How to reduce mortgage penalties

Interest rates are at records lows.. it’s popular water-cooler talk… You’ve heard your co-workers or friends who are lucky enough to renew their mortgage into these emergency, once in a lifetime rates..

But how you do you take advantage?  If you break your fixed rate mortgage then you face an enormous prepayment penalty…we’ve seen reports of $10k, $15k and $20k in penalties….Wow!

Well, here’s a few tips…

-first, if you are in a 10 year fixed rate mortgage, and your are at least 5 years into the term, then the maximum penalty is 3 months interest  (this is a little known fact… Section 10 of the Interest Act of Canada).

-One more way to reduce the penalty is to utilize the annual prepayment privilege that’s within the mortgage.  Most mortgages have between 15% and 25% prepayment privileges which equates to a 15% to 25% reduction in the penalty….

-negotiate the penalty in combination with an extension on your current term..this requires some discussion with your current lender and you should seek the help of a mortgage broker…if the lender wants your business they may be able to offer some incentive to stay.

Another situation where the lender cannot charge any penalty is if the mortgage goes into default and the lender issues a Notice of Sale (legal action to collect the mortgage)…. of course, I”m not suggesting that anyone default on their mortgage.

Our best piece of advice is this… don’t take the lender’s penalty calculation at face value… penalty calculations have changed and most bankers couldn’t tell you how the penalty is calculated if you asked them.  Always review the penalty with an unbiased party… speak with your mortgage broker or lawyer…enjoy the weekend!

Mortgage rates went down?

What’s this? RBC,  BMO and National Bank have lowered their posted fixed rates?  Yes, it’s true… the 5 year fixed rate is now 5.39%.  Bond rates have come down over the past few weeks after some concerns about the speed of the recovery.

These are posted branch rates…some banks advertise lower special rates of around 4.09%…. of course, there are even lower wholesale or discounted rates through the mortgage broker market…. speak to your mortgage broker to get current rates.

Variable rates aren’t expected to move anytime soon…  in fact, here’s one forecast for interest rates to remain flat for the entire year…. and I think this is very possible..  Happy Savings!!!

Canadian mortgage lessons 101

Here’s a good article from the Financial Times about Mortgage Lending in Canada…..and the lessons the U.S. can learn about prudent mortgage lending…  The article points to 3 important differences between the 2 countries.

Here’s another article that points to a great study done recently by the Canadian Association of Accredited Mortgage Professionals (CAAMP).   The study showed that Canadians more cautious than our American friends when it comes to taking on debt.  And they chose fixed rates over variable rates in 86% of the cases…

It’s good to see that Canadians are perceived as cautious people, however, we shouldn’t assume that variable rate mortgages are a riskier proposition… there was a great study done by Professor Moshe Milevsky, in 2001, that compared fixed rates and variable rate mortgage….. in that study, Professor Milevsky concluded that variable rate mortgage borrowers were better off being in a variable rate mortgage….

The study was updated in 2008 and the findings were even better… the variable rate mortgage was a cheaper option than fixed rate in over 80% of the time.   Of course, we each have different needs and risk tolerances… always seek professional advice.. speak with your mortgage broker.

When will rates go up and by how much?

It’s interesting to see all the forecasts in the media these days.   Just last month we saw the bond market go up which caused Experts to forecast for an increase in fixed rates (bonds affect fixed rates, Bank of Canada rate affects variable rates).   Economic recovery was going great…but then we saw some poor job creation data….. and less jobs means less cause for inflation (if inflation is lower than the bank’s target, then the Bank of Canada is unlikely to raise the Bank rate).

Looks like the recovery will be slower and take longer than expected…and this will be good news for borrowers as rates should remain low a little longer now…. maybe no increases til 2011? Financial Post

Australian Mortgage often overlooked

One of the most under utilized mortgage strategies is the Australian Mortgage.  The Australian Mortgage uses an All-in-one mortgage product to minimize how much interest you pay over the life of the mortgage.  The product gives you full credit for any savings in  your bank account by applying this immediately to your mortgage balance.   The result is a shortened amortization that ranges from 5 to 10 years, depending your situation.

This isn’t for everyone….. The product is for those that earn a fixed income or have a steady pay cheque.   You also need a surplus every month…make more than you spend…it’s certainly worth a look at renewal time….

Renovation Tax Credit ending Jan 31 2010

The Federal Govt’s Home Renovation Tax Credit is coming to an end this month.  According to Bloomberg.com. The tax credit was brought in last year as a way to help stimulate spending and create jobs.   A family could claim up to $1,350 in tax credits per family for projects costing between $1,000 and $10,000….provided the renos take place before February 1st, 2010…..

There was some speculation that the Home Reno Tax Credit would be extended or even continue with some modifications.  According to one conversation with an industry insider.   If you’re looking at getting some renos done, it’s not too late to take advantage of this program.

No increase expected by Bank of Canada

The Bank of Canada meets Tuesday to set the overnight rate, which in turn affects the Bank Prime rate… and as expected, no one thinks they will raise rates… Great news for borrowers.. money remains cheap…   Read the full report. Interesting little aside… the activity for mortgage underwriters has really picked up in the past 3 weeks…  looks like borrowers are taking advantage of the low rates….

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