Renewing Your Mortgage
A 2008 CAAMP (Canadian Association of Accredited Mortgage Professionals) survey reveals that 86% of people renew their mortgage with their current lender. With this statistic available it is no wonder that banks do not offer the best rates available when it is time to have your mortgage renewed. Why would they when they know very few people will switch to another lender? If a customer calls phones to negotiate a better rate all the banks needs to do it lower their initial rate by a little bit and the customer is happy.
Currently one of the big banks has a special 5 year rate of 4.44% available. That is a full quarter of a percentage over what can easily be found on any mortgage broker’s website. Let’s compare renewing a $250K mortgage taking the banks initial offer to getting 4.19% elsewhere. The numbers are based on a remaining amortization period of 25 years at 4.44% I will be adjusting the amortization period on the mortgage with the rate of 4.19% to ensure monthly are the same.
4.44% over 5 years – Monthly Payments: $1375.36 Balance at the end of the 5 year term: $219,272
4.19% over 5 years – Monthly Payments: $1375.36 Balance at the end of the 5 year term: $216,058
It will cost you $3,215 if you just sign your renewal without asking for a better rate or moving your mortgage. Make that phone call or shop around. You may find that there are no fees involved when you move your mortgage or refinance at the end of your term. Take advantage of this and consolidate your debt at this time, you will save money.
Canada’s outstanding mortgage debt at the end of year in 2007 was $821.4 billion. If this rate differential is applied to the entire mortgage debt the difference is just over $2 billion a year. This is money out of the hand’s of Canadian families and into the hands of lenders.
Simply incredible!
Cash Back Mortgage Calculator
Banks offer cash back mortgages as an incentive. Most of the time these mortgages are extremely over priced, but with the right set of circumstances they can work for you.
Recently a financial institution has been offering cash back mortgage which were definitely worth looking at. I have created a calculator that will give you the equivalent rate without the cash back. The assumptions made are the same monthly payment, the same balance at the end of the term and that the cash back is applied directly against the mortgage when received.
Enter your information and you will get the equivalent rate taking the cash back into account. For example a five year term with a 25 year amortization period with a rate of 5.85% with 5% cash back is the equivalent to 4.57% If you can’t get a rate of 4.57% without the cash back, you will be better off taking the cash back.
The other consideration is that if you have to break your mortgage for any reason in your mortgage term your cash back will be clawed back and factored into the penalty.
It is best to get expert help that can break down the numbers for you when you are trying to decide if cash back is to your advantage.
CLICK HERE TO DOWNLOAD THE CASH BACK MORTGAGE CALCULATOR
Create Your Own Mortgage Down Payment
A couple of months ago I wrote about No Down Payment Mortgages and evaluated if they were worth the money. First time home buyers as defined by the CCRA can use an RRSP and the Home Buyer’s Plan to get a better deal if they do not currently have any money for a down payment or any RRSPs.
In the next couple of months realtors, mortgage brokers and some financial institutions will market this strategy.
I am going to used the same numbers as used when I evaluated the No Down Payment Mortgages. You want to purchase a $300,000 home but you have no down payment or no RRSPs. You go to your bank and request a loan for $15,000 to purchase an RRSP. The bank will be happy to give you this loan somewhere between Prime & Prime +1 because you will then put it in an RRSP set up at their branch. You will need the money shortly so just place it in a savings account within the RRSP. CCRA requires the money to be in the RRSP for 90 days before you can take it out and use it as a down payment. Use this time to begin looking at homes and working with your bank or mortgage broker to ensure that you will qualify for your $300,000 home. You find your home and withdraw the $15,000 from your RRSP under the Home Buyers Plan. A month later you move into your new home.
Your new mortgage is $285,000 plus $7,838 for CHMC premiums for a total of $292,838. Your payments over 25 years are $1,602.92 a month. You still have the original RRSP loan to pay off so over 5 years you have monthly payments of $276.02. I have used 4% as an average interest rate for the RRSP loan. The total payments over five years with the No Down Payment example would be $111,015.64 and the total of the mortgage payments and RRSP loan payments over 5 years in the RRSP example would be $112736.52. Your total payments for 5 years with the RRSP as a down payment are an extra $1,720.88. Not a good thing, but now we have to look at your mortgage balance to have a fair comparison.
The mortgage balance with the No Down Payment example after 5 years would be $262,898 compared to the balance of RRSP as a down payment example of $256,630. There is a difference of $6,268. Take into account the $1,720.88 over the five years with the No Down Payment Mortgage and the RRSP as a down payment wins by $4,546.67. Not a bad savings.
There are various other things to consider that I have not addressed and it is suggested that you get professional advice before you attempt this to purchase your home. You will get a tax refund for the initial RRSP deposit, but you will either have to pay that money back to your RRSP over the next 17 years or get taxed on $1000 each year.
I did not factor the refund or the yearly payback amounts into the scenario because people are in different tax brackets and have financial situations. The tax refund arriving around the time you purchase a new home will be nice though. Talk to an expert, your realtor, mortgage broker or bank rep should be able to help you out.
I wanted to see exactly how this was marketed and found a clip this clip from an Investors Group Planner.
Although it is an interesting twist on an RRSP loan and the Home Buyer’s Plan which may be effective for some people he neglects to mention that you will have to pay back the money you took from your RRSPs to pay off the loan or be taxed on it. You have a two year grace period and then you have to make monthly payments of $222.22 over the next 15 years.
He also suggests not rushing to pay off your mortgage. Although there are many variables to consider, you will not find any guaranteed investment that will beat making extra payment on your mortgage and paying it off sooner.
This is an excellent article from the Globe and Mail that highlites paying off your mortgage rather than investing.
There are many things to consider with this strategy. Do you qualify taking the RRSP loan into account? Do you have money available for closing costs? Is your credit adequate to qualify for a mortgage? Do you have $15,000 of contribution room available in your RRSP? Can you use this strategy to add to savings and come up with a 20% down payment,saving yourself a few thousand dollars of CMHC premiums?
Talk to an expert, your realtor, mortgage broker or bank rep should be able to help you out.
Pay off Your Mortgage Faster Quicker Sooner
Imagine a young couple leaving the bank right after they signed for their mortgage. The banker fully explained their amortization schedule for their new mortgage. They had already known that their mortgage would start at $300,000, their interest rate was 5% and they would be making payments of $1601.07 for 30 years. What they didn’t fully understand is that the total that they would pay over these 30 years was $576,386 and $276,386 of that was interest. They also found it hard to believe that after their first 5 year term paying a total of $ 96,064 their mortgage balance was $275,285. Of the $96,064 they paid, their balance was reduced by less than $25,000. They were shocked to say the least.
If you have a mortgage and were unaware of the costs you likely felt the same way. Can you change this? Of course. Increasing payments, doubling payments, and making lump sum payments will all benefit you. The only way to pay your mortgage off quicker and save interest is by throwing more money at it, there is no silver bullet! How do you do this?
First, contact your bank and find out what your prepayment privileges are as you will have to work within their guidelines to avoid penalties. Some banks allow prepayments only on the anniversary date, some allow double payments on regular payment dates and some allow lump sum payments or increased payments anytime up to a certain percentage of your original mortgage. There are many other variations, each bank is different. This is something to think about when you are shopping for a mortgage. The more flexible the prepayment privileges the better.
I am going to compare difference scenarios based on the mortgage information above.
The easiest way to implement a plan to pay down your mortgage faster and save you money is to switch from a monthly payment to a bi-weekly payments. You simply divide your monthly payment by 2 and pay every second week. Although it doesn’t feel like it, you are essentially making an extra mortgage payment a year. Results:
Mortgage paid off 4.7 years earlier, $49,880 saved.
Bonus from work or saved up some cash? Make a lump sum payment of $6000 on every anniversary date. Results:
Mortgage paid off 11.75 years earlier, $118,717.60 saved.
In contrast to the $6000 lump sum payment on the anniversary date, you will be better off making an extra monthly payment of $500. Same amount of money out of your pocket. Results:
Mortgage paid off 12 years earlier, $122,649.44 saved.
Double up on a monthly payment twice a year as you can afford it. Results:
Mortgage paid off 8 years earlier, $83,874.61 saved.
Generally everyone’s financial position improves over the years. You receive raises, student loans get paid, etc. Let’s increase our monthly mortgage payment by 5% per year. Results:
Mortgage paid off 12.67 years earlier, $109,452.59 saved.
Let’s look at at 10% increase per year. Results:
Mortgage paid off 16.17 years earlier, $141,146.17 saved.
The best advice I feel I can give is not to put your mortgage on autopilot. Actively track your mortgage payments and balance. You will find it motivational to see what you are saving.
I recommend using a calculator from Vertex42. You can keep track of your mortgage and play with the numbers to see how you can save yourself thousands.
I do want to bring to your attention that when you look at your numbers keep in mind that it is based on your current interest rate. When your term is over you will have to renegotiate and will likely end up with a new rate. If the rate is lower you can keep your payments they same and your amortization period will be shorter or you can keep your amortization period the same and your payments will decrease. If the rate is higher it will be just the opposite. You can increase your payments to keep your amortization period the same or you can keep your payments the same and increase your amortization period. Naturally I would suggest trying to keep your amortization period shorter as you will save money.
Renewing the original example after the first 5 year term at 4% will result in a new mortgage payment of $1,448.06 saving $153.02 a month to keep the original amortization period of 30 years. Renewing at 6% will result in a new mortgage payment of $ $1,761.29 costing an extra $160.22 to keep the original amortization period of 30 years.
I encourage you to start making extra mortgage payments early and often! The result will be a savings of tens of thousands of dollars!
Pay off Your Mortgage
It is often asked if you should pay off your mortgage or invest for the future. It is hard to compare the financial differences because rates of returns, tax brackets and mortgage interest rates vary. I feel the psychologically, paying the mortgage first is beneficial.
The security of having your home fully paid off can not be over looked. With a paid off home you won’t suffer in bear markets and you will be able to sleep at night. A job loss for a few months will not put your home in jeopardy and you can always borrow against the equity in your home.
If this is they way you are going to structure your priorities make sure that when you do have the mortgage paid off you put your normal mortgage payments into investments for your retirement fund. If you don’t have the discipline to do that then stick with investing for the future while making normal mortgage payments.
I am curious about your opinion.