Mortgage Questions & Answers
Since I began my blog in June 09 I have spent some time in different forums reading, learning, and answering questions, specifically in relation to mortgages and the calculations involved in comparing different scenarios. I have learned that very few people, including some experts do mortgage calculations properly. While I am confident that errors are occurring due to minor oversights or assumptions they have the potential to cost you hundreds, if not thousands of dollars. In the past, I have provided accurate information to people to be helpful, because I enjoy working with numbers and saving people money. It has recently occurred to me that my responses can be time consuming and of value to people.
If you have a question about the $$$ savings you may experience by refinancing your mortgage for a lower rate, consolidating debt or are comparing different offers from lenders please feel free to email me at mortgagemath@debtfreeby43.com . You will receive a reply within 48 hours. Your email address will only be used to reply to your question and will not be added to any mailing lists now or in the future!
I have set up this email address to send an auto response that will include a link to make a donation to Debt Free by 43. Although a donation is required to have your question answered there is no minimum donation. Simply donate what you feel an answer to your question is worth. It is that easy!
I won't get rich, but it is my hope that I can generate some cash every month to take my better half out for a nice dinner. That may decrease the number of times she refers to herself as an "Excel widow." I do love working with the numbers. If you need some help please feel free to email me at the address above. I appreciate your continued support.
Mortgage Renewal Time
A couple of months before your current mortgage contract is about to expire your bank will send you a renewal letter. The rates on this letter are not likely the best that your bank or another lender can offer you for renewal. Why wouldn't your bank offer you the best rate? Your bank is a business and like any other business they want to make money, lots of money to pay for their skyscrapers.
The CAAMP current report shows that 88% of consumers renew their mortgages with their current bank. Let's look at this from a business perspective.
You are the CEO and you know there is an 88% chance that your customer will renew with you so you send out a renewal letter with your 5 year posted rate on it at 5.49% A small percentage of your customers accept this rate without question and you have just locked in some huge profits.
A greater percentage of your customers call and ask why they were not offered the special rate of 4.19% advertised on your website. Your customer service representative's simple response is, "Those rates are for new customers, but I can also offer it to you." Your customer accepts that response and is happy with their rate. You have still not given your customer the best rate you can, but have locked in some more profit.
A few of your customers will still not be satisfied and will call and state that they have seen the rate of 3.99% offered on many mortgage brokers' web pages. You may or may not meet this rate for various reasons.
Let's look at the effect of this on your customers based on renewing a $200,000 mortgage with a 20 year amortization period. The following are the rates, monthly payments and the outstanding balance after your new 5 year term.
Rate: 5.49% Monthly PMT: $1542.52 Balance: $222,936
Rate: 4.19% Monthly PMT: $1340.93 Balance: $218,349
Rate: 3.99% Monthly PMT: $1313.70 Balance: $217,597
Of the 88% that renew with you 15% accept the posted rate, 60% are happy with your current special rate and 13% push for the rate they have found posted elsewhere. You have still retained 88% of your customers and compared to the rate of 3.99% that you could have offered all of your customers you have locked an average profit of over $5,000 per mortgage over 5 years. Multiply that by 750,000 customers and you have some big profits making shareholders very happy.
What are your experiences with mortgage renewals?
Disclaimer: The rates compared are hypothetical but reasonable based on current rates posted on the internet. The writer's opinion is not necessarily the opinion of a bank's CEO or any other bank employee.
Renewing Your Mortgage
A 2008 CAAMP (Canadian Association of Accredited Mortgage Professionals) 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 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.