I am one of you, a Landlord... We always want a good tenant who pays his rent without fuss and we can get return on our investment without any fuss..
I just want to share few Residential Tenacies Act which has been in effect from January 31, 2007,
The Residential Tenancies Act
2009 Rent Increase Guideline
Each year the Ontario government announces the province’s rent increase guideline for the following year. The annual rent increase guideline is the maximum percentage by which a landlord can increase the rent for most sitting residential tenants without approval from the Landlord and Tenant Board.
The 2009 guideline is 1.8 per cent.
The new rent increase guideline applies to a rent increase that begins any time between January 1, 2009 and December 31, 2009 and applies to most residential units in Ontario.
The 2010 guideline is 2.1 per cent.
The new rent increase guideline applies to a rent increase that begins any time between January 1, 2010 and December 31, 2010 and applies to most residential units in Ontario.
In most cases, the rent for a unit can be increased if at least 12 months have passed since the tenant first moved in or since his or her last rent increase. The tenant must be given proper written notice of the rental increase at least 90 days before the rent increase takes effect.
Who is responsible for maintaining the unit?
It is the landlord's responsibility to maintain the unit and ensure that it is in a good state of repair, even if:
• the tenant was aware of problems in the unit before they moved into it, or,
• the landlord puts into the lease that the tenant is responsible for maintenance.
However, the tenant is responsible for keeping the unit clean, up to the standard that most people consider ordinary or normal cleanliness. The tenant is also responsible for repairing or paying for any damage to the rental property caused by the tenant, their guests or another person living in the rental unit.
Notice to End a Tenancy
Landlord must give proper notice
A landlord can end a tenancy only for the reasons allowed by the Act.
In most cases, the first step is for the landlord to give the tenant a notice in writing that they want the tenant to move out.
There are proper forms a landlord must use for giving a notice to end the tenancy are available from the Board. There are different notices for different reasons.
Landlords must use the correct notice form and fill it out completely and accurately to ensure that the tenant receives all the information that the Act requires.
If the landlord does not give the tenant all the information required by the Act, the notice may be void.
And, if the landlord files an application to evict the tenant based on an incomplete or incorrect notice, the application may be dismissed.
Reasons for ending a tenancy
The Act allows a landlord to give a tenant notice to end the tenancy early if the tenant, the tenant’s guest or someone else who lives in the rental unit does something they should not do, or does not do something they should. This is sometimes called ending a tenancy “for cause”.
Some examples of “for cause” reasons for ending a tenancy are:
• not paying the rent in full,
• causing damage to the rental property,
• disturbing other tenants or the landlord, and
• illegal activity in the rental unit or residential complex.
There are also other reasons for ending a tenancy that are not related to what the tenant has done, or not done. These are sometimes called “no fault” reasons for ending a tenancy.
Some examples of “no fault” reasons for ending a tenancy are:
the landlord plans to do major repairs or renovations that require a building permit and the work cannot be done unless the rental unit is empty,
the landlord requires the rental unit because the landlord, a member of the landlord’s immediate family or their caregiver wish to move into the unit, and
the landlord has agreed to sell the property and the purchaser requires all or part of the property because the purchaser, a member of the purchaser’s immediate family or their caregiver wish to move into the unit. (This reason for eviction only applies in rental buildings with three or fewer units and in condominiums.)
When the landlord must give notice
Where a notice to end a tenancy must be given, the landlord must give the notice to the tenant before the termination date (the day the tenancy will end). The amount of advance notice depends on the reason for ending the tenancy.
Tenant’s remedy
For some of the for cause reasons for ending a tenancy, a tenant can prevent the tenancy from ending by stopping the behaviour referred to in the notice, or by doing what the notice requests. This is a called a tenant’s remedy. The notice explains what this is, and gives a deadline for the tenant to comply. If the tenant does what the notice asks them to do by the deadline, the notice to end the tenancy is then void. The landlord cannot apply to the Board to evict a tenant based on a void notice.
For those reasons for ending a tenancy that do not have a remedy, the tenant cannot do anything to void the notice. However, this does not mean the tenant has to move out.
If the tenant does not move out after receiving a notice to end the tenancy, the landlord can file an application to the Board to end the tenancy. The Board will decide if the tenancy should end after holding a hearing. Both the landlord and the tenant can come to the hearing and explain their side of the story to a Member of the Board. (For information about when a landlord can apply to the Board see the Application to the Board section).
Application to the Board
Applying for approval to end the tenancy
A landlord can apply to the Board for approval to end a tenancy if:
• the landlord gave the tenant a notice to end the tenancy,
• the landlord and tenant have an agreement to end the tenancy,
• the landlord wants to evict an unauthorized occupant,
• the tenant gave the landlord a notice to end the tenancy,
• the tenant breached a condition of a Board order or mediated settlement and the order or settlement allowed the landlord to apply to end the tenancy,
• the tenant abandoned the rental unit, or
• the tenant was the superintendent and the superintendent’s employment has ended.
If there is a tenant remedy, the landlord cannot file an application to the Board unless the tenant fails to correct the behavior referred to in the notice, or fails to do what the notice requested, by the deadline set out in the notice.
Where the tenant does not have a remedy, the landlord can file their application as soon as they give the notice to the tenant.
Deadline to apply
In most cases, there is a deadline by which the landlord must file their application to the Board.
Most, but not all, landlord applications must be made within 30 days of the termination date set out in the notice. However, there is no deadline for making an application to terminate a tenancy where the landlord has given the tenant a Notice to End a Tenancy Early for Non-Payment of Rent (Form N4).
New Fee for Landlord Applications
As of April 6, 2009, the fees for landlord applications for evictions and for applications to collect arrears was raised from $150 to $170 per application. The fee for all other applications remains the same.
Saturday, October 31, 2009
Mortgage Guide for Canadian
You are new in Canada , ready to buy your dream home and you know what type of house you want, which location you want to live for next 10yrs or so. You went to bank for mortgage pre approval and bank has approved you certain amount with lot of terms and condition that you find it confusing to understand. No wonder we are not experties in every field...
Following are the few facts and figure that will give you better understanding of some of the intricases of Canadian Mortgage.
Different type of Mortgages and Further more
• OPEN MORTGAGES
An open mortgage allows you to pay off part or the entire mortgage at any time without penalties. Open mortgages usually have short terms of six months or one year. The interest rates are higher than those for closed mortgages with similar terms.
• VARIABLE RATE MORTGAGES / ARM (ADJUSTABLE RATE MORTGAGES)
At the start of a variable rate mortgage, the lender will calculate a mortgage payment that includes principal & interest. For the term of the mortgage your payments usually do not change. However, as the prime rate changes so will your mortgage rate.
If interest rates are dropping, less of each payment will go toward interest and more will go toward principal. If interest rates rise, more of your payment will be interest and less money will be reducing your principal.
Some of these mortgages are completely open (you can pay off all or part of your mortgage at any time without penalties). Others that offer a 'prime minus' interest rate (e.g. prime - 0.375%) may charge a penalty.
The interest rate on most variable rate mortgages is compounded monthly.
• CAPPED RATE MORTGAGES
These are variable rate mortgages that the lending institution has rate 'capped'. In other words, the rate will fluctuate with prime, but the institution guarantees that you will not pay more than a certain interest rate, set by them.
These mortgages often have a penalty for early 'payment in full' and are often not portable.
• CLOSED MORTGAGES
The expression 'closed mortgage' originates from the 1980's when this type of mortgage was literally 'closed'. You contracted to the lender to make your payments for the term chosen, you could not pay anything additional, nor could you pay off the entire amount for any reason except the sale of your property.
These days, there are many ways to pay down your mortgage principal quicker, though the name 'closed' mortgage still remains. See pre-payment options for ways to pay off your mortgage quicker.
• FIXED RATE MORTGAGES
Fixed rate mortgages are the most popular type of mortgage. You benefit from the security of locking in your mortgage interest rate, for lengths of time ranging from 3 months up to 25 years. The rates are slightly lower than for an open mortgage for the same term.
If you think interest rates could rise, you may want to choose a longer term, such as a 5 or 10 year term. If you think that rates are going lower, you may want to gamble on a shorter length of time. Discuss this with your mortgage broker.
The major lending institutions have different pre-payment options allowed under their contracts. These options allow you to pay off your mortgage faster. It is also possible to pay off most closed mortgages prior to the end of the term or pay down a portion of the balance owing. However, lenders charge penalties for doing so.
Please note that some lending institutions will not give any pre-payment options. It is wise to find out what options are available before entering into any mortgage contract.
• CONVERTIBLE MORTGAGE
These are fixed rate mortgages for terms of 6 months or 1 year. Not all lending institutions offer convertible mortgages. With a convertible rate mortgage you can lock into a longer term during the current term of your mortgage without penalty - but only with the same lender. For example, if after a couple of months you hear that interest rates are going to increase, you may change to a longer term mortgage such as the 5 year term.
• REVERSE MORTGAGE
CHIP - Canadian Home Income Plan is the name of the company providing reverse mortgages in Canada.
A reverse mortgage allows homeowners to convert equity in their homes into cash, without selling the property or having to make monthly payments.
To qualify, homeowners must be at least 62 years old, have significant equity in their property and live in B.C. or Ontario.
The amount that can be borrowed depends on the homeowner's age. Reverse mortgages are for between 10% and 40% of the appraised value of the home. The older the homeowners, the more they can borrow.
The homeowner retains ownership and possession of the house. The lending company registers a reverse mortgage against the property. At death, or when the house is sold, the loan and the accrued interest must be repaid.
The biggest disadvantage to reverse mortgages, is that the interest keeps building on the amount of money borrowed (hence the maximum 40% loan). This means that if you borrow $50,000 this year and your interest bill is $5,000, next year your interest will be charged on $55,000 and so on. The longer the loan is in place, the greater the interest bill that has to be paid.
It is possible that when the house is sold, 100% of the proceeds from the sale may be required to pay off a loan.
If the homeowner dies the estate will have to pay off the loan and the accrued interest. This may wipe out any inheritance for the homeowner's heirs.
An alternative is to establish an equity credit line. This allows you to take funds only as you need them, thereby owing the least interest possible, with no surprises.
Consult with a financial advisor for more alternatives.
Variable rate mortgages (VRM's) are they all the same??
The simple answer is no and the fact is that a lot of people don’t realize it.
The most common mistake people make when getting a variable rate mortgage (VRM) is clients just focus on the current rate or discount below prime, yet often clients who take variable rate mortgages are planning to lock in their VRM when they feel rates are going to start moving upwards again in say 12 to 18 months.
The problem is when do you decide to lock in the VRM to a fixed mortgage? Are there penalties or fees to the lender? And at what rate do you lock in? Do you get the current discounted rate or the lenders posted rate?
You have to remember that the majority of the time a variable rate mortgage is actually a closed mortgage. The lender has you tied up and is less likely to be aggressive on the discount. There are few lenders that guarantee in writing up front that you get their lowest advertised rate at the time you lock in so long as you lock into a fixed rate mortgage of 3 or more years.
So if you are in a 5 year term and you decide to lock in your rate and you have 3 years remaining, which was more important, the discount below prime on the variable rate mortgage or the rate you lock in at, for 3 to 5 more years?
Ask your Mortgage Specialist to help you to put together a plan that will not only help you today but down the road as well.
If you're looking for ways to pay off your mortgage quicker, you have three basic options:
• Reduce your amortization period,
• Increase your monthly mortgage payment
• Change the way you make your payments.
If changing the way you make your payments sounds appealing, than accelerated bi-weekly mortgage payments might be just the ticket.
Not to be confused with semi-monthly mortgage payments (24 payments per year)
Accelerated bi-weekly mortgage payments (26 payments per year) will not only pay your mortgage off quicker, but it's guaranteed to save you a significant amount of money over the term of your mortgage. (Explained in detail in next para)
Let me explain to you further :
Each institution has different rules on the amount, and when, you can pay down on your mortgage.
Some lenders combine the totals from 'additional mortgage payments' with 'lump sum payments'.
Please discuss the current policies of the different institutions with your mortgage broker.
PREPAYMENT OPTIONS
Any additional payment made on your mortgage will end up saving you lots of money in interest. Every normal payment you make consists of principal and interest. The balance owing on your mortgage determines how much is interest. As the balance outstanding reduces, less of your payment goes to interest and more comes off the balance.
For example:
THE FOLLOWING ARE WAYS TO REDUCE THE AMOUNT YOU OWE ON YOUR MORTGAGE:
INCREASING THE FREQUENCY OF YOUR PAYMENTS :
As I explained above most lending institutions offer you the choice of payment frequency.
The most common is :
• MONTHLY : such as the 1st of every month. This is easy to remember if you are used to paying rent.
Most lending institutions will let you make payments on a different date if that is more convenient for you - for example the 15th day of every month.
Other options generally available are:
• SEMI-MONTHLY
Payments are taken twice a month, usually on the 1st and the 15th.
Payments are one half of the monthly amount.
If you pay $1,000 per month X 12 months = $12,000 in payments per year
With this option you pay $500 twice a month - $500 X 24 = $12,000.
This option saves you very little money because you are paying the same annual amount, just a little bit quicker. See comparison for an example of the savings.
• BI-WEEKLY - accelerated (saves lots of money!)
How do accelerated bi-weekly mortgage payments work and how can they help pay my mortgage off quicker?
Payments are exactly half of a monthly payment amount, collected every two weeks.
For example if the monthly payment is $1,000 then the bi-weekly payment will be $500.
This saves you money because you pay an extra $1,000 over a twelve month period.
HOW?
Payments are made on the same day every 2nd week.
At least twice a year you will have three payments in the month.
Stated another way;
If you pay $1,000 per month X 12 months = $12,000 in payments for the year, but if you pay bi-weekly then it is $500 X 26 = $13,000.
The amount of interest is the same, therefore, the additional payment of $1,000 (or the amount of YOUR monthly mortgage payment) will be deducted from the balance owing on your mortgage.
You will also make an extra small deduction from the mortgage balance because you are making small payments faster than if they were larger, once a month payments.
This is a very easy payment plan to keep up with if you receive a pay cheque every 2 weeks. If you are paid monthly, or semi-monthly (1st & 15th) bi-weekly payments can be very difficult because of the extra payments twice a year - your income won't change, but your mortgage payment will be 1 1/2 times normal (e.g. instead of $1,000 you will have to pay $1,500). See comparison for an example of the savings.
Here's how it works.
Let's say you have a mortgage of $100,000, an interest rate of 5.00% and an amortization period of 25 years. Your monthly mortgage payment would be $581.60 and your total payments for a year would be ($581.60 x 12) $6,979.20.
To understand the savings accelerated bi-weekly mortgage payments can make, take the monthly mortgage payment of $581.60 and divide it by two ($581.60 / 2 = $290.80). Then take that payment and multiple it by 26 to arrive at your total of all payments for the year ($290.80 x 26 = $7,560.80).
There's the difference. Using the monthly mortgage payment plan, you've made a total of $6,979.20 worth of payments for the year, while using the accelerated bi-weekly mortgage plan you've made $7,560.80 worth of payments, a difference of $581.60. Basically with accelerated bi-weekly mortgage payments, you're making one additional monthly payment in the year.
Using this example, you would reduce the amortization on your $100,000 mortgage from 25 years to just over 21 years and a total savings on interest, over the life of the mortgage, to just over $12,000.
• BI-WEEKLY - not accelerated (does NOT save lots of money!)
The $1,000 a month payment is multiplied by 12, then divided by 26.
This equals a bi-weekly payment of $461.54 - at the end of the year you will have paid $12,000 !
A very small amount of savings are gained due to half of your payment being made early each month.
The main reason for choosing this option would be the convenience of matching your payment to your pay days, with lower payments than the accelerated version.
• WEEKLY - accelerated (saves lots of money!)
Same as bi-weekly accelerated, except that payments occur on the same day every week. Your payments will be one quarter of your normal monthly payment.
If you pay $1,000 per month X 12 months = $12,000
Then you will pay $250 per week X 52 weeks = $13,000
You pay an extra $1,000 per year, which will be deducted from your mortgage balance.
Sometimes there are 5 weeks in the month and you will have 5 payments in that month. This will happen at least 4 times a year. See comparison for an example of the savings.
• WEEKLY - not accelerated (does NOT save lots of money!)
The $1,000 a month payment is multiplied by 12, then divided by 52.
This equals a weekly payment of $230.77 - at the end of the year you will have paid $12,000 !
A very small amount of savings are gained due to three quarters of your payment being made early each month. The main reason for choosing this option would be the convenience of matching your payment to your pay days, with lower payments than the accelerated version.
LET’S COMPARE THE ABOVE PAYMENT PLAN
The table below shows a comparison of interest saved and the length of time this takes,
assuming: a mortgage of $142,772.35 at 7% for an original amortization of 25 years.
* this table only shows the savings for the accelerated versions of weekly & bi-weekly payments. The not-accelerated versions will save approximately the same amount as the semi-monthly payment.
PENALTY CHARGES
This is the most difficult topic related to mortgages and it will continue to be confusing until the laws in Canada are changed to require consistency on how lending institutions charge their penalties.
Most lenders charge an early payoff penalty on closed mortgages if the debt is paid prior to the maturity of the term. The lending institution must describe the penalty they could charge on the mortgage document.
The most common penalty is:
The greater of three months interest penalty OR the interest rate differential.
In other words, whichever amount is the larger of these two figures will be your penalty.
• THREE MONTHS INTEREST PENALTY
If you are paying off your mortgage before the maturity date, most lending institutions charge three months interest penalty (or an interest differential penalty).
Your present mortgage balance is multiplied by your current interest rate and multiplied three.
• INTEREST RATE DIFFERENTIAL / LOSS OF INTEREST
This usually means the difference between the interest rate on your mortgage contract compared to the rate at which the lending institution can re-lend the money.
For example:
If your mortgage has a balance of $125,000 at 9.25%, you have 2 years left to go and the current 2 year mortgage rate is 6.25%. Then the lending institution will probably charge you -
$125,000 X 24 months X 3% (9.25 - 6.25) = $7,266.21
However, just to further confuse the issue, the penalty above has not been present valued. This is when a lender charges a lower penalty because you are paying all of the 'extra' interest (in the example 3%) now, not over the remaining term. Some lenders present value, other lenders do not.
10/10 15/15 20/20 - Payment Plant
These numbers refer to the percentage the lending institutions will allow you to increase your payments by, or the percentage amount allowed as a lump sum payment.
• INCREASING THE AMOUNT OF YOUR PAYMENTS
Most lending institutions will allow you to increase the amount of your mortgage payment, some allow an increase once per year others only once per term.
The amount of this increase varies from 10% to 20% depending on the lending institution.
For example: If your present mortgage payment is $1,000 per month you may be able to increase it to $1,200 per month ($1,000 X 20% = $1,200). The extra payment amount reduces your mortgage principal, therefore paying your mortgage off faster.
The disadvantage of this benefit is that the increase is usually permanent (until your next renewal date), so you have to be very sure that you can afford this increase.
Please discuss the current policies of the different lending institutions with your mortgage broker.
• PAYING EXTRA ON YOUR PAYMENT DATES
Sometimes referred to as 'double-up' payments.
Most lenders will allow you to make additional payment amounts on your mortgage. These extra amounts are principal only and reduce your mortgage balance and so you pay off your mortgage faster.
The best thing about this benefit is that you are in control of how much extra you pay, and when you pay it.
There are some limitations which vary by institution, but generally speaking you can pay up to double your normal mortgage payment on any (or all) of your payment dates.
Please discuss the current policies of the different institutions with your mortgage broker.
• MAKING LUMP SUM PAYMENTS
Most lending institutions will allow you to make large lump sum payments against your mortgage principal. These amounts are principal only and reduce the balance owing.
The amounts vary by institution, some are up to 20% of the original mortgage amount. So if you borrowed $120,000 originally, they will allow you to pay up to $24,000. This is usually allowed on only one occasion per year.
PROMOTION :'CASH BACK' MORTGAGE
Several lending institutions offer a 'cash back' incentive for choosing them as your mortgage lender.
The amount of the 'cash back' is a percentage of the mortgage amount you are borrowing - usually 3%. For example, if you borrow $100,000 you could receive as much as $3,000 back from the lender.
There are several negative aspects to these offers.
• You will probably pay the full posted interest rate.
• You cannot use the funds as part of your down payment.
• If you pay off the mortgage before the end of the term you will have to repay the lender some of the 'cash back' money.
The advantage is, you can choose how to spend the cash you receive. For example, you may have too much credit card debt and by paying down your debt you may qualify for a bigger mortgage.
Perhaps you need new furniture, or to make some improvements to your new house.
Is the amount of money you receive on these mortgages worth it?
The following comparison shows the difference between receiving cash now, versus saving money over the term with a discount on the mortgage rate.
Most mortgage brokers are able to get you up to a 1% discount on the posted mortgage rates.
As you can see, you will save more money over the term by getting a lower interest rate.
You really need to decide if you need the money now, or if the lower monthly payment and lesser interest paid is more important.
Discuss your situation with your mortgage broker to see which is the best for your circumstances.
Mortgage Broker vs Bank Specialist
You always wonder what is the best? Where to go ? Bank or Broker?
There are actually a number of differences which you may not be aware of.
Heres some information to help you understand.
• A Mortgage Broker works for you, the client, whereas Bank Specialists are employed by the financial institution.
• The benefit of using a Mortgage Broker is the fact that they have the ability to offer you mortgage products from a number of financial institutions. Because a Bank Specialists works for the bank, that means that they can usually only offer you their institution’s products.
• Brokers are typically paid the same amount no matter what rate is offered to the client. Bank specialists rate of pay is generally reduced in direct relation to the amount they discount your rate from the bank’s posted rate.
• Depending on your Province, Mortgage Brokers must be licensed and are subject to a strict set of requirements. Accredited Mortgage Professionals (AMP) must take continuing education courses in order to maintain their accreditation. Bank specialists are not licensed and require no formal training.
• Because Mortgage Brokers don't work for a specific lender, your assured that you will be given impartial advice. A bank specialist has a limited number of their own institutions products and while it may not be the best mortgage product out there, they will do their best to sell you their institutions mortgage product cause if they don't your going somewhere else.
• Mortgage brokers use their knowledge and experience to negotiate the best possible rate and product for you from a number of lenders. When you see a bank specialist, that mortgage negotiating is typically left up to you.
• For conventional financing, the services of a mortgager broker are generally provide at no cost to you. If there is a cost, you will be advised of those costs up front.
So in conclusion, if you have the ability to use the services of a professional Mortgage Broker and have that Mortgage Broker do all your mortgage leg work at no cost, why would you not take advantage of the offer?
FYI, Today, 75% of people in the United States use mortgage brokers. Because the Mortgage Brokerage Industry is relatively new in Canada, the numbers are lower, however, those numbers are increasing every year.
Following are the few facts and figure that will give you better understanding of some of the intricases of Canadian Mortgage.
Different type of Mortgages and Further more
• OPEN MORTGAGES
An open mortgage allows you to pay off part or the entire mortgage at any time without penalties. Open mortgages usually have short terms of six months or one year. The interest rates are higher than those for closed mortgages with similar terms.
• VARIABLE RATE MORTGAGES / ARM (ADJUSTABLE RATE MORTGAGES)
At the start of a variable rate mortgage, the lender will calculate a mortgage payment that includes principal & interest. For the term of the mortgage your payments usually do not change. However, as the prime rate changes so will your mortgage rate.
If interest rates are dropping, less of each payment will go toward interest and more will go toward principal. If interest rates rise, more of your payment will be interest and less money will be reducing your principal.
Some of these mortgages are completely open (you can pay off all or part of your mortgage at any time without penalties). Others that offer a 'prime minus' interest rate (e.g. prime - 0.375%) may charge a penalty.
The interest rate on most variable rate mortgages is compounded monthly.
• CAPPED RATE MORTGAGES
These are variable rate mortgages that the lending institution has rate 'capped'. In other words, the rate will fluctuate with prime, but the institution guarantees that you will not pay more than a certain interest rate, set by them.
These mortgages often have a penalty for early 'payment in full' and are often not portable.
• CLOSED MORTGAGES
The expression 'closed mortgage' originates from the 1980's when this type of mortgage was literally 'closed'. You contracted to the lender to make your payments for the term chosen, you could not pay anything additional, nor could you pay off the entire amount for any reason except the sale of your property.
These days, there are many ways to pay down your mortgage principal quicker, though the name 'closed' mortgage still remains. See pre-payment options for ways to pay off your mortgage quicker.
• FIXED RATE MORTGAGES
Fixed rate mortgages are the most popular type of mortgage. You benefit from the security of locking in your mortgage interest rate, for lengths of time ranging from 3 months up to 25 years. The rates are slightly lower than for an open mortgage for the same term.
If you think interest rates could rise, you may want to choose a longer term, such as a 5 or 10 year term. If you think that rates are going lower, you may want to gamble on a shorter length of time. Discuss this with your mortgage broker.
The major lending institutions have different pre-payment options allowed under their contracts. These options allow you to pay off your mortgage faster. It is also possible to pay off most closed mortgages prior to the end of the term or pay down a portion of the balance owing. However, lenders charge penalties for doing so.
Please note that some lending institutions will not give any pre-payment options. It is wise to find out what options are available before entering into any mortgage contract.
• CONVERTIBLE MORTGAGE
These are fixed rate mortgages for terms of 6 months or 1 year. Not all lending institutions offer convertible mortgages. With a convertible rate mortgage you can lock into a longer term during the current term of your mortgage without penalty - but only with the same lender. For example, if after a couple of months you hear that interest rates are going to increase, you may change to a longer term mortgage such as the 5 year term.
• REVERSE MORTGAGE
CHIP - Canadian Home Income Plan is the name of the company providing reverse mortgages in Canada.
A reverse mortgage allows homeowners to convert equity in their homes into cash, without selling the property or having to make monthly payments.
To qualify, homeowners must be at least 62 years old, have significant equity in their property and live in B.C. or Ontario.
The amount that can be borrowed depends on the homeowner's age. Reverse mortgages are for between 10% and 40% of the appraised value of the home. The older the homeowners, the more they can borrow.
The homeowner retains ownership and possession of the house. The lending company registers a reverse mortgage against the property. At death, or when the house is sold, the loan and the accrued interest must be repaid.
The biggest disadvantage to reverse mortgages, is that the interest keeps building on the amount of money borrowed (hence the maximum 40% loan). This means that if you borrow $50,000 this year and your interest bill is $5,000, next year your interest will be charged on $55,000 and so on. The longer the loan is in place, the greater the interest bill that has to be paid.
It is possible that when the house is sold, 100% of the proceeds from the sale may be required to pay off a loan.
If the homeowner dies the estate will have to pay off the loan and the accrued interest. This may wipe out any inheritance for the homeowner's heirs.
An alternative is to establish an equity credit line. This allows you to take funds only as you need them, thereby owing the least interest possible, with no surprises.
Consult with a financial advisor for more alternatives.
Variable rate mortgages (VRM's) are they all the same??
The simple answer is no and the fact is that a lot of people don’t realize it.
The most common mistake people make when getting a variable rate mortgage (VRM) is clients just focus on the current rate or discount below prime, yet often clients who take variable rate mortgages are planning to lock in their VRM when they feel rates are going to start moving upwards again in say 12 to 18 months.
The problem is when do you decide to lock in the VRM to a fixed mortgage? Are there penalties or fees to the lender? And at what rate do you lock in? Do you get the current discounted rate or the lenders posted rate?
You have to remember that the majority of the time a variable rate mortgage is actually a closed mortgage. The lender has you tied up and is less likely to be aggressive on the discount. There are few lenders that guarantee in writing up front that you get their lowest advertised rate at the time you lock in so long as you lock into a fixed rate mortgage of 3 or more years.
So if you are in a 5 year term and you decide to lock in your rate and you have 3 years remaining, which was more important, the discount below prime on the variable rate mortgage or the rate you lock in at, for 3 to 5 more years?
Ask your Mortgage Specialist to help you to put together a plan that will not only help you today but down the road as well.
If you're looking for ways to pay off your mortgage quicker, you have three basic options:
• Reduce your amortization period,
• Increase your monthly mortgage payment
• Change the way you make your payments.
If changing the way you make your payments sounds appealing, than accelerated bi-weekly mortgage payments might be just the ticket.
Not to be confused with semi-monthly mortgage payments (24 payments per year)
Accelerated bi-weekly mortgage payments (26 payments per year) will not only pay your mortgage off quicker, but it's guaranteed to save you a significant amount of money over the term of your mortgage. (Explained in detail in next para)
Let me explain to you further :
Each institution has different rules on the amount, and when, you can pay down on your mortgage.
Some lenders combine the totals from 'additional mortgage payments' with 'lump sum payments'.
Please discuss the current policies of the different institutions with your mortgage broker.
PREPAYMENT OPTIONS
Any additional payment made on your mortgage will end up saving you lots of money in interest. Every normal payment you make consists of principal and interest. The balance owing on your mortgage determines how much is interest. As the balance outstanding reduces, less of your payment goes to interest and more comes off the balance.
For example:
THE FOLLOWING ARE WAYS TO REDUCE THE AMOUNT YOU OWE ON YOUR MORTGAGE:
INCREASING THE FREQUENCY OF YOUR PAYMENTS :
As I explained above most lending institutions offer you the choice of payment frequency.
The most common is :
• MONTHLY : such as the 1st of every month. This is easy to remember if you are used to paying rent.
Most lending institutions will let you make payments on a different date if that is more convenient for you - for example the 15th day of every month.
Other options generally available are:
• SEMI-MONTHLY
Payments are taken twice a month, usually on the 1st and the 15th.
Payments are one half of the monthly amount.
If you pay $1,000 per month X 12 months = $12,000 in payments per year
With this option you pay $500 twice a month - $500 X 24 = $12,000.
This option saves you very little money because you are paying the same annual amount, just a little bit quicker. See comparison for an example of the savings.
• BI-WEEKLY - accelerated (saves lots of money!)
How do accelerated bi-weekly mortgage payments work and how can they help pay my mortgage off quicker?
Payments are exactly half of a monthly payment amount, collected every two weeks.
For example if the monthly payment is $1,000 then the bi-weekly payment will be $500.
This saves you money because you pay an extra $1,000 over a twelve month period.
HOW?
Payments are made on the same day every 2nd week.
At least twice a year you will have three payments in the month.
Stated another way;
If you pay $1,000 per month X 12 months = $12,000 in payments for the year, but if you pay bi-weekly then it is $500 X 26 = $13,000.
The amount of interest is the same, therefore, the additional payment of $1,000 (or the amount of YOUR monthly mortgage payment) will be deducted from the balance owing on your mortgage.
You will also make an extra small deduction from the mortgage balance because you are making small payments faster than if they were larger, once a month payments.
This is a very easy payment plan to keep up with if you receive a pay cheque every 2 weeks. If you are paid monthly, or semi-monthly (1st & 15th) bi-weekly payments can be very difficult because of the extra payments twice a year - your income won't change, but your mortgage payment will be 1 1/2 times normal (e.g. instead of $1,000 you will have to pay $1,500). See comparison for an example of the savings.
Here's how it works.
Let's say you have a mortgage of $100,000, an interest rate of 5.00% and an amortization period of 25 years. Your monthly mortgage payment would be $581.60 and your total payments for a year would be ($581.60 x 12) $6,979.20.
To understand the savings accelerated bi-weekly mortgage payments can make, take the monthly mortgage payment of $581.60 and divide it by two ($581.60 / 2 = $290.80). Then take that payment and multiple it by 26 to arrive at your total of all payments for the year ($290.80 x 26 = $7,560.80).
There's the difference. Using the monthly mortgage payment plan, you've made a total of $6,979.20 worth of payments for the year, while using the accelerated bi-weekly mortgage plan you've made $7,560.80 worth of payments, a difference of $581.60. Basically with accelerated bi-weekly mortgage payments, you're making one additional monthly payment in the year.
Using this example, you would reduce the amortization on your $100,000 mortgage from 25 years to just over 21 years and a total savings on interest, over the life of the mortgage, to just over $12,000.
• BI-WEEKLY - not accelerated (does NOT save lots of money!)
The $1,000 a month payment is multiplied by 12, then divided by 26.
This equals a bi-weekly payment of $461.54 - at the end of the year you will have paid $12,000 !
A very small amount of savings are gained due to half of your payment being made early each month.
The main reason for choosing this option would be the convenience of matching your payment to your pay days, with lower payments than the accelerated version.
• WEEKLY - accelerated (saves lots of money!)
Same as bi-weekly accelerated, except that payments occur on the same day every week. Your payments will be one quarter of your normal monthly payment.
If you pay $1,000 per month X 12 months = $12,000
Then you will pay $250 per week X 52 weeks = $13,000
You pay an extra $1,000 per year, which will be deducted from your mortgage balance.
Sometimes there are 5 weeks in the month and you will have 5 payments in that month. This will happen at least 4 times a year. See comparison for an example of the savings.
• WEEKLY - not accelerated (does NOT save lots of money!)
The $1,000 a month payment is multiplied by 12, then divided by 52.
This equals a weekly payment of $230.77 - at the end of the year you will have paid $12,000 !
A very small amount of savings are gained due to three quarters of your payment being made early each month. The main reason for choosing this option would be the convenience of matching your payment to your pay days, with lower payments than the accelerated version.
LET’S COMPARE THE ABOVE PAYMENT PLAN
The table below shows a comparison of interest saved and the length of time this takes,
assuming: a mortgage of $142,772.35 at 7% for an original amortization of 25 years.
* this table only shows the savings for the accelerated versions of weekly & bi-weekly payments. The not-accelerated versions will save approximately the same amount as the semi-monthly payment.
PENALTY CHARGES
This is the most difficult topic related to mortgages and it will continue to be confusing until the laws in Canada are changed to require consistency on how lending institutions charge their penalties.
Most lenders charge an early payoff penalty on closed mortgages if the debt is paid prior to the maturity of the term. The lending institution must describe the penalty they could charge on the mortgage document.
The most common penalty is:
The greater of three months interest penalty OR the interest rate differential.
In other words, whichever amount is the larger of these two figures will be your penalty.
• THREE MONTHS INTEREST PENALTY
If you are paying off your mortgage before the maturity date, most lending institutions charge three months interest penalty (or an interest differential penalty).
Your present mortgage balance is multiplied by your current interest rate and multiplied three.
• INTEREST RATE DIFFERENTIAL / LOSS OF INTEREST
This usually means the difference between the interest rate on your mortgage contract compared to the rate at which the lending institution can re-lend the money.
For example:
If your mortgage has a balance of $125,000 at 9.25%, you have 2 years left to go and the current 2 year mortgage rate is 6.25%. Then the lending institution will probably charge you -
$125,000 X 24 months X 3% (9.25 - 6.25) = $7,266.21
However, just to further confuse the issue, the penalty above has not been present valued. This is when a lender charges a lower penalty because you are paying all of the 'extra' interest (in the example 3%) now, not over the remaining term. Some lenders present value, other lenders do not.
10/10 15/15 20/20 - Payment Plant
These numbers refer to the percentage the lending institutions will allow you to increase your payments by, or the percentage amount allowed as a lump sum payment.
• INCREASING THE AMOUNT OF YOUR PAYMENTS
Most lending institutions will allow you to increase the amount of your mortgage payment, some allow an increase once per year others only once per term.
The amount of this increase varies from 10% to 20% depending on the lending institution.
For example: If your present mortgage payment is $1,000 per month you may be able to increase it to $1,200 per month ($1,000 X 20% = $1,200). The extra payment amount reduces your mortgage principal, therefore paying your mortgage off faster.
The disadvantage of this benefit is that the increase is usually permanent (until your next renewal date), so you have to be very sure that you can afford this increase.
Please discuss the current policies of the different lending institutions with your mortgage broker.
• PAYING EXTRA ON YOUR PAYMENT DATES
Sometimes referred to as 'double-up' payments.
Most lenders will allow you to make additional payment amounts on your mortgage. These extra amounts are principal only and reduce your mortgage balance and so you pay off your mortgage faster.
The best thing about this benefit is that you are in control of how much extra you pay, and when you pay it.
There are some limitations which vary by institution, but generally speaking you can pay up to double your normal mortgage payment on any (or all) of your payment dates.
Please discuss the current policies of the different institutions with your mortgage broker.
• MAKING LUMP SUM PAYMENTS
Most lending institutions will allow you to make large lump sum payments against your mortgage principal. These amounts are principal only and reduce the balance owing.
The amounts vary by institution, some are up to 20% of the original mortgage amount. So if you borrowed $120,000 originally, they will allow you to pay up to $24,000. This is usually allowed on only one occasion per year.
PROMOTION :'CASH BACK' MORTGAGE
Several lending institutions offer a 'cash back' incentive for choosing them as your mortgage lender.
The amount of the 'cash back' is a percentage of the mortgage amount you are borrowing - usually 3%. For example, if you borrow $100,000 you could receive as much as $3,000 back from the lender.
There are several negative aspects to these offers.
• You will probably pay the full posted interest rate.
• You cannot use the funds as part of your down payment.
• If you pay off the mortgage before the end of the term you will have to repay the lender some of the 'cash back' money.
The advantage is, you can choose how to spend the cash you receive. For example, you may have too much credit card debt and by paying down your debt you may qualify for a bigger mortgage.
Perhaps you need new furniture, or to make some improvements to your new house.
Is the amount of money you receive on these mortgages worth it?
The following comparison shows the difference between receiving cash now, versus saving money over the term with a discount on the mortgage rate.
Most mortgage brokers are able to get you up to a 1% discount on the posted mortgage rates.
As you can see, you will save more money over the term by getting a lower interest rate.
You really need to decide if you need the money now, or if the lower monthly payment and lesser interest paid is more important.
Discuss your situation with your mortgage broker to see which is the best for your circumstances.
Mortgage Broker vs Bank Specialist
You always wonder what is the best? Where to go ? Bank or Broker?
There are actually a number of differences which you may not be aware of.
Heres some information to help you understand.
• A Mortgage Broker works for you, the client, whereas Bank Specialists are employed by the financial institution.
• The benefit of using a Mortgage Broker is the fact that they have the ability to offer you mortgage products from a number of financial institutions. Because a Bank Specialists works for the bank, that means that they can usually only offer you their institution’s products.
• Brokers are typically paid the same amount no matter what rate is offered to the client. Bank specialists rate of pay is generally reduced in direct relation to the amount they discount your rate from the bank’s posted rate.
• Depending on your Province, Mortgage Brokers must be licensed and are subject to a strict set of requirements. Accredited Mortgage Professionals (AMP) must take continuing education courses in order to maintain their accreditation. Bank specialists are not licensed and require no formal training.
• Because Mortgage Brokers don't work for a specific lender, your assured that you will be given impartial advice. A bank specialist has a limited number of their own institutions products and while it may not be the best mortgage product out there, they will do their best to sell you their institutions mortgage product cause if they don't your going somewhere else.
• Mortgage brokers use their knowledge and experience to negotiate the best possible rate and product for you from a number of lenders. When you see a bank specialist, that mortgage negotiating is typically left up to you.
• For conventional financing, the services of a mortgager broker are generally provide at no cost to you. If there is a cost, you will be advised of those costs up front.
So in conclusion, if you have the ability to use the services of a professional Mortgage Broker and have that Mortgage Broker do all your mortgage leg work at no cost, why would you not take advantage of the offer?
FYI, Today, 75% of people in the United States use mortgage brokers. Because the Mortgage Brokerage Industry is relatively new in Canada, the numbers are lower, however, those numbers are increasing every year.
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