Looking at Amortizations

One of the most common subjects I have been discussing with clients about in the last few weeks is amortization, so today I wanted to clarify the meaning of it, show you the different options available and provide a few examples. A common misperception is that you pay significantly more interest on a monthly basis by choosing a longer amortization, however this is not true. Although your interest cost over the long term is greater because you are increasing the amount of time over which your mortgage will be paid, it’s how much you pay to principal that makes a huge difference. Lets take a look at an example of a $300,000 mortgage with an interest rate of 3.99% over a 5 year term, amortized over 25 years. These are numbers are taken from our TD Mortgage Payment Calculator.

Principal: $300,000
Payment frequency: Monthly
Mortgage type: Fixed rate
Interest Rate: 3.99%
Amortization: 25 years
Total Payment: $1576.43
Total P+I Payment for term: $94,585.80
Total Interest Cost for Term: $55,697.22
Total Principal Repayment for Term: $38,888.58
Mortgage Balance at End of Term: $261,111.42

Now let’s take a look at the same example, but amortized over 35 years.

Principal: $300,000
Payment frequency: Monthly
Mortgage type: Fixed rate
Interest Rate: 3.99%
Amortization: 35 years
Total Payment: $1320.64
Total P+I Payment for term: $79,238.40
Total Interest Cost for Term: $57,290.85
Total Principal Repayment for Term: $21,947.55
Mortgage Balance at End of Term: $278,052.45

So as you can see from the examples above, there’s not a significant difference in interest cost between the two scenarios for the first 5 years. The difference in interest cost is $1593.63. But the difference in paid principal? $16941.03. So why would anyone choose a 35 year amortization over a 25 year amortization? Flexibility. By choosing a maximum amortization of 35 years, it allows you to reduce your monthly payments. Not sure which option to go with? Talk to your mortgage advisor or give me a call and I can help you crunch the numbers, and determine what makes most sense for your unique situation. No matter what type of mortgage financing you are looking for, it makes sense to speak to me first. If you have any questions or would like to leave a comment, please do so below. Thank You!

Sincerely,
Josephine Ng
www.tdmortgage.wordpress.com

All about VIRM’S (Variable Interest Rate Mortgages)

It seems like the VIRM is the more common mortgage option now adays, especially given the fact that the spread between the discounted 5 year variable closed and 5 year fixed is currently over 2%. Just to put it into perspective, the difference in monthly payments between the two on $100,000 is approximately $113 based on a 35 year amortization. But whether the variable mortgage may be the right option for you shouldn’t be solely dependant on rate. As you know, the interest rate on a variable mortgage fluctuates and more importantly is currently on its way up but not knowing how the product works may leave you with more challenges down the road. Aside from using IDEAS outlined in my blog Fixed or Variable to help you evaluate your situation, I thought I would go over everything you need to know about Variable Interest Rate Mortgages. Keep in mind that the products in my blog are specific to TD so always check with your lender on their mortgage products work.

There are two types of variable mortgages. Open and closed. Both with TD are 5 year terms but the 2 main differences are the rates and prepayment privileges. With the variable closed, the rate is usually priced below bank prime and with the open it’s usually priced above bank prime. In terms of pre-payment priviledges, the closed term does not allow the mortgage to be pre-paid in full without paying 3 months interest compensation. The open term allows pre-payment in full however administration fees apply if the mortgage is paid in full in the first or second year, $500 and $250 respectively. Two important things to note about variable mortgages with TD is that they are NOT assumable nor portable. To learn more about portability, please visit my article on Porting or Replacing your Mortgage.

The interest rate on a variable mortgage is calculated monthly, not in advance and changes when TD Mortgage Prime changes. This is different than a fixed rate mortgage in which the interest is calculated semi-anually and not in advance. The rate is set on the 1st day of each month based on the variable mortgage rate. So if the bank prime changes mid month, your variable rate will not be changed until the first of the following month. Keep in mind your lender’s rate adjustment policy if you choose to go with a variable mortgage. Your payments on our variable mortgage are fixed for the entire 5 year term. I always recommend to those who choose a variable mortgage to set their payments based on a higher rate to pay off the principal faster and to safeguard against interest rate increases. Since interest rate fluctuations can push the outstanding balance beyond the contractual amortization, it is always a good idea to increase the payment frequency and amount. For more information on how to pay off your mortgage faster, please visit my blog on Mortgage Payment Plans and Say Goodbye to your Mortgage Faster. When your interest rate reaches the point where your payments no longer cover the interest charged under the mortgage, this is referred to as the Trigger Rate. If this occurs, you may be asked to pay your mortgage down to the appropriate trigger point, re-evaluate your property, convert your mortgage to a fixed rate, or increase your regular payments.

If you currently have or choose to go with our closed variable mortgage, you have the option to early renew into a fixed rate mortgage with a minimum term equal to the lesser of 3 years or remaining period of the original term. If you have or choose to go with our open variable mortgage, you have the option of renewing into any fixed term mortgage. So as you can see, there is more to variable mortgages than just the rate. Knowing what your options are during your contract period can have an impact on your decision or situation down the road. Going forward, the variable may no longer win according to the Financial Post, but there never seems to be a clear answer on whether to lock in or stay variable. No matter what type of mortgage financing you are looking for, it makes sense to speak to me first. If you have any questions or would like to leave a comment, please do so below. Thank You!

Sincerely,
Josephine Ng
www.tdmortgage.wordpress.com

Mortgage Payment Plans

Choosing a mortgage with the right combination of features to meet your needs can save you money, reduce the amount of time it takes to pay off your mortgage and most importantly provide you with peace of mind. Knowing how to utilize those features to your full advantage can be confusing though so today I wanted to go over the various mortgage payment plan options that TD has to offer. Other lenders should have similar payment plan options but you may want to check with them to be sure.

With your TD Canada Trust mortgage, you can choose a payment frequency of weekly, bi-weekly, semi-monthly, or monthly. With the first 3 types of payment frequencies, you can also between regular or rapid repayment. Rapid plans basically accelerate the repayment of the mortgage by permitting the equivalent of 13 “monthly” payments per year instead of 12 on a regular plan. Of course, this will lower your amortization in the long run. Just to give you an example, for a $50,000 loan with an interest rate of 11%  amortized over a 25 year period, making a rapid weekly repayment reduces the period from 25 to 18 years. Since you can increase your minimum payments by up to 100% on all our fixed and variable term mortgages anyway, you can even pay more than the rapid option.

From time to time I get customers that don’t know the difference between semi-monthly and bi-weekly so just to clarify:

• Weekly payments are due on the same day each week
• Bi-weekly payments are due on the same day every other week
• Semi-monthly payments are due twice each month, usually on the 1st and 15th
• Monthly payments can be set up on any day of the month for a monthly payment frequency

Now here comes the important part. I get a lot of customers who aren’t familiar with conversion dates and interest adjustments so if you happen to request a change in payment frequency, please take note of this. If you are on a monthly payment plan, you are always paying for the month behind. Same goes for a semi-monthly plan, you are always paying for the 15 days before. In other words, on a monthly plan, your June 1st  payment is paying for the month of May. So if you decide to convert to semi-monthly and you want your semi-monthly payment to start on July 1st, you will have an interest only payment due on June 15th which is the conversion date. This covers the period between June 1st and June 15th. Your first semi-monthly payment would then begin on July 1st. Having to make that interest adjustment payment can throw people off so hopefully this clarifies things.

The easiest thing to do is to have your mortgage payments come out on the same day as pay day. Most of us are paid on a bi-weekly or semi-monthly basis so use this opportunity to increase the frequency of your payments. If its within your financial means, choose the rapid repayment feature to lower your amortization which will save you more money. For other strategies on how you can own your home faster, please visit my blog on Say Goodbye To Your Mortgage Faster. If you have any questions or would like to leave a comment, please do so below. Thank You!

Sincerely,
Josephine Ng
www.tdmortgage.wordpress.com

CMHC/Genworth Mortgage Insurance

The first question I get from a lot of first time homebuyers is what is CMHC and what does it stand for? Now there are mainly two mortgage insurers but CMHC stands for Canada Mortgage and Housing Insurance and its basically mortgage loan insurance that you have to pay if you are making a down payment of less than 20% of the purchase price of your home. Mortgage loan insurance helps protects the lender against mortgage default and enables you to purchase a home with a minimum down payment of 5%. So to give you an example, it would look something like this:

Purchase Price: $300,000
Down Payment: $15000
Required loan: $285000
Mortgage Insurance (Standard Premum): $7837.50
Mortgage Amount: $292837.50

The premium payable is based on the size of your down payment. The lower your down payment, the higher percentage you will pay in insurance premiums. There are also extended amortization surcharges if you choose an amortization of greater than 25 years. To learn more about the insurance premiums, you can visit the CMHC website. With both mortgage insurers, you can pay the premium in full upfront or you can add the premium to the principal amount of the mortgage like the example above. TD Canada Trust no longer offers insured Home Equity Lines of Credits  therefore they are only available on a conventional basis. Remember if you choose a mortage term of less than 5 years or a variable rate option, we will qualify you by using the 5 year posted interest rate. For more information on qualifying rates, please visit my blog on New Mortgage Rules.

Keep in mind that Mortgage loan insurance enables you to purchase a home with only 5% downpayment but once you own your home, the maximum loan to value that lenders will grant is 90% if you refinance. In other words, you will need to have at least 10% equity in your home. Mortgage loan insurance is also not to be confused with mortgage life insurance which guarantees that your remaining mortgage at the time of your death will not be a burden to your estate. To learn more about TD Mortgage Life and Critical illness insurance and other home insurance, please visit our website. If you have any questions or would like to leave a comment, please do so below. Thank You!

Sincerely,
Josephine Ng
www.tdmortgage.wordpress.com

Is your Mortgage Coming Up for Renewal?

Here are some interesting stats for you from CMHC.

• 88% of people who renew their mortgage stay with their current lender
• 70% of people who refinance their mortgage do not change lenders when obtaining their current mortgage
• 46% of first time home-buyers took out their mortgage with the institution they were dealing with at the time
• 58% of repeat buyers did not change lenders when obtaining their most recent mortgage

Is this good news or bad news? It all depends on whether you have taken the time to research your options to see if you are saving the most money and getting the best advice based on your situation. For those of us who are complacent and just sign the mortgage renewal agreement that comes in the mail, you could missing out and end up paying the financial institution more money. How do you know that you are getting a competitive rate? More importantly, how do you know that you are choosing the right term? So before you sign the the mortgage renewal agreement, take 15 minutes our of your day and review the following questions that can end up saving you thousands of dollars. After you review these questions, call your mortgage specialist or myself if you would like a second opinion before you renew or decide that it may be better to transfer your mortgage to a different financial institution.

1. Is renewing early an option to look at given the current interest rate environment?
2. What financial changes do you anticipate in the next 6-12 months that might impact this renewal?
3. How satisfied are you with your current mortgage?
4. Are you moving or selling in the near future?
5. Are you considering doing renovations or improvements to your home?
6. Do you prefer fixed or variable rates?
7. Have you already been considering a specific term? If so, which term and why?
8. Do you have any other debt that you would like to consolidate?

All of these questions may impact your decision and most importantly can end up saving you a lot of money in the long run. These questions are very similar to the ones on my blog on Important Questions to Consider Before Choosing the Right Mortgage.

Before you go on to review your mortgage renewal options, here are some other important factors to consider. These features may not be important to you but you would be surprised at how it may affect your situation in the future.

• Are you able to early renew your mortgage for 120 days in advance without paying a penalty?
• Can your financial institution offer you a blended rate to spread out the penalty costs over the term of the new mortgage?
• How many days in advance from your maturity can you pay out your mortgage?

Just to give you an example, a recent mortgage transfer that I did for a customer was not able to fund until the exact day of maturity. Their financial institution would not allow early payout 30 days in advance. At TD, this is a standard feature of our mortgages. How did this affect my client? 30 days of paying a higher interest rate. To learn more about what TD Canada Trust has to offer, please see our Mortgage Line-up. No matter what type of mortgage financing you are looking for, it makes sense to speak to me first. If you have any questions or would like to leave a comment, please do so below. Thank You!

Sincerely,
Josephine Ng
www.tdmortgage.wordpress.com