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 WHICH MORTGAGE?

 

Mortgage Strategies for 2018


Our tools will help you plan the purchase of new home, refinance, renew your mortgage or take out equity.

Compare a fixed rate mortgage to a variable rate mortgage so you can decide if the potential cost savings offset the risk

The right mortgage will help you get into a home sooner but take longer to pay off. 

The right mortgage will save you $40,000 to $70,000 in interest payments, and take 3 to 6 years off the life of  a new mortgage loan
 
As a first time home buyer getting on the housing ladder is becoming more difficult. One way is to take out a high ratio insurable mortgage with a down payment of  less than 19%) and a 30 year amortisation schedule to get you on the first step. Choosing a variable rate mortgage might worry you in a rising interest rate environment. Remember that your mortgage is usually for 25 or 30 years and that these interest rate increases moving back to more normal levels are not going to last much longer. Governments always reduce interest rates when economic growth slows. And variable mortgage rates drop in line with decreasing interest rates. Healthy savings over a 30 year mortgage.

If you qualify for the debt service ratios (known as GDS and TDS) you can try the 5% down payment then pay the CMHC mortgage insurance premium for a new home purchase. With an insured mortgage you'l always qualify for the lowest mortgage rates even when you renew. 

First time home buyers should take advantage of the Home Buyers Plan and max out contributions and loans 90 days prior to needing the funds for a down payment. Also take advantage all available tax credits and rebates that can help you buy more house.

Compare a $400,000 fixed rate 4.0% 30 year mortgage with monthly payments of  $1902.07 to a $400,000 variable rate 2.75% 30 year mortgage with monthly payments of  $1,629.66.  SAVING YOU $272.41 every month or $3,268.92 per year or $16,344.60 over a 5 year term. Over 30 year you could pay your mortgage off 6 years earlier and save $41,445 in total mortgage costs just by using a variable rate mortgage to buy you first house

Go for Variable Mortgages that are portable. The spread between fixed and variable now leans in favour of variable rates. As of August 16th 2018 the spread between fixed rates and variable rates is now as high as 1.25% which could save you significant amounts over the next term of your mortgage. Anywhere in the region of $2000 to $4000 per year in interest savings x 5 years $10,000 to $20,000 savings could be realised using a variable rate mortgage

If you're renewing or refinancing your mortgage, and can afford to increase payments then shortening your amortisation schedule with a variable rate could save you 3 to 5 years of payments and at least $30,000 in interest payments.

With the more or less continuous changes to mortgage regulations and lenders loan underwriting guidelines it makes sense to talk to an independent mortgage professional. Ask them to do a mortgage comparison analysis to determine which mortgage is right for you. To optimise the combination of down payment, interest rate, and amortisation schedule into payments you qualify for and can afford.
 
Our tools will help you decide how much down payment you need and calculate your monthly or weekly mortgage payment amounts and the payment schedule for the duration of the term of your mortgage.
 
You can calculate how much mortgage you can afford and qualify for.
 
You can determine how much you can pay for your house based on your income and amount of down payment you have.
 
You can calculate your mortgage payments and amortisation schedule to see what your interest payments and balances are.
 
You can also run what if scenarios to see what happens if you select the accelerated (increased) payment schedules or shortened amortisation time frames. Or select a fixed or variable rate type of mortgage to see if that shortens your amortisation schedule.
 
Try our mortgage calculators to test your options for saving more:
 
Fixed or Variable Rate Mortgages -Which one is best?

There are many types of mortgages and the great debate is always which mortgage should I take Fixed Rate or Variable Rate?  It depends on how you want to manage risk? Consider your finances are? Are you financially maxed out?

Fixed Rate Mortgages protect you in a increasing interest rate environment from unexpected payment increases. If you are maxed out in terms of Loan to Value ratio and borrowing capacity Fixed Rate may just be the right option for your needs

Variable Rate Mortgages typically have lower interest rates than Fixed Rate mortgages and provide savings for you along the way. Variable interest rates are usually .5% to .9% lower than Fixed Rates. But will increase as the Bank of Canada increases the prime lending rate

As of August 16th 2018 the spread between fixed rates and variable rates is now as high as 1.25% which could save you significant amounts over the next term of your mortgage. Anywhere in the region of $2000 to $4000 per year in interest savings x 5 years $10,000 to $20,000 savings could be realised using a variable rate mortgage. Personally I've always used Variable rate mortgages and saved a bundle in interest costs over 25 years 

The best option is to have flexible mortgages that allow generous prepayment options or refinancing options. The calculations are pretty easy to see if it makes sense to refinance



Refinancing to SAVE MORE is usually pretty easy

Refinancing penalties are usually 3 months interest.  Some banks use additional calculations called the interest rate differential IRD to add to these disincentives to make is uneconomical to refinance. And a few bank add some really ugly time bomb penalties that you may not be be aware are in your contract.  If you move to another institution you will have to pay for a bank level appraisal and legal fees which may add another $1300 to your mortgage so be sure to add this into the calculations

The philosophy is pay yourself not the banks

 

Its payment amounts not payment frequency that saves you the most Money

The greatest fallacy with mortgage repayments is that changing payment frequency will save you significant money over the life of your mortgage. Not true. Accelerating a payment means your are increasing the payment amount. Making 1 or 2 additional payments each year if your contract allows. This will take 2 to 3 years off your mortgage.

25 YEAR AMORTISATION is the industry default setting 
25 year mortgages are the maximum allowed by OTTAWA. If you can get the lenders to reduce your amortisation schedule in your loan contract to 20 or 15 years instead of 25 you can save $50-$60,000 over the life of the mortgage

Latest Qualifying Rate Update effective September 22, 2018

Qualifying rates were changed in October 2016,  in Sept 2017 and then again in October 2017 and then again October 25th and again in 2018. Ottawa introduced new stress tests for those applying for an insured mortgage by applying an interest rate of 5.34% or the lending interest rate plus 2.0% to see if the borrower could still afford those payments.
 
Does anyone think we are heading for an interest rate of 4.99% on mortgages anytime soon. YES as there are probably another 3 interest rate increases of .25% each coming by the end of 2018. If you do qualify for a mortgage under these rules you could probably save more using a variable rate mortgage over the life time of your loan.

Its always good to consult with a mortgage professional before you decide which mortgage you decide works bets for your personal situation. Always take your time and check with a few different sources to source your best suppliers. You can always refinance one you have a mortgage if you figure out a way to save more money than it costs to pay off those nasty refinancing charges. You can also approach private lenders as there are increasing numbers of borrowers paying more interest for higher loan to value ratios or second mortgages. Increased government regulation and red tape is creating a shadow banking system for those borrowers that dont qualify for loans under the new laws.


 

Main Types of Mortgages

  1. Fixed Rate
  2. Variable Rate
  3. Blended
  4. Interest Only
  5. Interest Accruing
  6. Home Equity Line of Credit
  7. Reverse Mortgage
  8. Re-advance able

 

Mortgage Prepayment options

  • Fully Open
  • Partially Open
  • Closed Mortgage
  • Accelerated Mortgage Payment

 

New Mortgage Borrowing Guidelines

What is the minimum amount you need for a down payment? (With Mortgage Default Insurance)

  • 5% for home purchases less than $500,000 The Mortgage Default premium is $17,100 or 3.6% with a 5 % - $25000 down payment. For a DP of  $50,000 or 20% a lender may ask for a $10,000 Premium
  • 10% for the next $500,000 to $999,999.99,
  • 20% for homes costing over $1 million  Homes costing over $1 million are not eligible for mortgage insurance

 

What is the minimum amount you need for a down payment? (Without Mortgage Default Insurance) 

20% is required.

Lenders usually require mortgage loan insurance for any borrower wishing to purchase a home with less than a 20% down payment. Lenders will sometimes require a borrower to take loan insurance even if the down payment is greater than 20%

The amount of your down payment determines many things:

  • How much you can afford to pay for your new home 
  • Where you can live
  • How much your mortgage debt and your payments will be
  • How long it will take you to pay off your mortgage 
  • The cost of mortgage default insurance if your borrowing falls outside of the guidelines

Helpful Hints

First time home buyers can borrow up to $25,000 ( in a given calendar year) from your RSP to go towards the down payment.


 


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