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Mortgage Penalties: Just How Much Will it Cost to Break my Mortgage?

Would now a good time to break your mortgage and refinance?

calculator isolate on White BackgroundThis is a really common concern– when should I break my existing mortgage and refinance for a current best mortgage rate? It’s best to initially weigh out the costs.

Breaking your Mortgage

A Canadian mortgage rate agreement is a fully committed contract. There is an out clause, however it comes at a cost.

How Much is my Mortgage Penalty?

Typically the cost is determined based upon either three months worth of interest payments, or the interest rate differential (IRD).

Step 1: Calculate your IRD (Interest Rate Differential)

1) Use the principal balance and multiply it by the difference between your existing mortgage rate, and the new low mortgage rate.

2) Divide that number by 12.

3) Multiply that number by the remaining months in your term to obtain the approximate IRD owed.

Step 2: Calculate 3 Months of Interest

Just simply multiply the amount of interest you would owe on the present mortgage amount. Multiple this by 3.

Step 3: Find out the Penalty you Would Pay

When it comes to a fixed rate you would pay the greater of the IRD, or 3 months of interest. While in a variable rate, you would generally pay 3 months of interest. Contact your mortgage broker or lender to identify your specific required payments.

Step 4: Calculate Your Savings

1) Calculate the interest on your current mortgage rate.

2) Calculate the interest for your new mortgage rate.

3) Calculate your savings.

Step 5: Find out if it is Worth It

Decide if changing is worth it by comparing your expenses to your savings.

Mortgage Term Vs. Amortization

Do you understand the difference between your mortgage term and your amortization period?

Question markA frequent source of confusion for potential homebuyers is the difference between a mortgage term and amortization period. A standard Canadian mortgage rate has a 5-year term with a 25-year amortization period.

Mortgage Term

The mortgage term is the length of time you commit to a low mortgage rate, lender, and associated best mortgage rate terms.

Mortgage Amortization Period

This is the length of time it will take you to repay your whole mortgage. Longer amortization periods lower your month-to-month payments, as you are paying your mortgage off over a greater number of years. But nevertheless, you will pay even more interest over the life of the mortgage.

Maximum Amortization Reduced to 30 years on March 18th, 2011

In January 2011, Minister Flaherty revealed that the maximum amortization duration on all CMHC insured houses would be lowered from 35 to 30 years.

Quite a few home buyers opt for a reduced amortization period leading to greater regular monthly payments if they have the means to do so, understanding that it encourages desirable saving  habits and  minimizes the  overall interest payable.

Short vs. Long Term Amortization Periods

Prepayment privileges set out by your lender will determine whether you can reduce your amortization period, by either enhancing your regular month-to-month payments and/or putting lump sum payments towards the principal. Nevertheless, beyond these privileges, you will typically incur charges for making extra payments. According to the Canadian Association of Mortgage Professionals, 24 % of Canadians benefited from prepayment options in 2009.

Land Transfer Tax

How much is the land transfer tax in your province?

Canada mapEach province has a land transfer tax, with the exception of Alberta and Saskatchewan. Ontario, British Columbia, Prince Edward Island and the city of Toronto offer land transfer tax rebates for first-time homebuyers. Considering purchasing some property? Be sure to review land transfer taxes when completing your budget and considering your Canadian mortgage rate.

Ontario first-time homebuyer land transfer tax rebate

Equal to the full value of the land transfer tax up to a maximum of $2,000.

Eligibility

The buyer must be older than 18 years, occupy the home within nine months of purchase, and has not owned a home anywhere else the world.

Purchasing a home in Toronto incurs an additional municipal land transfer tax.

Toronto first-time homebuyer land transfer tax rebate

Eligible to receive a refund up to a maximum of $3,725.

Eligibility

The buyer must be older than 18 years, occupy the home within nine months of purchase, and has not owned a home anywhere in the world.

British Columbia first-time homebuyer land transfer tax rebate

First-time homebuyers and best mortgage rate holders are eligible to receive a full land transfer tax refund on homes purchased for $425,000 or less.

Eligibility

You are Canadian citizens or permanent residents, have never owned an interest in a principal residence anywhere in the world at anytime.

Alberta and Saskatchewan land title transfer fees

Though Alberta and Saskatchewan do not have a land transfer tax, there is a charge for title transfer fees. This fee should be considered when calculating your low mortgage rate and closing costs.

Making a Budget

Make a budget and find out the best ways to manage your mortgage money better

We recently took a look at the expenses beyond securing a low mortgage rate, the purchase price that you should anticipate to pay, and the expenses related to moving in. Now it is time to have a look at your ongoing month-to-month expenses, ways to pay off your Canadian mortgage faster, and the renewal process. This handy checklist will help keep you organized.

Budgeting for Home Expenses

Budgeting for home expenses calls for organization and some degree of restraint. Also, you will want to have funds reserved for unanticipated maintenance expenses.

Monthly expenses includes things like:

Property taxesCanadian dollars in a piggy bank studio cutout
Maintenance and upkeep
Insurance
Mortgage payments
Heating and cooling
Hydro
Condo fees (if applicable)
Internet
Water
Cable
Telephone
Appliance rental (if applicable)

Budget Your Monthly Expenses

Beyond the expense of your monthly best mortgage rate, it  is essential that you are aware of exactly what you are spending and where you are able to cut expenses. Budgeting can be time consuming and tedious! Making use of an online budgeting tool like Mint.com will help you save money and time as it automatically tracks your expenses and allocates them against your budget.

How Can I Save Money?


High Interest Savings Account
Make your savings work harder for you.

Save Money on Credit Cards
Altering your credit card can help save you money by providing you with a lower interest rate.

Paying off Your Mortgage Faster            
Having your very own house is both thrilling and gratifying. Spend some time putting together a strategy to pay it off as quickly as possible. There’s no freedom like financial freedom.

 

How to Prepare For Mortgage Rate Increases

Can your budget handle a rate increase?

There is a bunch of talk about Canadian mortgage rate increases. The single biggest investment most Canadians make is their home; this represents almost 40% of the average family’s total assets. The big problem at the moment is that many Canadians are living in homes they won’t be able to afford once interest rates start to rise. Right now The Bank of Canada’s overnight rate is 1% – this prime rate went above 20% in 1981! What would happen to your home and mortgage if rates were to go up tomorrow?

Tip # 1: Pay Down Your Principal

If rates are increasing, the best plan is to lower your principle. The two most common ways to tackle this is by:

Switching from Monthly to Rapid Bi-Weekly

Switching from monthly mortgage payments to bi-weekly payments could help you save thousands of dollars in interest.

Making Lump Sum Prepayments

Try making lump sum prepayments or doubling up your payments whenever possible. This will help you tackle your debt quickly and efficiently.

Tip # 2: Plan for it Now

Open a savings account that you are able to pull from to pay for increases in your mortgage interest rate and payments down the road.

Tip # 3: Get Some Professional Advice

Speak with a mortgage professional about your options. You may be able to refinance now and lock in a low mortgage rate.

Tip # 4: Get Real About Your Debt

If you need to, downsize your home or consolidate your loans to protect yourself from rising interest rates. Most importantly, if you are shopping for a new home, calculate your affordability at a much higher interest rate – it’s the only way you can determine your chances of affording your home for the long term.