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Frequently
Asked Questions and Answers about Canada Mortgages
Q I
have a 5 year term with my mortgage what does this
mean?
A Every
mortgage has a start date and an end date. The end date
is referred to the maturity date. The duration between
the end date and start date is the term of your mortgage.
You can choose terms of just 6 months, 1, 2, 3, 4, 5,
7, 10 or even a 25-year term. At the end of the term
you can either pay off your mortgage or accept the lender's
invitation to renew it for another term period of your
choice.
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Q
At the end of the term of my mortgage is the lender
obligated to renew my mortgage?
A No.
The lender is not under any obligation to renew your
mortgage. It does not 'automatically' renew. In fact
if you have 'missed' or been late with any payments the
lender could use this as an excuse not to renew with
you. A loss of a job or a divorce may be another reason.
But, in truth, no excuse is necessary for the lender
to call your loan.This can not be understated. For example,
it is common for businesses to find their commercial
mortgages NOT renewed for any reasonable reason at the
end of term. And this may be no fault of the business
that paid their mortgage payments on time. A bank could
refuse to renew because they don't like the economic
climate of a particular geographic area or even a type
of industry a business operates in. Think about the hardships
suffered. For this reason alone it is critical for businesses
and homeowners to obtain a quote from a mortgage consultant
60 to 90 days before their current mortgage matures.
This way if your current lender does not offer you a
renewal you have a backup lender in the wings. If you
use a mortgage consultant you will often benefit with
a lower rate anyway.
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Q
Does a lender charge a renewal fee?
A 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. Please keep it mind
that if you use a mortgage consultant it is very, very
rare for you to ever pay a renewal fee. For all conventional
residential mortgages there will not be a fee because
the mortgage consultant will shop the market for you
and find a lender that doesn't charge a fee AND will
beat your current lender's mortgage renewal rate!
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Q
Should I take a short-term mortgage or a long-term
mortgage?
A When
interest rates are low you should take as long of a term
as you can afford. When the interest rates are high you
should take the shortest term and renew every 6 months
or 1-year. Whenever the interest rate spread between
short term and a long-term mortgage rates are significant
it is always better to take the shortest term possible.
The difference in savings could be invested elsewhere
i.e. paying down your mortgage principal, investing in
segregated funds or for topping up your RSP contributions.
Currently, with such low rates most people are locking
in for terms of 5 or even 10 years.
SEE
MORTGAGE CALCULATOR!
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Q
What is amortization? And what is the best amortization
period to seek?
A Your
amortization is the total length of time it will take
you to pay off your mortgage. Often when you first get
a mortgage it is amortized over 25 years. If you make
your mortgage payments over 25 years your mortgage will
be paid off. However, your amortization period will not
stay constant because different borrowing terms at each
renewal vary the amount of interest charged over your
amortization period. The length of time to pay off your
mortgage will be determined by the interest charge, the
loan amount and the amount of payment you make. You should
first qualify for a 25-year amortization and then change
the amortization down to 15 years by making a larger
monthly payment. A 15-year amortization is a great goal
for everyone. A good rule of thumb is to pay down your
mortgage by at least 1% each year from the original amount.
Make your monthly payment and add in this "top up" amount.
It is the amount of 'extra' payments that you make that
reduces your principal, which saves you, interest charges.
Another rule of thumb, when interest rates are low, is
to make your mortgage payments as large as possible in
your monthly budget. If interest rates rise by next renewal
keep your mortgage payments the same and ride out the
high rates by taking shorter renewal terms. This way
you will get in the habit of making the same larger mortgage
payment over time and by doing so will save thousands
in interest charges.
SEE MORTGAGE CALCULATOR!
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Q
What is a fixed rate mortgage?
A It simply
means that for the term of your mortgage the interest
rate charged is a fixed amount and does not change during
the term of your mortgage. If you look at our rate comparisons
you will see this distinction between fixed and variable
rates.
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Q
What is a variable interest rate mortgage?
A Compared
to a fixed rate mortgage a variable interest rate 'floats'.
Although the mortgage payment amount may stay the same
the actual interest charged may change on a monthly basis.
A drop in interest rates is great news for you and it
will mean that more of your mortgage payment will go
towards reducing your mortgage principle. If interest
rates rise then less money will be used for reducing
your principle and will instead be used for paying higher
interest costs. If you think interest rates will fall
over the next 3 to 5 years then purchasing a variable
mortgage makes a lot of sense. With mortgages you pay
a price for certainty. You generally pay more for a fixed
rate mortgage because the lender is taking the risk as
to what the rates will do by fixing the rate for you.
You generally pay less for a variable rate mortgage because
it is you that is taking the risk of uncertainty as to
how interest rates will move - up or down. With low interest
rates variable interest rate mortgages have become popular.
Often it is possible to get a rate just over or under
the bank prime rate!
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Q
What can I do if I have variable interest rate mortgage
and interest rates start to rise?
A Most
variable mortgages give you the right to change to a
fixed rate at any time. If you think the interest rise
is not just a short-term fluctuation but will be a long-term
trend then 'lock into' a fixed rate immediately. There
is usually no charge for this great benefit.
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Q
What is an open mortgage?
A An open
mortgage gives you the most flexibility in making extra
payments towards your mortgage principal and even lets
you pay off your mortgage entirely whenever you wish
to. 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 have an open mortgage.
This way if you 'have to move' you can pay off your mortgage
without any penalty. This could save you thousands in
prepayment penalties. Warning! Not all-open mortgages
are created equal. Check with a mortgage consultant to
see just how 'open' your mortgage is!
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Q
What is a closed mortgage?
A Compared
to open a closed mortgage offers little to no privileges
in paying off your mortgage early. You can not pay off
your mortgage without attracting penalties, called prepayment
penalties, from the lender. Warning! Not all closed mortgages
are created equal check with your mortgage consultant
as to how your prepayment penalties are calculated. The
difference between one lender definition of penalty to
another lender is enormous. Only people with very predictable
lives should pick closed mortgages with long terms. And
really, whose life is that predictable these days? Avoid
long term-closed mortgages.
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Q
Is there ever a good time to break my closed mortgage
and pay the prepayment penalties?
A Yes!
A good rule of thumb is whenever making a change will
result in a 2% - 3% interest rate saving. This is so
popular that it is even has a name - the 'break and run'
strategy in the lending industry. The improved rate change
will absorb any prepayment penalty over the next 5 years
in any switch when the spread between the old rate and
the new mortgage rate is great enough. Check with a mortgage
consultant as often he or she can find additional incentives
or deals that reimburse some or all of your prepayment
penalties. If you switch and keep your mortgage loan
amount the same there are usually no legal fees involved
- just a simple 'no fee' switch with the new lender.
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Q
Are there always penalties when I switch my mortgage
to another lender?
A No.
If you switch from one lender to another at your renewal
date there will not be any penalties whatsoever. If you
switch before your maturity or renewal date there may
be a penalty. If you have an open mortgage there probably
will not be any charge. If you have a closed mortgage
you will most likely have a cost. It is important to
consult with a mortgage consultant so that you can determine
whether or not a 'break and run' strategy will work for
you. Often your penalties can be minimized when a mortgage
consultant finds a new lender anxious for your business.
A new lender will often assist with incentives to lure
you over to them. Sometimes the incentive can be as high
as a 3% cash back offer that can be used towards any
prepayment penalties.
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Q
If I see a dramatic change with a higher interest rate
posted by banks should I immediately lock into a fixed
rate mortgage?
A Absolutely
not. Do not chase newspaper headlines but do ask yourself
why a change is occurring and whether or not it appears
to be a long-term trend or a short term 'blip'. For example,
it is not uncommon to see a dramatic interest rate jump
due to a constitutional referendum or a fear of a heated
economy. But it is short lived. Ask a certified financial
planner or your financial advisor on his opinion on this
matter.
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Q
It is possible to negotiate a mortgage rate?
A Yes!
This is the whole point of using a mortgage consultant.
When you shop the market you will look at your newspaper
for current mortgage rates or use mortgageconsultant.com
for a more complete summary of best-posted rates. This
is what the lenders are posting as their best rates available.
However, it is possible to then negotiate a further ½ %
to a full 1% off the posted rate! If you try this yourself
get it in writing. If you don't get your rate guaranteed
in writing you may find out that a lender has 'amnesia'
just before renewal and you may get stuck with a poor
renewal rate. Ask for a letter of commitment to secure
your rate. If you wish to shop to more than one bank
it is wise to use a mortgage consultant. When you use
a mortgage consultant there is only one credit report
done. When you shop around at various lenders they all
do one and this will effect your credit rating. Further,
a mortgage consultant knows where the deals are and the
particular lending habits of the different lenders that
would best suit your needs. He or she will find the best-posted
rate and then negotiate to better your rate even further.
The lenders know that when a mortgage consultant is involved
the deal will get placed and so they will actively bid
to get it before a competitor does.
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Q
O.K. so there is many reasons to use a mortgage consultant,
but what does that cost?
A For
conventional residential mortgages there is no fee paid
by you. Instead the lender pays a finders fee to the
mortgage consultant. For commercial properties a mortgage
consultant will charge fees but will always put this
in writing before any work is commenced. In any case,
ethics and laws bind a mortgage consultant to state to
you whether or not any fees will be charged and to put
it in writing before any work is commenced. No mortgage
consultant listed under mortgageconsultant.com will ever
charge fees for any conventional residential mortgage.
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Q
Is there any other reason to use a mortgage consultant?
A It is
less stressful for you. Lenders like to pretend that
mortgages are complex and can not be understood by ordinary
people. People feel intimidated and rarely feel courageous
enough to play hard ball with negotiation on prepayment
penalties, open versus closed options, rates and flexibility
for repayment. A mortgage consultant plays hard ball
for you with the lender and designs the best mortgage
for you - and rarely charges you a fee for his or her
services. What could be easier?
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Q
What is a high ratio or insured mortgage?
A Whenever
you need a mortgage loan that is greater than 76% to
90% of the current market appraised value of your home
it is considered a high ratio or insured mortgage. If
you are a first time home buyer then you can borrow up
to 95% value and only need to come up with a 5 percent
minimum down payment. The Canada Mortgage and Housing
Corporation (CMHC) insures the lender in case you default
on your loan. You must pay for this insurance premium
which is usually tacked on top of your loan. If the lender
feels that you are still a risk for default even though
you have paid more than 25% down the lender can insist
that you insure the mortgage anyway. However, in this
situation a mortgage consultant would probably shop this
mortgage to a lender that didn't insist on insuring.
The fees for CMHC can be as high as 2.5% of the mortgage
principal but is often not noticed by a borrower because
of being added to your mortgage principal. Rates for
a high ratio loan vary widely between lenders so it is
best to use a mortgage consultant to explore the best
options for you.
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Q
When making a mortgage payment is it better to pay
weekly or monthly?
A It is
not really the frequency that makes a real difference
but how much you pay. An actuary could do the math and
say that by paying weekly you are 'slightly' better off
when comparing 12 monthly payments versus 52-week payments.
There is a lot of advertising out there that promotes
weekly but the difference is really not that significant.
What is important is whether or not you are making an
extra payment towards your principal with whatever frequency
that you choose. Any extra payment towards your principal
dramatically improves your amortization period. In fact
a 10% increase in your payment amount may knock off almost
8 years in your mortgage. That is nearly 100 less monthly
mortgage payments! Think of the vacations you could go
on! Think payment amount not frequency of payment.
SEE
MORTGAGE CALCULATOR!
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Q
Is it important to insure my mortgage with life insurance
and disability insurance?
A Yes,
but contact a professional life insurance consultant
who can properly advise you on the right amount of coverage
for your total estate needs. Having enough insurance
to cover your mortgage is just one of the expenses you
will need to guard against. It is also extremely important
to have a current last will and testament.
OBTAIN
AN INSURANCE QUOTE!
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Q
Well, would it not be easier to buy my insurance
direct from the bank when I obtain my mortgage?
A Instead
of purchasing creditor insurance from the bank it is
better to purchase private insurance from a licensed
insurance agent. Creditor insurance has many restrictions
and limitations. From a mortgage consultant point of
view, we are very concerned when your insurance is tied
to your mortgage lender. What do you do if you want to
switch to a more competitive lender at your next mortgage
renewal? When you switch you will lose your creditor
insurance. If you are unhealthy you may not qualify for
another insurance plan elsewhere! This means you may
be stuck staying with a lousy interest rate with the
old lender just because you need to keep your insurance.
This is poor planning that could cost you thousands of
dollars. Keep the mortgage lender and your insurance
separate from each other. Also, with creditor insurance
once your mortgage is paid off it ceases to exist. There
are many reasons why you may wish insurance coverage
to continue for estate purposes and with private insurance
you will have that option. Ask your certified financial
planner or professional insurance agent for advice.
OBTAIN
AN INSURANCE QUOTE!
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Q
If I have extra cash should I pay off my mortgage
or buy a RSP?
A Assuming
that you are already making a mortgage payment 10% greater
than necessary and you still have extra cash then we
would answer the following way 1: if interest rates are
high then pay off your mortgage more with additional
payments 2: if your investment returns are 2% lower than
your mortgage rate then pay down your mortgage more 3:
if you are in a low tax bracket then pay off your mortgage.
And if you are part of the investment fund craze seeking
higher investment returns consider purchasing segregated
funds over mutual funds for similar returns but better
financial safety.
SEE MORTGAGE CALCULATOR!
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Q Does it make sense at my
next mortgage renewal to increase my loan amount to
buy RSPs?
A Absolutely.
If you are in a high tax bracket and have not taken advantage
of your RSP room it is an excellent opportunity for you
to buy a large amount of RSPs and obtain a large tax
refund. Your new RSP portfolio could even be used as
an income splitting tool to transfer wealth to your spouse
with a spousal RSP. You would get the deduction and your
spouse would get investments accruing in his or her name.
At retirement, you and your spouse would both draw out
pension income that would taxed at a lower rate than
if being claimed by only one pensioner. Finally, you
could use the tax refund to pay down your mortgage even
further.
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