TOP 4 REASONS WHY A VARIABLE RATE MORTGAGE CAN PUT YOU FURTHER AHEAD

The general consumer will be hard pressed when left to their own devices to shop on their own for their next mortgage, especially if they visit with one of the BIG banks. Typically they will talk about their most popular and profitable product, the 5 year FIXED rate mortgage. If you don’t know to ask for anything different, that is what they will recommend for you.

Working with a professional mortgage broker, the insight and value we can provide will help you not just get a mortgage, but build a personal home loan strategy to help you get farther ahead down the road, to better reflect you future needs and goals.

So here are the TOP 4 reasons why you need to look at a variable rate type mortgage product.

1) It’s always a cheaper interest rate: The current GAP between the Best in Market (BiM) fixed rate and BiM variable rate mortgage is a difference of = 0.60%— for the Average Canadian Mortgage Balance ($310K), that’s a savings of $159.57 that you don’t have to pay to the BANK for interest each month. Over the full 5 year term, you have saved over $9.5K in interest  – should nothing change in the prime rate (breaks down to just $29.70/month for every $100K borrowed).

2) It’s always a better monthly P+I repayment distribution which helps YOU pay down your mortgage loan balance quicker, and in effect, again pay less interest to the banks.

So –  which product’s monthly payment do YOU want to pay for principal? 59.32% of the lower payment’s monthly amount to principal or 51.15% of the higher payment’s monthly amount to principal?

3) More flexible contract terms, and cheaper to get out of if you need to. To break this type of mortgage contract the penalty calculations are SIMPLE– just 3 months interest calculated on the balance remaining, for the term remaining.

The average Canadian will do something with their contracts after the 3 yr mark so if you owed $281K after 36months of this contract, then your penalty to break about $1,500.

Whereas the FIXED is a very complicated math equation, with fine print, and potential claw backs on the discounts given up from. In the opening contractual terms, you agreed to pay them the full interest of $38,612. After 36 months, you may have paid the majority of that to them, but they will want the rest to full term – it is this calculation that can be quite severe.

YOU can always do a SWITCH into the remaining term fixed as well, should you wish to take that route – with additional costs. Most VRMs are portable, meaning if you don’t need any new money for your next purchase. You can take that existing contract with you to your new property.

4) Banks are NOT going to increase your VRM payment severely…. MYTH— you will have a legal contract term outlining the math equations associated with the Bank of Canada overnight prime lending rate. Most banks have a similar prime. Right now, (as of the last announcement BoC announcement on September 19, 2015) prime is 2.50% and holding…. most internal bank prime rates are now 2.70%. The discount associated with their prime is what they are in control of for the mortgage variable rate offering… BUT once you sign your five year contract that math equation WILL NOT change in the term. The only thing that MAY change is the Federal Government’s Regulated BoC Prime lending rate, and that is capped to a max of a quarter of a point (0.25%) as to not trigger a negative effect in the larger economy. A 0.25% increase (or decrease as we have seen twice this year) for every $100K borrowed is just a change of $12.24/month, which is manageable. Most lenders take up to 90 days to do the administration to change your interest portion of your monthly payment, which gives you enough time to speak with your mortgage agent to help decide if you want to SWITCH to a fixed. (no costs to do that)

Since 2005, the Bank of Canada Rate hasn’t changed much. Back then, it was 2.50%, and lenders had same as their internal prime rate. The Federal Government promised to keep rates low, and from June 2007 to July 2009, they froze that rate to a ZERO increase. We have only seen two increases since then, bringing the prime up to 3.00%, and on December 2010, the Feds again froze the rate, which resulted in NO adjustments until January 2015, when they opted to DECREASE the rate by 0.25%, down to 2.75 and again a second decrease in July 2015 to where we are now. The September 19 announcement has said they will keep rates at a zero increase for some time to come.

Knowing it’s an election year, it’s not likely that the politicians are going to mess around with people’s money — they want their votes… and frankly after the election, whoever the new minister will be…. will take some time to get up to speed in their new duties of that portfolio… so don’t expect much change for the next year. This was reiterated by Dominion Lending Centres’ Chief Economist, Dr. Sherry Cooper, at our most recent conference.

Conclusion: Overall effect of using the variable rate contract is this:

More flexible product, with a lower monthly expected payment; better redistribution of that payment to principal, resulting in a lower end balance to renegotiate in five years time (should nothing happen to the Prime in that term) AND if you want to be conservative, and have a set payment for your household budget then… why not use the lower VRM product and make the FIXED payment.

EVERY additional dollar you put down per month – is now all principal – reducing our overall loan, and now reducing the overall interested they CAN charge you in term.

… or… better yet… why not set that monthly payment difference aside into a TSFA account, and once a year, make a decision to either invest it, or pay down your mortgage balance, or do both.

Anti-Money Laundering policies are in full effect with the lenders in today’s mortgage environment. Our own Brent Shepheard from DLC Mortgage Evolution West shares this with us.

VERIFYING YOUR DOWN PAYMENT – WHAT YOU NEED TO KNOW

Saving for a down payment is often one of the biggest challenges facing young people looking to break into the real estate market.  The source of your down payment could come from your own savings, a gift from a family member, your RRSP if you’re a first time home buyer or from the proceeds of selling your current home.

No matter where your down payment comes from,one thing that is for certain is your lender will be verifying your down payment prior to full approval. It’s required by all lenders to protect against fraud and to prove that you are not borrowing your down payment, which can change your lending ratios and your ability to repay your mortgage.

DOCUMENTS YOU WILL NEED TO SHOW WHEN VERIFYING YOUR DOWN PAYMENT

1. Own Savings/Investments:  If you’ve saved enough money for your down payment, congratulations!  What your lender will want to see is a 3 month history of any source accounts used for your down-payment such as your savings account, TFSA (Tax Free Savings Account) or Investment account.

Your statement will need to clearly show your name and your account number.  Any large deposits outside of your normal contributions will need to be explained i.e.  you sold your car and deposited $12,000 or you received your bonus from work.  If you have transferred money from one account to another you will need to show a record of the money leaving one account and arriving in the other.  The lenders want to see a paper trail of where the money came from and how it got in your account.  This is mainly to combat money laundering and fraud.

2. Gifted Down Payment:  Especially in the pricey Metro Vancouver and Toronto real estate markets, the bank of Mom and Dad is becoming a more popular source of down payments for young home buyers.  You will need a signed gift letter from your family member that states the down-payment is indeed a gift and no repayment is required on the funds.

Be prepared to show the funds on deposit in your account no later than 15 days prior to closing.  Again, the lender wants to see a transaction record.  i.e. $25,000 from Mom’s account transferred to yours and a record of the $25,000 landing in your account.  Documents must show account number and name.

Gifted down payments are only acceptable from immediate family members (parents, grandparents, siblings). You can learn more about gifted down payments and get a sample gift letter here.

3. Using your RRSP:  If you’re a First Time Home Buyer, you may qualify to use up to $25,000 from your Registered Retirement Savings Plan (RRSP) for your down payment.  To see if you qualify for the Home Buyer’s Plan to use your RRSP’s as a down payment visit here.  You will need to complete aForm T1036 to withdraw your funds without penalty.

Verifying your down payment from your RRSP is just like verifying from your savings/investment accounts.  You will need to show a 3 month history via your account statements with your name and account number on them.  Funds must have been in your account for 90 days.

4. Proceeds From Selling Your Existing Home:  If your down payment is coming from the proceeds of selling your current home then you will need to show your lender a fully executed purchase and sale agreement between you and the buyer of your home.  If  you have an outstanding mortgage on the property, be prepared to provide an up-to-date mortgage statement as well.

5. Money From Outside Of Canada:  Using funds from outside of Canada is acceptable but be prepared to have the money on deposit in a Canadian financial institution at least 30 days before your expected closing date.  Verifying your down payment from overseas will also require that you provide a 90 day history of your source account.

No matter what the source is, verifying your down payment will require you to show documentation of where the money originated from and be ready to explain any large deposits.  Making regular contributions into your savings or investment accounts will help develop a pattern of deposits and avoid any red flags.  Don’t stockpile your cash and make large lump-sum deposits.

Most lenders will want to see that you have 1.5% of the purchase price on deposit as well to cover your closing cost.  If you buy a home for $650,000 you will need a minimum of 5% down ($32,500) and another $9,750 (1.5%), for your closing cost.  You will need to show a total of $42,250 available on deposit.

Thanks for reading and if you need more information, please don’t hesitate to contact Dominion Lending Centres.

4 THINGS THAT WILL KILL YOUR MORTGAGE APPROVAL

So, you’ve worked hard to save every penny and have managed to finally afford the down payment necessary on a home. You have searched high and low, only to find the house of your dreams at a price you can afford. Though your credit rating is good and you have a stable job, there are some key things to avoid while waiting for your mortgage to be approved.

Here are 4 things you must absolutely avoid to ensure that you get that dream house:

1. Buying a Vehicle

Your current car may have finally given up or a great deal has arisen, but before making any decision on a new vehicle, check with your mortgage professional. You need to ensure that the numbers you provided on your mortgage application hold true in order to be approved!

2. Changing your Credit or Payment Routine

Before putting extra money towards a debt or changing your payment schedule on any liability, you must check with your mortgage professional. Again, anything that doesn’t align to the information you provided on your mortgage application could put your approval in jeopardy.

3. Changing Jobs

There are many opportunities and challenges that come with any job, but before deciding to drastically change your employment situation, keep the following in mind:

• If you are accepting a new position you need to ask if you will be given a probation period. Any mortgage lender will not accept probationary employment on a mortgage application.

• If your income situation is changing, such as receiving bonuses, overtime, or commissions, you could be putting your approval in limbo. This is risky because these job perks require a 2 year history before a lender will accept them as income.
• If you cannot stand your job any longer and are considering leaving the position, you need to talk to your mortgage professional immediately. The information you provide on your application must check out, especially when it comes to your employment. Most likely, you will need to wait to leave your job until after the mortgage has been approved and you’ve taken possession of the home or you’ll risk losing your dream house.
• If you are considered a contractor or self-employed person, you must provide a 2 year history in order to be approved for a mortgage. If you are considering going into this line of work you’ll need to wait until after you take possession.

4. Making Payments Late

While waiting for your mortgage to be approved, make sure you make every payment early or on time! If your credit experiences even a slight drop because of a late payment or maxed out credit card, a lender will not approve your mortgage and will cancel the application.

Getting approved for a mortgage doesn’t have to be difficult! As long as you do your due diligence and know all the information, you will be on the path to a happy home-buying process. Contact Dominion Lending Centres to inquire about mortgage approvals. We’re always happy to lend a helping hand!

Wonderful post to share as a blog from DLC Head Office

Most banks boast a higher than 90% renewal rate on their mortgages (some even higher than 95%). Since it costs them a lot more money to acquire a new client vs. keeping an existing one, banks love the savings of a simple renewal. So you would think that they would offer you the best rate up front on your renewal as it’ll save them money in the long run? Well…not necessarily.

With renewal rates being as high as they are, there is not much incentive for banks to give their clients the best rates up front. They know that most people will stay as they know it’s easier to just sign a form as opposed to applying for a mortgage at another bank. Hence the dreaded renewal letter that gets mailed out automatically prior to your renewal date.

The banks would love nothing more than for you to just pick the term, sign the document, and send it back to them. It costs them relatively little to process it and they don’t have to follow up with you after that (other than sending you a new copy of the agreement).

Since the renewal documents are printed automatically (and yes they may include a “preferred rate” which makes it even more tempting to sign) they don’t factor in any rate specials that may occur after they’re printed.

Recently a client’s mortgage was coming up for renewal and they received the automatic renewal letter. Just calling the 1-800 number saved them an extra .10%, which on a $500,000 mortgage was an extra $500 per year in interest. Not bad for a 5 min phone call.

There are also some important questions to answer:

-are you planning on selling your home anytime over the next 5 years?

-do you need to access any equity from your home for renovations, children’s education, etc.

-what are your long term goals with the property?

These are important questions to ask as they help us suggest the right product for you.

So it’s important to treat your renewal as if you’re obtaining a new mortgage and spend some time researching your options. When I worked at the bank I was always shocked at the number of people that just signed the form and sent it back.

That’s why (in addition to the financial institution where your mortgage is now) you need to contact your Dominion Lending Centres Mortgage Broker and have them give you an unbiased view of which mortgage product is right for you, as they have access to hundreds of different financial institutions.

Some odds and ends from the week’s mortgage rate action…

The Misleading Core…

One can be forgiven for wondering why the BoC cut the overnight rate ¼ point on Wednesday when its official “core” inflation measure is above target.

As it turns out, core inflation (which has stubbornly risen to 2.3%) doesn’t tell the whole story. Governor Stephen Poloz believes the “underlying trend” is actually much lower at 1.50% to 1.70%. “The Bank of Canada tries to strip out transitory factors in determining the underlying trend,” explains DLC Chief Economist Dr. Sherry Cooper. The biggest transitory factor at the moment is the boost in import (input) prices caused by our plunging loonie.

“But this is not inflation,” she explains. “Inflation isn’t a one-shot increase in prices. It’s an ongoing spiral up in prices.”

Don’t get too hung up on the BoC’s 2% inflation guideline either, Dr. Cooper cautions. “Inflation targets aren’t meant to be binding without judgment,” especially with the “R word” looming.

The DoF may tap the brakes again

Seven years of mortgage rules can’t keep the major markets down. Debt levels and home prices continue deviating from incomes, despite the Department of Finance’s efforts.

With this week’s cut and record real estate numbers, things have gotten interesting. When you get heads of real estate companies joining the BoC’s chorus about housing vulnerability, you can rest assured that policy-makers are on high alert.

The last thing rule-makers want is a housing calamity. The second-last thing they want is to be seen as not being proactive before a housing calamity. For that reason, the odds that tighter mortgage guidelines are on the way have just leaped.

TD’s Gambit

TD was ready for the rate cut. It announced a 10 bps reduction in its prime rate just 12 minutes after the BoC’sstatement. It seemingly wanted to set the trend and perhaps get out in front of consumer backlash from banks withholding part of the quarter-point cut.

TD’s move would have been well played, had the other Big 5 matched its rate. But they didn’t. RBC, the biggest kahuna in Canadian mortgages, decided to trump TD’s less generous rate and drop prime by an extra 5 bps to 2.70%. “They just wanted to make TD look bad,” said one capital markets source.

Not to lose face (and business) over a 5-bps-rate difference, TD quickly relented and matched 2.70%. Being first to announce prime rate entails a lot more reputational risk than it used to.

The Banks Stole My 10 Beeps

About 1 in 4 mortgagors has a variable rate. And they choose variables because they expect to receive every basis point of BoC rate cuts.

But big banks haven’t been in a giving mood lately. They’ve passed along only 60% of the benefit of the last two rate cuts. This latest “spread pocketing” has driven the prime – overnight difference up to 220 bps, 45 bps higher than in 2008.

Here’s a look at how the prime – overnight spread has been creeping up.

But why?

RBC cited this as its reasoning for passing along only 60% of the rate cut:

“Our decision is consistent with the rate adjustment that we made in January when the Bank of Canada previously lowered their rate. It is meant to balance the interests of our clients who are always top of mind, with the costs that we incur to provide our products and services.”

What bank critics don’t acknowledge is that

• Every single year, shareholders demand to be fed with a steady diet of earnings and dividend growth.
• Banks have a minimum target spread they need to earn between what they lend and borrow at.
• The Bank of Canada’s rate cut instantly shrinks lender spreads on variables—partly because banks fund much of their variable-rate book from deposits. They can’t really lower those deposit rates since they’re already near/at zero. Banks feel they have little choice (if they want to maintain spreads) but to pass along only a fraction of the rate cuts.
• Adding fuel to the fire is that variable-rate MBS spreads have been steadily inflating this year—i.e., it’s getting relatively more expensive to fund variable rate mortgages using mortgage-backed securities.
• On top of that, funding costs have risen on other parts of their mortgage book, thanks in part to widening swap spreads.

The interesting part is that this time around, you can barely hear any consumer outcry in the media—compared to when the banks last pocketed some spread in January. And that’s just the way banks like it.

Coming Up Next for Rates

The markets are pricing in a fair probability of another BoC cut on September 9, 2015. By then, the Bank of Canada will have data confirming if Canada is in a technical recession, more visibility on oil prices, as well as two more employment and inflation reports.

If the BoC lowers another quarter point, there’s a good chance that banks will again hold back some of the cut.

As for fixed rates, 5-year yields have been in a clear downtrend and the 0.55% record low is just 15 bps away. If yields makes a new low, fixed rates will do the same. But the same margin concerns that kept banks from lowering prime ¼ point will also keep the average 5-year fixed – bond yield spread closer to 165 bps than the 135 bps of old. In other words, we may not see overly generous fixed-rate discounting for some time.

Buying a house or investment property? We often hear how important it is to get pre-approved for your mortgage amount: It helps us understand our maximum house-price, the down-payment required and the monthly payments we’ll need to make once we purchase the property. But the difference between the pre-approval and the approval process is so vastly different that many buyers are often left feeling stressed and anxious during the week or two that financing is being finalized.

To help you avoid this aggravation and anxiety, I’ve put together a little mortgage approval cheat sheet. This should help you understand what documents and paperwork you will need to actually get a mortgage—and reduce the stress during this period of the home buying process.

Mortgage pre-approval process

This isn’t actually a process—it’s more of a marketing tool. By setting up mortgage calculators, online instantaneous pre-approval applications, and advertising low mortgage rates banks and lenders are really trying to capture your mortgage business. Why? Because lending is a big business with phenomenal returns (see this CBC article about the “shadow” mortgage mortgage, or why people like you and me are risking our money by lending it out).

But that doesn’t mean the pre-approval process is useless. The biggest advantage is that you can lock-in your rate for 30 to 90 days, depending on the lender. If rates rise during that time, you’re protected with the price lock. If they fall, consider shopping around again to make sure you have the best rate and mortgage option.

Now, all you get with a pre-approval process is an open file at a lending institution (or mortgage broker, who should do the periodic-rate shopping automatically for you) and the rate-lock. That’s it. There is no guarantee that you’ll get approved for the mortgage, or that this is the final rate you will pay for your mortgage. Those details can only be determined when you actually apply for a mortgage.

And herein lies the dilemma: A lender won’t actually go through all the paperwork until you’ve made an offer on a real property. Why? Because a mortgage application is as much about assessing you as the borrower as it is about assessing the property being bought. For the vast majority of home buyers this isn’t a problem. However, those with high debt ratios, for the self-employed, or real estate investors who already own three or more properties, you’ll want to find a mortgage broker or lender that’s willing to review your paperwork during the pre-approval process. While many lenders won’t do this, it’s an important step if you don’t want to be scrambling during the financing stages of mortgage approval. Mortgage professionals that do a more thorough pre-approval verification are able to determine where you might get flagged by lenders and how and what to submit in order to satisfy lender mortgage requirements.

Mortgage approval process

So, you’ve found the perfect home, you put in an offer and won. Now it’s time to seal the deal and this boils down to money. So you call your lender to finalize the mortgage. That’s when you’re going to get hit with a list of paperwork that’s required for your application. The paperwork you’ll need includes:

* Personal information: Age, marital status, number and age of kids

* Employment details: This includes proof of income (such as T4 slips, copies of your last two paystubs, personal income tax returns, Notice of Assessments from the CRA for the last two tax filing years, and a letter from your company’s HR department stating your position, length of service and salary)

* If self-employed you’ll need to provide: Incorporation documents, if applicable, as well as financial statements of the corporation for the last two to three tax years. You’ll also be required to submit full personal tax returns as well as CRA Notice of Assessments for both the corporation as well for you personally. The lender may also ask to see portions of your books, such as your General Ledger or Profit & Loss statements. Talk to your accountant or bookkeeper for these reports.

* Other sources of income: Typically this is a statement on your part, but the lender could ask for back-up documentation. Other income can include pension, rental income, part-time work, etc. You’ll probably be asked for copies of your tax returns, or copies of paystubs or rental income documentation

* If you already own property: A copy of the mortgage statement on your current property and a copy of last year’s property tax statement and, perhaps, this year’s up-to-date property tax statement.

* Current banking information: Including bank, branch, accounts and balances

* Verification of your down payment: This can be a snapshot of a bank account where the money is currently deposited, or a letter from a family member stating that the money is a loan or gift

* Consent to run a credit history search: Every lender will either verbally ask for permission (and then obtain your Social Insurance Number) or ask you to sign an authorization form allowing them to pull your credit history.

* List of debts (otherwise known as liabilities): This is where people sometimes opt to exclude a few items owed, but you need to resist this urge. Your credit history will show all outstanding money owed, so be upfront and honest. Provide a list of what is owed, to whom you owe it to and what monthly payments, if any, you put towards paying down the debt. The list should include student loans, credit card balances, car loans, monthly lease (or lease-to-own) arrangements and personal loans.

* Copy of the listing: You will need to print off a copy of the MLS listing and include this in your mortgage documentation package.

* Copy of purchase document: You will need a copy of the document you signed to buy the home. Known as the Agreement to Purchase and Sale, it’s the thick document that states the address, what’s included/excluded and the price, deposit and down-payment you agreed to.

* Condo documentation: If you’re buying a condo or strata-townhome, you’ll also need to include thecondo corporation’s financial statements and status certificates.

* Rural property: You’ll need to include the certificate for the well and/or septic tank if you’re property isn’t on municipal water and sewer.

If you want to reduce your stress during the financing phase of your home purchase, and you don’t want to or can’t submit all this information prior to finding a property then consider gathering up all this documentation ahead of time. Just having all the documentation at the ready will reduce your workload and free you up to concentrate on last-minute requests.

This article was borrowed of course from the internet!  Many thanks to its contributor.

The nice thing about an election year that’s accompanied by federal budget surpluses is that it’s fertile ground for tax cuts – and both the Conservatives and Liberals have promised that tax savings are on the way. But who should really benefit from tax cuts? While it might not seem politically correct to suggest that the rich should get the lion’s share of tax breaks, let me share a story that I first shared many years ago that provides food for thought here.

The cost of dinner

Each and every day, 10 men go to a restaurant for dinner together. The bill for all 10 comes to $100 each day. If the bill were paid the way we pay our taxes, the first four would pay nothing; the fifth would pay $1; the sixth would pay $3; the seventh $7; the eighth $12; the ninth $18. The 10th man – the richest – would pay $59. Although the 10 men didn’t share the bill equally, they all seemed content enough with the arrangement – until the restaurant owner threw them a curve.

“You’re all very good customers,” the owner said, “so I’m going to reduce the cost of your daily meal by $20. I’m going to charge you just $80 in total.” The 10 men looked at each other and seemed genuinely surprised, but quite happy about the news.

The first four men, of course, are unaffected because they weren’t paying anything for their meals anyway. They’ll still eat for free. The big question is how to divvy up the $20 in savings among the remaining six in a way that’s fair for each of them. They realized that $20 divided by six is $3.33, but if they subtract that amount from each person’s share, then the fifth and sixth men would end up being paid to eat their meals. The restaurant owner suggested that it would be fair to reduce each person’s bill by roughly the same percentage, and he proceeded to work out the amounts that each should pay.

The results? The fifth man paid nothing, the sixth pitched in $2, the seventh paid $5, the eighth paid $9, the ninth paid $14, leaving the 10th man with a bill of $50 instead of $59. Outside the restaurant, the men began to compare their savings. “I only got one dollar out of the $20,” said the sixth man, pointing to the 10th man, “and he got $9!” “Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too! It’s not fair that he got nine times more than me!” “That’s true,” shouted the seventh man. “Why should he get back $9 when I only got $2? The rich get all the breaks!” “Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!”

The nine outraged men surrounded the 10th and brutally assaulted him. The next day, he didn’t show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they faced a problem that they hadn’t faced before. They were $50 short.

The moral

There are a couple of lessons to be learned here. The first is an observation from my wife: If the 10 individuals had been women, they probably would have figured things out. But in all seriousness, I’m going to suggest that the approach taken by the restaurant owner in the story is exactly the right approach to divvying up tax cuts. It’s how our system should work. The people who pay the highest taxes should get the greatest relief from a tax cut, in absolute dollars.

The fact is, if you overtax the rich, they just might not show up for dinner next time. After all, there are plenty of good restaurants around the world.

This story is relevant today because both the Conservatives and the Liberals have proposed to cut taxes – in different ways. The Liberals have said that they would offer no tax cuts to the rich, but would instead increase the tax burden on the highest earners. The problem with this, of course, is that pushing any taxpayer’s marginal tax rate to 50 per cent or higher (which would be the case for many Canadians, particularly in provinces that also have taken steps to increase the marginal tax rate for the highest earners) will absolutely cause those folks to explore new ways to bring the tax burden down. And in the end, it may drive some to leave.

Tim Cestnick is managing director of Advanced Wealth Planning, Scotiabank Global Wealth Management, and founder of WaterStreet Family Offices.

I see this time and time again.

Clients have opted for a fixed rate mortgage with their bank – a chartered bank – and they find out the ‘great’ rate they signed up for comes with a massive curveball!

IRD – Interest Rate Differential – get to know this term.  It is scary.

To get the market rate received, the bank gave you a ‘discount’ off their posted rate.

This posted rate is used in their interest calculations on full pre-payment.

Your 5 yr fixed at 2.99% or 3.09% had a discount of 1.8%-2.15% (from 4.79, 5.09 or 5.24%).

At the 3 yr mark, the posted rate could be 3.44% is deducted from the posted rates at the time of your mortgage.

The applicable posted rate less this 3 yr rate (or 1, or 2 or 4 as applicable) can generate a rate differential of 1.35% to 1.80% times your mortgage balance times the time remaining.

Example: 3.09% Big Bank fixed needs to be ‘broken’ after 2 years for whatever valid reason.

Balance $500,000 x 3 years (36mos/12) X 2.15% rate differential = $ 32,250 penalty due.

A broker channel lender with whom I work with – the penalty would be 3 months interest – as they don’t have the posted rate model.  Penalty = 500,000 x 3.09%/12 x 3 = $ 3862.50 penalty due.

Did you see the difference?

Broker Penalty : $3862.50

BIG Bank Penalty: $32,250

Which one would you prefer to pay?

Why not consider using a mortgage broker and save yourself down the line!

It is $28,000 question!

Yours in Mortgages,

Michael James

BREAKING NEWS – New CMHC Stats show Mortgage Brokers are AWESOME

A hilarious short video about the neighbour who gets his mortgage from the bank instead of a broker!

https://t.co/q91Mjndvnp

Copy and paste the links in your browser.  Enjoy!