Here’s a great article written by consumer advocate, Ellen Roseman. She points to different industries where signing in for the long term protection can be very costly and expensive.
Ever wanted to change cell phone providers? How about internet providers? Move your investments or rrsps? Cancel that hydro or gas contract because you moved?
And how about mortgages? When interest rates started heading downward about 12 months ago, thousands of borrowers in fixed rate mortgages wanted to get out of their higher rates and start benefitting from the record low interest rates we have been seeing.
But they were shocked to hear of unbelievably high early prepayment penalties… the example Ellen uses is about a $46k penalty on a $530k mortgage with a major bank… I’ve seen dozens and dozens of situations like this.
Beware of long term mortgages… with the average person moving or refinancing about every 3 years, choosing a 5 year fixed rate term is usually not the best option. It could cost you more than you think… always seek professional advice from a reputable mortgage broker before selecting your mortgage.
(Just a personal note… It sure would have been nice to see some mortgage relief given to the average homeowner during the recession. CMHC used to cap their penalties to 3 months interest but removed this cap in 2000…quietly, all financial institutions are free to charge a higher penalty…and they all do.. the longer the term, the greater the penalty…)
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!
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….
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.