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There’s so much more to a mortgage than just the interest rate

 

 

 fixed or variable rate?

Your decision on fixed versus variable rates depends on two things: whether you think interest rates will rise or fall and your risk tolerance.

Choose a fixed rate if

  • you want the same interest rate and payment guaranteed for the length of your mortgage
  • you believe rates are likely to go up during your mortgage term

Choose a variable rate if

  • you don't mind your interest rate fluctuating with changes in the prime rate (if prime goes up, your payments won't change, but you'll pay less toward the principal)
  • you expect the prime interest rate to remain low during your mortgage term.
 

 Open-term mortgages

Say goodbye to financial penalties when you pay off your open-term mortgage early. An open-term mortgage is ideal if you are expecting additional funds to pay down the mortgage. It's also a good option if you plan to sell your home but not transfer the mortgage to another home. If you are planning on keeping the property you can extend your mortgage amortization up to 35 years.

Features and benefits:

  • enjoy great versatility: pay any amount at any time without penalty
  • convert or renew early to another term without penalty
  • available for six-month and one-, two-, three- and five-year periods
  • Interest Savings - Here are two situations where the flexibility of an open term mortgage could save you a substantial amount of money on interest costs:
    • when you're planning to sell your home soon without buying another.
    • when you think you may be able to pay down a considerable portion of your mortgage debt

     

  Closed Mortgages
A closed mortgage offers the security of fixed payment for terms from 6 months to 10 years. The interest rates are considerable lower than open, and if you are not planning on any one of the above reasons, then choose a closed mortgage. Nowadays, they offer as much as 20% prepayment of the original principal, and that is more than most of us can hope to prepay on a yearly basis. If one wanted to pay off the full mortgage prior to the maturity, a penalty would be charged to break that mortgage. The penalty is usually 3 months interest, or interest rate differential (I.R.D. - please refer to glossary for detailed explanation).

 

 Interest Rate Differential (IRD)

The IRD is a compensation charge that may apply if you pay off your mortgage prior to the maturity date, or pay the mortgage principal down beyond the amount of your prepayment privileges.

The IRD is based on:

  • The amount you are pre-paying; and,
  • An interest rate that equals the difference between your original mortgage interest rate and the interest rate that the lender can charge today when re-lending the funds for the remaining term of the mortgage.
  • You can calculate your IRD bay going to this page: http://www.mortgagebc.biz/ird

Most closed fixed-rate mortgages have a prepayment penalty that is the higher of 3-months interest or the IRD. Variable-rate mortgages are not subject to IRD.

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  • Each lender has its own formula for calculating penalties.
  • Some lenders use posted rates for their IRD calculation and some use discounted rates.
  • Some lenders round up to the next longest term when determining comparable IRD interest rates.  Some round down.
  • The Interest Act prohibits IRD penalties on terms over 5 years, after five years has elapsed.  In such cases, a maximum 3-month interest penalty may apply. For example, someone who has been in a 6-year mortgage for 60 months or more would pay a 3-month interest penalty (maximum) to break it before maturity.
  • A small number of lenders prohibit breaking a mortgage early—regardless of the penalty—unless in the case of an approved bona fide sale.
  • The moral:  Always contact your lender directly for an exact penalty quote.

 

 Choosing the mortgage amortization

The amortization is the number of years over which the repayment of your mortgage is calculated. When considering amortizations up to 35 years over the traditional 25 years:

  • your monthly payments will be less making your property more affordable and improving your cash flow. This could be a short term strategy to get you into the property market, or allow you to buy an investment property that will generate income for you
  • you will take longer to pay off your home and will pay more interest over the life of the mortgage
  • if your mortgage has mortgage insurance the premium will be higher than for amortization up to 25 years. You should factor this cost into your calculations
  • if you choose a longer amortization consider bi weekly payments to help pay off your mortgage sooner

 

  High ratio mortgage:

A mortgage for more than 75% of either or both a property's appraised value and its purchase price. In other words, the down payment amount is less than 25% of the purchase price/appraised value.

 

 

  
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