- The bank is giving me a big discount off their posted rate. I must be getting a great rate!?
- What is a pre-approved mortgage?
- What is a high ratio mortgage?
- What is the difference between mortgage amortization and mortgage term?
- What is the difference between an open mortgage and a closed mortgage? Which one is right for me?
- How much better off am I with bi-weekly vs. monthly payments?
- What is the difference between a Co-signer and a Guarantor?
- Is there ever a good time to break my closed mortgage and pay the prepayment penalties?
- At the end of my mortgage term, is the lender obligated to renew my mortgage?
- Does a lender charge a renewal fee?
- What is a second mortgage?
- What is a reverse mortgage (CHIP)?
Unfortunately, it’s not that simple. The short answer is you won't know that you received a great rate unless you've shopped your mortgage to numerous lenders. The long answer involves learning what the major banks' posted rate is really all about.
With a couple of minor exceptions, ONLY the major banks have posted rates. The major banks' posted rate is found on a rate sheet and the posted rate has no meaning whatsoever at the time you’re taking your mortgage. The only time the posted rate comes into play is when you break your mortgage before the end of the term resulting in a prepayment penalty. The prepayment penalty is calculated based on what the posted rate was on the day you took out your mortgage.
Bank salespeople are trained to making it seem like you are getting a great mortgage rate by drawing your attention to the discount you are receiving off their posted rate. You may be surprised to learn that every customer that qualifies at the bank, receives the same discount off the posted rate (some may receive a small additional discount reserved for certain situations) and that no one actually receives a mortgage at the posted rate! Regardless of the discount received, banks calculate prepayment penalties by using the rate difference between your contract rate and the posted rate on the day you took your mortgage, and subtracting that rate difference from the posted rate that is closest to your remaining term.
For example, suppose on the day you took out your mortgage, the posted 5-year fixed rate was 6% and you received a contract rate of 4% - a discount of 2%. Three years later (2 years remaining on your mortgage term), you need to break your mortgage and the 2-year posted rate at that time is 4.5%. The bank will subtract the full discount you received of 2% from the 2-year posted rate: 4.5% - 2% = 2.5% (confused yet?).
Next, the bank will compare your contract rate with the rate just calculated: 4% - 2.5% = 1.5%. This 1.5% calculated is referred to as the Interest Rate Differential or IRD. The IRD is the rate the bank uses to calculate your prepayment penalty. Always ask the bank salesperson to explain their IRD calculation to you and if your fixed rate mortgage penalty will be based on posted rates, bond yields, or discounted rates.
It is important to note that every time mortgage rates fall, it is favourable to NEW mortgage borrowers but unfavourable to existing fixed-rate mortgage holders due to higher prepayment penalties. It is also worth noting that non-bank lenders (e.g. Monoline Lenders) do NOT use posted rates and, generally, their IRD is based on the contract rates both on the day you took your mortgage as well as the day you are breaking your mortgage. Unless there are just a couple of months remaining in the mortgage term, the difference in IRD between the major banks and non-banks can be substantial, usually several thousands of dollars!
A pre-approved mortgage confirms in writing by a lender the maximum amount of money that they are willing to lend you for the purposes of a mortgage. This is especially useful during a time when interest rates are fluctuating. The advantage to you is you know exactly what your borrowing limit is before you start house hunting. With a pre-approval, a lender will guarantee you a specific mortgage amount for a specific period of time. In the event the mortgage interest rate drops before the lender advances you the funds for a mortgage, our licensed mortgage professional will ensure you are given the lower mortgage rate. If the rates rise, you are protected against the higher rate and given the rate at the time you had the mortgage pre-approved.
Note, a pre-approval should not be confused with a pre-qualification. A pre-approval is when a lender has thoroughly reviewed all of your supporting documents and confirmed that as long as there are no adverse changes to your file and they approve of the property, they will extend you a mortgage at x rate and y amount. A pre-qualification, on the other hand, is when a lender has NOT reviewed your documents but simply gone over your numbers and credit score, and is letting you know the rate and the amount they will extend to you if all of your documents are verified during the subsequent application.
Any home purchase where less than 20% down payment is made will require a high-ratio mortgage. If you are a first-time homebuyer then you can borrow up to 95% of the home value and only need to come up with a 5 percent down payment as a minimum. High-ratio mortgages insure the lender in case of mortgage default by the borrower. There are 3 mortgage default insurers in Canada of which the Canadian Mortgage & Housing Corporation (CMHC) is the largest. Although default insurance protects the lender, the lender passes the cost of the insurance premiums down to the borrower. The insurance premiums can be as high as 4% of the mortgage principal but are often not noticed by the borrower because the insurance premiums are usually tacked onto your mortgage payments for each period. Interest rates for a high ratio loan vary widely between lenders so it is best to use a licensed mortgage professional to explore the best options for you.
Mortgages with 20% or more down payment are referred to as conventional mortgages.
Mortgage amortization refers to the total number of years, often 25 years, that it will take you to completely pay off your mortgage. Once the mortgage amortization period is complete, the mortgage is always fully paid off and no more payments are due.
The mortgage term refers to the contracted lending period of time that the mortgage terms and interest rates are in effect. After the term expires, the borrower has 2 options: 1) To completely pay off the remaining balance of the mortgage with their own funds, or 2) To renew the mortgage for another term with either the same lender or a different one. Breaking a term early often results in prepayment penalties depending on whether your mortgage was an open mortgage or a closed mortgage. The most common mortgage term in Canada is a closed mortgage for 5 years.
Generally, an open mortgage gives you the most flexibility in making extra payments towards your mortgage principal and even allows you to pay off your mortgage balance entirely at your discretion. However, this flexibility comes at a cost to the borrower in terms of a higher interest rate.
In contrast, a closed mortgage offers little to no privileges in paying off your mortgage early. You cannot pay off your mortgage without attracting penalties, referred to as prepayment penalties. Note of caution - not all closed mortgages are created equal. It is best to check with your licensed mortgage professional as to how your prepayment penalties are calculated. The difference between how one lender calculates the penalty compared to another lender can be significant (tens of thousands of dollars)!
Choosing between an open or closed mortgage is dependent upon your personal circumstances and outlook over the term of the mortgage. If you have uncertainty in your life such as a serious illness, a looming separation, or a possible job transfer to another city, it is better to opt for an open mortgage. Doing so can save you thousands of dollars by avoiding the high prepayment penalties associated with closed mortgages. Another note of caution - not all open mortgages are created equally either. Always check with your licensed mortgage professional to see just how 'open' your mortgage really is.
Despite popular belief, the advantages of bi-weekly vs. monthly payments is slight. It is not the payment frequency that makes the difference to pay off your mortgage early, but rather how much you pay towards your outstanding principal. Any extra payments toward your principal will dramatically reduce your amortization period.
Think payment amount and not frequency as the key to paying off your mortgage early. In other words, look at the total amount you’re paying towards your mortgage over the course of a full year, regardless of payment frequency, to determine whether your mortgage is being paid down faster.
A Co-signer is placed on the mortgage and is registered on title. A Guarantor signs a document that personally guarantees the mortgage but is not registered on title. Most lenders will allow for both on an application.
Generally, a co-signer is required when the borrower, in the eyes of the lender, has insufficient income to support the full costs of homeownership. A lender may ask for a guarantor if the borrower’s credit falls short of the lender’s requirements.
There are two rates on a mortgage - the one you get going in and the one you get going out! Major banks offer clients a discount off of their posted rate, or sometimes they refer to the lower rate as a special off the posted rate. The reason for this is they will always use the posted rate when calculating the penalty should you look to break your term.
Many Canadians have benefitted over the past several years of breaking their closed mortgages and opting for a new mortgage with lower rates (nearly three-quarters of all 5-year closed mortgages in Canada are broken by the end of the 3rd year)! This is such a popular strategy in the mortgage industry that it even has been given a name - the 'Break and Run' strategy. This strategy assumes changing to the lower rate will more than offset all of the prepayment penalty over the course of the next five years.
However, the benefits are dictated by how your present lender calculates the prepayment penalty as well as the length of your mortgage term remaining. Check with a licensed mortgage professional to see if this strategy is appropriate to your situation and if they can find any additional incentives or deals that reimburse some or all of your prepayment penalties. Often your penalties can be minimized when your licensed mortgage professional finds a new lender anxious for your business. Also, if you switch and keep your mortgage amount the same, there are usually no legal fees involved - just a simple 'no fee' switch to the new lender.
No - the lender is not under any obligation to renew your mortgage. There is no automatic renewal. In fact, if you have 'missed' or have been late with any payments, the lender can legally use this as an excuse not to renew with you. A loss of a job or a divorce is usually the other reasons we have seen for a lender to refuse a mortgage renewal.
In truth, no excuse is necessary for the lender to not renew your mortgage term. A lender can refuse to renew because they simply do not like the current economic climate of a particular geographic region or even the type of industry you are employed or operate in.
For these reasons, it is critical for you to obtain a quote from a licensed mortgage professional at least 60 days before your current mortgage matures. This way if your current lender does not offer you a renewal you have a backup lender waiting to swoop in ready to take your business. Using a licensed mortgage professional will most often result in a better rate and terms anyway.
Often a lender will attempt to charge a renewal fee or tempt you to renew without a fee if you sign within a certain 'time offer' at their posted rates. This is very often the case with the major banks. Please keep it mind that by using a licensed mortgage professional, it is very rare for you to ever pay any renewal fees. For conventional residential mortgages, there will not be a renewal fee because the licensed mortgage professional will shop the market for you and find a lender that not only does not charge a renewal fee but is also ready to beat your current lender's mortgage renewal rate!
A second mortgage is simply an additional mortgage registered against the title of your home. Some lenders call it a "Home Equity Loan" or "Home Equity Line of Credit" and since these types of loans are registered against the title of your home as a second charge - they are all second mortgages. First and second mortgages are characterized by when they were registered on title respectfully, not by how much money was advanced or is owing.
A reverse mortgage is a loan secured against the value of your home. It is designed exclusively for homeowners aged 55 years and older. It enables you to convert up to 55% of your home's value into tax-free cash. The funds from a reverse mortgage can be used for whatever reason you desire; to cover monthly expenses, renovate your home, pay off debt, or travel. Growing in popularity, many reverse mortgagors are using the proceeds to gifting their loved ones with an early inheritance so they can witness first-hand the impact of those inheritances!
With a reverse mortgage, you maintain ownership of your home and there are no monthly mortgage payments to make. Repayment of the loan is only required if you subsequently choose to move or sell. A reverse mortgage guarantees the amount you eventually repay will never exceed the fair market value of your home. And if your home rises in value, the appreciation is all yours to keep. You are simply required to maintain your property and pay the property taxes and home insurance.
Reverse mortgages are sometimes referred to as CHIP. This refers to a reverse mortgage once called The Canadian Home Income Plan provided by HomeEquity Bank.