Paying Off Your Mortgage Faster With A Mortgage Renegotiation

Click Here for “Refinancing Your Mortgage – A Window Of Opportunity Is Here”  Teleconference call with Monique Cornish of The Mortgage Group

Looks like Rob Carrick of “The Globe And Mail” and Monique Cornish and I were all on the same page today… Click Here To Read “The Art of Mortgage Renegotiation”

Falling mortgage rates have revealed yet another way the banks are charging their clients more in these financially stressful times.

Rates on mortgages have fallen a lot in the past several months, prompting many people to ask about renegotiating in order to cut costs. “The bulk of my business today is people breaking their mortgages,” said Jim Tourloukis, a mortgage broker with Advent Mortgage Services in Markham, Ont. The problem in breaking a mortgage is the penalty that lenders charge.

Banks typically have two ways to calculate the penalty and recently they’ve switched to the more expensive one.

A little context may help you gauge how annoyed you should be about this.

With a recession and global financial crisis hurting their revenues, the banks have been pushing up interest rates on lines of credit, charging more in service fees and adjusting credit card rules to extract more money from clients.

Mortgage penalties are somewhat different in that they’re mainly influenced by what’s happening with interest rates. It’s boilerplate in mortgage contracts for penalties associated with breaking a loan to be set at the greater of three months’ interest or the difference between the interest the bank could make on your mortgage as originally arranged versus lending money out at current rates.

Mr. Tourloukis explained that three months’ interest was the typical penalty until rates began to fall hard in the past couple of months.

Now, the so-called interest rate differential, or IRD, is the larger penalty. “The spread between the client’s rate and what banks can lend money for now has grown dramatically,” he said.

If you have any thoughts of breaking your mortgage, get on it today. If mortgage rates fall further, and they could ease a little bit more, then interest rate differentials will grow in size and cost you more.

Mortgage brokers say breaking your mortgage is worth some thought if your current rate is in the low 5-per-cent range or more.

Mr. Tourloukis said he’s been renegotiating five-year, fixed-rate mortgages at 3.99 per cent for clients who several months ago signed up for similar loans at 5.79 per cent.

Other mortgage brokers are showing five-year rates in the low 4-per-cent range.

The first step in breaking a mortgage: Ask your lender what your penalty would be.

There’s no standardized calculation of penalties, so your number will depend on your lender’s own policies and personal circumstances like the amount you’ve borrowed and the number of years left on your mortgage. In some cases, breaking your mortgage just won’t make sense because of the steep IRD amount. “If you have a lot of time left on your term, it could be deadly,” said Vince Gaetano, vice-president at Monster Mortgage in Toronto.

Practices vary widely among banks, but one method for calculating the IRD is to compare a client’s original rate against the posted rate for the term that corresponds with the remaining time left on the mortgage.

Example: You’re two years into a five-year mortgage, so your IRD would be calculated using the current posted three-year rate.

Once you know your penalty, ask your lender to show you how much interest you’d save by renegotiating with the best possible current rate. If the penalty overwhelms the potential savings, then you have a couple of options beyond giving up.

One is to try and negotiate the penalty lower, or have it eliminated altogether. Mr. Tourloukis said lenders have the discretion to help clients out this way.

Another is to chop the amount of money you owe on your mortgage, thereby reducing the penalty for breaking the loan. The way to do this is to take advantage of the prepayment privileges built into most mortgages.

For example, you might be allowed to prepay as much as 20 per cent of your outstanding balance in a year without incurring any charges. Make this lump-sum payment and then get a quote on the penalty to break your newly shrunken mortgage.

There are a couple of strategies to look at if you’d benefit from breaking your mortgage but can’t afford the penalty charge.

One is to take the cost and add it to your mortgage balance. In some cases you’ll still end up paying less interest than if you stayed with your current mortgage.

Another possibility is a blend and extend, where you jump into a new mortgage that blends your existing rate with the lower current rate and extends your term by a few years. There’s no penalty charged in a blend and extend, but you won’t save as much as you would if you paid the penalty and got the best possible current interest rate. “If you want the better rate, you have to come up with the cash,” Mr. Gaetano said. – End Column –

5 year mortgage rates question answered

Question:  I have a 5 year mortgage rates question.  Currently I have 3.69% 5 year rates until March 25th! Recent mortgage rule changes sparked as many questions as answers…and the news on TV is just confusing… Please help!

Answer: For 5 year mortgage rates here’s what we know  (to the best of our knowledge) at this point. The quotes come from an insurer memos…

The news for 5 year mortgage raates: 5-Year Fixed Qualification Rates The New Rule: Borrowers will need to qualify using a 5-year fixed rate regardless of what term they choose. If you want a 1.95% variable rate, for example, you will need to show that you can afford payments at a higher fixed rate, like 4.09%.

The Government’s Reasoning: “This initiative will help Canadians prepare for higher interest rates in the future.”

The Effect: It will now be harder to qualify for a variable-rate mortgage, but not much harder. Most lenders already use three- or five-year mortgage rates to calculate a borrower’s debt service ratios. For many discount lenders, this means the qualifying rate will go from something like 3.25% to 3.89%-not a huge difference.

The Verdict: A sound and necessary change–although many lenders already use similar guidelines.

The bad news: 90% Maximum Refinancing The New Rule: No longer will you be able to refinance your home to 95% of it’s value. 90% will be the new refinance maximum.

The Government’s Reasoning: “This will help ensure home ownership is a more effective way to save.”

The Effect: Borrowers will be less able to pay off high-interest debt with lower-cost mortgage money. On the upside, this rule has the positive effect of keeping equity in the home (which is quite helpful when home prices fall). It also discourages homeowners from relying on home equity to bail themselves out when they accumulate debt.

The Verdict: Bad…for people who need to restructure debt in an effort to pay more principal and less interest. On the other hand, a 90% refinance limit is beneficial in that it deters people from racking up debt and using their homes as a proverbial ATM machine.

The Ugly: 80% Maximum Insured Financing On Rentals

The New Rule: People buying non-owner occupied rental properties will need to put down 20% to get an insured mortgage, versus 5% previously. The Government’s Reasoning: To reduce speculation.

The Effect: The number of investors creating rental housing will drop notably. Investors will need to borrow down payment funds elsewhere (assuming it’s allowed) or use higher-cost non-insured lenders (like TDFS) to get 90% financing.

Note: This rule does not apply to multi-unit owner-occupied homes with rental units (like duplexes and triplexes).

The Verdict: Ugly. How the government can go from 100% rental financing (17 months ago) to 80% today is confounding. The intent is understandable, but the government could have increased net worth requirements, increased Beacon minimums, tightened debt servicing guidelines, or limited the number of insured rental mortgages a person can qualify for. Instead, the solution was near-draconian, and it will have an effect on the rental stock in Canada. Will it cause a material rise in rents?  That’s a tough call, but it will definitely reduce the supply of rental units and limit Canadians’ investment options.

Note: Moving forward with any purchases or refinance deals will NEED to show income claimed on their Notice of Assessment. This means their income that they reported AFTER expenses – if they’ve been self employed for more than 3 years. They can add 15% to this number for their total income used to qualify.

*** Please remember this for any refinances coming up..they will have to qualify on the going 5 yr rate and show 2 Yrs NOA’s ****

If you have any further questions on 5 year mortgage rates or rates of any kind for that matter – contact: Monique Cornish, The Mortgage Group Phone: 604.707.6324 Cell: 604.219.9556 Fax: 604.648.9455 Email: monique@mortgagegrp.com

3 questions to answer on the real estate market for your financial security and peace of mind

1. Do you see your real estate market being higher or lower 10 years from now?

2. Do you see the Canadian and American stock markets higher or lower 10 years from now?

3. Where do you want to be personally and financially in 10 years from now? Better off than today?

Your action plan: Continue to invest with confidence in both the real estate and North American stock markets. Use common sense and have patience – you WILL be rewarded!

Now, turn off CNN and begin dreaming of your better life ahead of you…

Backgrounder to:

Click Here to see that the Andex Chart To You And Me 

Click Here to see the Canadian Real Estate Andex Chart

Click Here to read about my interview with legendary Sir John Templeton – and the markets…

This conversation is missing YOUR voice…Take a  few moments and let us know what you think!

The Top 10 Canadian Home Ownership Myths Exposed Audio

I just wanted to let you know that I just recorded and unloaded the audio for: “The Top 10 Canadian Home Ownership Myths – Exposed!”

You can listen to it right here on the blog now! Click Here now!

Make sure to turn up your speakers because the recording came out on the quiet  side… However, I trust that the recording will  be of value to you…

Once you listen to it let us all know what you think here…