Category Archives: amortization

Why a 20% home down payment may not be worth it

Source: The Globe and Mail – Rob Carrick

Rob Carrick

It’s tough to feel financially prudent when buying a house these days.

That’s why an increasing number of first-time buyers are saving a down payment of 20 per cent or more. In doing so, they avoid having to buy mortgage default insurance which, in the case of a house price of $487,095 (the national average) bought with a 10 per cent down payment, would be 3.1 per cent or $13,590. This premium is generally added to the mortgage, which means more interest to pay.

It certainly sounds financially prudent to make a 20-per-cent down payment where possible, but this isn’t always the case. In fact, you may save money both now and in the future by making a slightly smaller down payment and taking on the cost of mortgage default insurance.

Listen up if you’re concerned about the new mortgage lending rules that were announced last week and will take effect on Jan. 1. When making a down payment of 20 per cent or more, the new rules require that you be able to qualify for a mortgage at the greater of the five-year benchmark rate published by the Bank of Canada, or the original contractual rate plus two percentage points. An easier path to a mortgage may be to make a smaller down payment.

To even propose this seems bizarre. “The story has been that you’re just throwing money away with mortgage insurance,” said Mike Bricknell, a mortgage agent with CanWise Financial. What this thinking ignores is the way today’s mortgage market discriminates against people who make down payments of 20 per cent or more. They may pay a fair bit more for a mortgage than someone with a high-ratio mortgage (down payment of less than 20 per cent) both now and on renewal.

A lender dealing with a client who has a sub-20 per cent down payment can take comfort from the fact that the loan is covered by government-backed insurance that is paid for by the borrower. A conventional mortgage (20 per cent or more) can be insured as well, but by the lender. All in all, a high-ratio mortgage is preferable from the lender’s point of view and often results in a lower mortgage rate.

Mr. Bricknell has lately found that rates on five-year fixed rate mortgages are about 0.45 of a percentage point less for high ratio as opposed to conventional mortgages. Maybe your lender can do better than that. If not, consider this example of how a down payment less than 20 per cent can pay off.

We start with a $450,000 house and a buyer with a 20-per-cent down payment already saved. With a conventional mortgage amortized over 25 years, Mr. Bricknell figures this person could get a five-year fixed rate mortgage at 3.29 per cent. That means a monthly payment of $1,758.

Now, let’s see what happens when this borrower makes a 19-per-cent down payment. A smaller down payment means borrowing a bit more, and thus more interest over the life of the mortgage. Also, mortgage insurance will be required at a cost of $10,206. All of this nets out to a monthly payment of $1,743, with the mortgage insurance premium included. How is this possible? Mr. Bricknell said it’s because the high-ratio borrower gets a mortgage rate of 2.84 per cent.

There’s a stress test for high-ratio mortgages as well, but it’s marginally less onerous than it is for conventional mortgages because you only have to be able to handle the Bank of Canada benchmark rate, currently 4.89 per cent. Thus the high-ratio mortgage in Mr. Bricknell’s example would have a qualifying rate of 4.89 per cent and the conventional mortgage would be at 5.29 per cent (the client’s actual rate plus two percentage points).

The two mortgages outlined by Mr. Bricknell are pretty much a wash right now when compared on cost. Looking ahead, the high-ratio mortgage offers the potential for lower interest rates when it’s time to renew your mortgage. This assumes that lenders will continue to look more favourably at high-ratio mortgages.

Mortgage industry data show that even as house prices increased from the early 2000s through the past few years, the percentage of people making down payments of less than 20 per cent has declined to 39 per cent from 54 per cent. If the rationale for this is to save money and be financially prudent, a rethink is required. Depending on the rates offered by your lender, a slightly smaller down payment could save you money in the long run.

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What the new mortgage rules mean for homebuyers – There are two scenarios new buyers can anticipate

mortgage math

 

Source: MoneySense.ca – by  

 

 

Today, the Office of the Superintendent of Financial Institutions (OSFI) introduced new rules on mortgage lending to take effect next year.

OSFI is setting a new minimum qualifying rate, or “stress test,” for uninsured mortgages (mortgage consumers with down payments 20% or greater than their home price).

The rules now require the minimum qualifying rate for uninsured mortgages to be the greater of the five-year benchmark rate published by the Bank of Canada (presently 4.89%) or 200 basis points above the mortgage holder’s contractual mortgage rate. “The main effect will be felt by first-time buyers,” says James Laird, co-founder of Ratehub.ca. “No matter how much money they put down as a down payment, they will have to pass the stress test.” The effect of the changes will be huge, resulting in a 20% decrease in affordability, meaning a first-time homebuyer will be able to buy 20% less house, explains Laird.

MoneySense asked Ratehub.ca to run the numbers on two likely scenarios and find out what it would mean for a family’s bottom line. Here’s what they found:

SCENARIO 1: Bank of Canada five-year benchmark qualifying rate

In this case, the family’s mortgage rate, plus 200 basis points, is less than the Bank of Canada five-year benchmark of 4.89%.

According to Ratehub.ca’s mortgage affordability calculator, a family with an annual income of $100,000 with a 20% down payment at a five-year fixed mortgage rate of 2.83% amortized over 25 years can currently afford a home worth $726,939.

Under new rules, they need to qualify at 4.89%
They can now afford $570,970
A difference of $155,969 (less 21.45%)

SCENARIO 2: 200 basis points above contractual rate

In this case, the family’s mortgage rate, plus 200 basis points, is greater than the Bank of Canada five-year benchmark of 4.89%.

According to Ratehub.ca’s mortgage affordability calculator, a family with an annual income of $100,000 with a 20% down payment at a five-year fixed mortgage rate of 3.09% amortized over 25 years can currently afford a home worth $706,692.

Under new rules, they need to qualify at 5.09%
They can now afford $559,896
A difference of $146,796 (less 20.77%)

If a first-time homebuyer doesn’t pass the new stress test, they have three options, says Laird. “They can either put down more money on their down payment to pass the stress test, they can decide not to purchase the home, or they can add a co-signer onto the loan that has income as well,” says Laird. The stress test will be done at the time of refinancing as well, with one exception. “If on renewal you stay with your existing lender, then you don’t have to pass the stress test again,” says Laird. “However, if you change lenders at mortgage renewal time, you may have to pass the stress test but it’s not crystal clear now if this will be the case for those switching mortgage lenders.”

So if you’re a first-time homebuyer, it may mean renting a little longer and waiting for your income to go up before you’re able to buy your first home. Alternatively, some first-time buyers will buy less—maybe a condo instead of a pricier detached home. Or, the new buyers may opt to get a co-signer to qualify under the new rules.

But whatever you do, if you’re a first-time buyer, make sure you understand what you qualify for using the new regulatory rules, and get a pre-approved mortgage before you start house-hunting. “This shouldn’t be something that shocks you partway through the home-buying process,” says Laird.

And finally, do your own research and run the numbers on your own family’s income numbers. You can use Ratehub.ca’s free online mortgage affordability calculator to calculate the impact of the mortgage stress test on your home affordability.

mortgage math

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Three ways to pay off your mortgage faster

Housing prices, to downsize, mortgages (Photos.com)

Things like traffic, work and dirty dishes can seem to go on forever; your mortgage doesn’t have to.

Even if you have signed on for a long mortgage, with payments scheduled to continue until you’re old, there are ways to speed everything up, experts say.

It’s a matter of knowing your options and paying attention to detail.

“Obviously there’s budgeting, where you cut back on some of your spending,” says April Dunn, a mortgage broker at Red Door Mortgage Group in Kelowna, B.C.

“But that only works if you actually take the funds to pay down the mortgage.” If you can’t bear to give up that triple skinny latte with an extra shot and some foam, “there are other things you can do.”

Some of these are simple.

Biweekly payments

For example, instead of making payments once a month, you can ask your mortgage holder to accept biweekly payments, dividing the monthly amount in half.

Although it sounds like six of one and half a dozen of the other, it means you will actually be making 26 payments every year, paying down more than you would if you made 12 monthly payments.

The reason is that there are 13 four-week payment periods in a year, as opposed to 12 months, allowing two extra biweekly payments.

It can add up to your advantage. For example, you could cut three years off and save more than $16,000 by making biweekly payments instead of monthly ones on a 25-year mortgage of $300,000 at 3 per cent.

Round up

Another really easy and relatively painless way to make faster payments is to round up your regular payment by a small amount, whether it is monthly or biweekly. For example, if you normally pay $575 every two weeks, consider bumping it up to $600.

As with biweekly payments, you probably won’t feel the small additional amount in your regular budget and the savings over years will be substantial. Many people like to round up their payments when they get a raise.

Extra payments

A third way to speed up your mortgage payment is to put in extra money when it comes your way, for example through a tax refund, inheritance or work bonus.

You have to be disciplined to do this, though. “People often say they’re going to do it but then they spend the money on a vacation,” says James Robinson, mortgage broker and owner of Dominion Lending Centres Mortgage Watch in Toronto.

It is often common to have a mortgage that allows you to pay down an additional lump sum up to a fixed percentage of the total mortgage, typically on the anniversary of the mortgage. But beware: Mortgage terms can vary widely depending on the lender and your own financial situation.

Mortgages often have clauses that penalize the borrower heavily – into thousands of dollars – if they pay off the entire mortgage before the full term. This may make little difference for those who win the lottery but it can be a burden for homeowners who downsize and are unaware of the penalties for paying off early.

“You’ll want to keep those terms as open as possible. It’s probably the most important thing you can do to have the ability to pay down faster,” says Thomas Elltoft, a real-estate agent in Niagara-on-the-Lake, Ont.

A common type of set mortgage prepayment lets the borrower pay a certain portion, say 15 per cent of the original amount, on the mortgage anniversary. The borrower can pay the same amount each year, which over time becomes a larger percentage of the amount that is left.

“You need to read the fine print or engage somebody who understands the fine print and can explain it to you,” says Mr. Robinson.

“A lot of people don’t realize that different lenders allow different amounts, or have different ways of letting you implement your prepayment,” Ms. Dunn says.

It is also important to remember that mortgages are made up of two components – principal and interest. The actual payment you make is a blend of the principal and the interest you owe, so the faster you pay down the principal, the less interest accrues over time and the less you will end up paying in total.

Speeding up mortgage payment doesn’t make sense for everyone in every circumstance. In today’s low-interest environment, with rates unlikely to rise drastically for a while, a mortgage is among the lowest-cost debt, compared with the cost of, say, car payments or credit-card debt.

Most importantly, stay informed about your mortgage, Mr. Robinson says.

“For most people, it’s the biggest debt you’ll ever have. Be financially literate.”

Source: DAVID ISRAELSON Special to The Globe and Mail Published Friday, Mar. 18, 2016
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Builders call for longer amortizations for first-time buyers

Image result for images of amortization

A body that represents Canada’s home builders is pushing the federal government for changes which would make building and buying a home easier. Among the measures that the Canadian Home Builders Association is calling for is longer amortization periods for first-time buyers. The Globe and Mail has obtained government documents that show the CHBA had 61 meetings last month with officials and politicians to discuss proposals such as reduced taxes for home building and renovations. Although the government’s policy has been for shorter mortgages; cutting the amortization for CMHC-backed home loans from 35 to 25 years under Jim Flaherty; the issue of overheated housing markets continues. The CHBA hopes that politicians will adopt some of its proposals as campaign issues in the coming months.

Source: MortgageBrokerNews.ca Steve Randall | 24 Jun 2015