.com
YouTube Hamilton Broker
@HamiltonBroker

Best Mortgage Rates

The purpose of this post is to bring awareness about how dangerous some of the low interest rate mortgages being advertised are.

It is a very wise idea to shop around for the best mortgage rates, after all it can save you thousands over the term of your mortgage. 

Recently a personal friend called about the renewal notice he received from his current lender.  They actually offered him 5.29% for a 5 year term; insane.  We renewed him at 2.99% with friendly terms.  His mortgage was for 200k which worked out to a savings of $15,058 over 5 years.  Even a 0.1% difference could save $616.80 over 5 years, better in your pocket than the banks.

Having said that it is equally important to pay close attention to the terms and to make sure you fully understand what you are signing.  There are many terms to look at, below are a couple of the majors.   

The two major pitfalls you should be looking for are:

     1.  How is the penalty calculated if you decide to break your mortgage?

The majority of 5 year term mortgages are broke before the renewal date arrives.  Knowing this you always want to have an out, even if you do not plan on selling.  Occasionally unforeseen circumstances may arise and you do not want to be at the mercy of a bank.  They show no mercy.

You want to ask your mortgage officer or broker for an example if you broke your mortgage in 2 years what your penalty will be and how it is calculated.  A lot of these discounted rates base the calculation on the current posted rate.  Imagine you signed up for the 2.99% and in 2 years decide you need to sell the home or refinance for whatever reason.  Your penalty could be calculated on 5.29 (current posted rate) - 2.99 (current discounted rate) = 2.30%.  So you will pay a penalty of 2.3% on your remaining mortgage balance for 36 months.  If for example you have a 200k mortgage, your penalty could potentially be $13,800.  Pretty damn scary.

There is no set way that any lender must base their penalty calculations.  To protect yourself always ask what the comparison rate will be in case you do have to break your mortgage.  Generally what you are looking for is a comparison rate that is fair and based on current discounted rates.  For example if you decide to break your 5 year 2.99% in two years your want to see your lender comparison rate be the current 5 year discounted rate or the 3 year discounted rate.  With interest rates as low as they are now, most likely you will end up with just a 3 month interest penalty.  If the comparison rate is the posted rate, run and run very fast, this is not a good deal.

     2.  Is your mortgage going to be registered as a collateral mortgage?

Please click on the link for a little more detail on what a collateral mortgage is.  In a nut shell, they are bad bad bad.  The only people who should be obtaining a collateral mortgage are people in a strong financial position.  

Quick scenario ~ Let's say you have a 200k mortgage and a bank signs you up with a collateral mortgage.  Then they offer you a line of credit to go with it, you also get a car loan and a Visa down the road.  Now your renewal date has arrived so you decide to shop around because you were offered a lousy rate, say 5.29%.  A broker offers you 2.99%, great lets get started.  At some point it is discovered you have a collateral mortgage and didn't even know it.  Well a collateral mortgage is not transferable, it must be handled as a refinance (lawyer fees).  Also we now find out your line of credit, car loan and Visa are all charged against your home.  The only way to handle your file is if you pay off all your other debts against the home first or throw all the debts into the new mortgage.  Problem!!!  There is not enough equity to refinance everything and you don't have enough available cash to pay out all the other debts.  Guess what???  Yep you guessed it, you are going back to your original lender and accepting the lousy rate.  You have been euchred, not a good feeling.

Remember, terms are just as important as rate. 

I really hope this posts will help out a lot of people, I am a little dramatic in this one but it is so crucial that you are getting your mortgage from someone that is trustworthy, as well knowledgeable in the industry.   And wants to see repeat business and referrals from your friends and family in the future.  Use a good and reputable mortgage broker.

Please reply or discuss, ask some questions.   

Till next time, have a great day!

Ron Miller

905-667-0699

1-855-684-8326
ron.miller@butlermortgages.com
YouTube Hamilton Broker
@HamiltonBroker

Refinancing, Debt Consolidation

People refinance thier homes for many reasons; starting a new business, clearing out credit card debt, renovating or property improvement, putting a child through school or just to take advantage of low interest rates. Sometimes refinancing makes sense for people retiring, they may not have the home paid off for whatever reason and at retirement they take a big hit on income. So why not stretch the amortization to the max and enjoy the golden years without feeling a financial pinch.

Refinancing is actually pretty simple, you just break one mortgage and get another one. In order to find out if it is best for you, it is a good idea to speak with someone who will explain all the pros and cons. We have all seen those flyers in our mailboxes that explain the savings when you consolodate and for the most part they are true, but rarely will they tell you the costs associated with it.

Refinancing Fees

There will be legal fees, usually about $1,000 and a penalty. The penalty can be just three months interest or interest rate differential. If your rate is higher than your currents lenders discount rate then they will penalize you the differnce in money they lose when you break your mortgage. If you are on good standing with your lender they may waive this penalty for you. If they don't why keep giving them your business?

Another thing, in most cases there should not be a broker fee. Occasionally there will be depending on your credit, income and equity in the home. Generally if the deal is going to a "B" lender you can expect some sort of fee. Make sure you know what it is when you get the approval, do not find out a rediculous broker fee is being charged when you are signing the papers. A mortgage insurance premium may also apply if you are refinancing over 80% of your homes value.

It is a good idea to sit down with a mortgage broker or call one to see if the costs make sense to you. If you are saving money or if it is going to cost you money. It could be the piece of mind you recieve is worth the extra costs. With interest rates as low as they are you can save a lot of cash over a five year term, and easily justify the costs, especially if you have high credit card debt.

We can finance up to 85% or your homes value, feel free to call me if you want a quick estimate on your home to see what is possible.

I hope this helps, feel free to ask questions or comment. Email or call for privacy.

Ron Miller
905-667-0699
ron.miller@butlermortgages.com