Mortgage Tips - Tip for great rate

Tips of the day:
"Toronto's York University Finance Professor Moshe Milevsky did a study of five-year rolling interest rate during the previous 50 years, and showed that 88.6 per cent of the time, homeowners would have saved money having floating interest rate mortgages, which are tied to the rise and fall of bond yields, rather than fixed-rate mortgages, which are usually locked-in over a period of one to five years. The average saving was $22,000 on a $100,000 mortgage paid out over 15 years"...... quote from Vancouver Sun dated April 3, 2007.

Mortgage Tips

Do I choose a Closed or Open Mortgage Choosing The Term On An Open Mortgage Choosing The Term On A Closed Mortgage Why Choose Adjustable or Variable Rate Use Your RRSP Money As Downpayment Get A gift From Parents For Downpayment Choosing A Cash Back Mortgage Can Help With Downpayment Obtain A Pre-Approved Mortgage Take Advantage Of High Ratio Mortgage Rent A Room To Increase Income Save Interest With Debt Consolidation Check If You Are Exempt From British Columbia Property Purchase Tax Disclaimer
Do I Choose A Closed or Open Mortgage

Under a "Closed Mortgage" you will have to stay with the committed interest rate for the duration of the term.
Therefore consider a "Closed Mortgage":

1. if you are ready to stick with the agreed interest rate for the duration of the term.
2. if you are of the opinion that the interest rate you are committing to will be the best over the duration of the term
3. if you do not have any plan to sell the property before the maturity of the term.
4. if you are of the opinion that interest rate will not go down significantly during the term of the mortgage.

Under an "Open Mortgage" you can repay fully or partially, or convert to a "Closed Mortgage" without penalty.
Therefore consider an "Open Mortgage":

1. if you are not willing to stick with the agreed interest rate for the duration of the term.
2. if you are of the opinion that interest rate will likely go down significantly in the short term. You would like to be able to convert to a lower interest rate when interest rate really goes down.
3. if you believe that there is a strong possibility that you may sell the property in the short term and repay the mortgage.

You should be aware that interest rate on "Open Mortgage" is significantly higher than the interest rate on "Closed Mortgage" for the same duration of the term.

So it is important to discuss both types of mortgages with the assistance of your lender and then make a final choice.

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Choosing The Term On An Open Mortgage
If you have made up your mind to go for an "Open Mortgage", you still have to choose the term of the mortgage which is usually either "six month term" or "twelve month term".
Interest rate on 6-month term is slightly higher than the interest on a 12-month term.
At the end of 6 month or 12 month as applicable, you will have to decide if:
a. you want to continue with Open Mortgage at then prevailing interest rate
b. you want to repay the loan in full or in part.
c. or convert to a Closed Mortgage at prevailing interest rate.

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Choosing The Term On A Closed Mortgage
If you have made up your mind to go for a "Closed Mortgage", you still have to choose the term of the mortgage which are between 1 year to 10 year term.

You should know that interest rate gets higher as you choose a longer term.
How long should you go for the term will basically depend on your prediction of interest rate movement.
If you believe interest rate will drop significantly, you would probably choose a shorter term
If you believe interest rate will go up significantly, you would probably choose a longer term.
Again you should consider if there is a possibility that you may want to sell the property and pay off the mortgage way before reaching maturity.

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Why Choose Adjustable or Variable Rate Mortgage
Over the past decade Variable Rate Mortgage has gained significant popularity.
Variable Rate Mortgage is a mortgage for which interest rate may change from time to time as other market conditions change. In other words the interest rate is not fixed for a specified period of time.
Interest rate on variable rate mortgage is tied to "Prime Rate" which is the rate lenders lend to their best customers.
Lenders are currently lending at "Prime Rate minus 0.85%" for first 90 days and thereafter at "Prime minus 0.40%" (Prime is currently 5.50% minus 0.40% = 5.10%) on a 5 year closed variable rate mortgage.
There is a significant saving of 0.40% if you compare Prime minus 0.40% to the current 5 year fixed rate mortgage at 5.50%.
If you are of the opinion that Prime Rate will not go up significantly over the five year period or better still rate may go down, Prime minus 0.40% is a very tempting choice.

There are two types of Variable Rate Mortgage
a. Open 5 year term. The interest rate is higher than the 5 year closed term but you have the flexibility to pay off the mortgage any time without penalty.
b. Closed 5 year term. The interest rate is lower but there is a prepayment penalty if you pay off the mortgage before maturity.

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Use Your RRSP Money As Downpayment
The hardest part in purchasing a property is to find the "Downpayment".
If you have some RRSP (Registered Retirement Savings Plan) money in the bank, you may borrow from your own RRSP and use the money as a downpayment, without increasing your tax liability. Please learn more

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Get A gift From Parents For Downpayment
Lender will accept that your parents give you the downpayment as a gift. All you need is a letter from your parents confirming that the amount is a gift from them.
Lender will not accept if it is a loan from your parent.

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Choosing A Cash Back Mortgage Can Help With Downpayment
Cash back mortgage is a mortgage where the lender will give you some cash back at time of closing. You can use the cash back to pay for furniture, legal expense, even as part downpayment.
You can receive back 4%, 5% or 7% of the mortgage amount but the catch is that you have to choose a fixed mortgage and the term must be at least 4 years. Also the interest rate will unfortunately be higher than standard mortgage rate.

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Obtain A Pre-Approved Mortgage
You do not need to wait until you have made an offer to purchase a home before you go to the Bank or other lenders to apply for a mortgage.
You can go to the Bank or other lenders first and get a pre-approval. In this way you know for sure that once you find a home, your mortgage is already approved.
Also pre-approved mortgage is particularly useful when interest rate is rising because lenders commit and guarantee upfront an interest rate, usually good for 60 days.
The good part is that if you cannot find a home within the 60 day period you have no obligation whatsoever.

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Take Advantage Of High Ratio Mortgage
The hardest part in purchasing a property is to find the downpayment.
The sad part is that by the time you have the downpayment, the property price may have gone up so much that you cannot afford the monthly payment anymore.
High Ratio Mortgage allows you to put as low as 5% down instead of 25% down for conventional mortgage.
If you have a good credit rating, a good steady job, a good salary and can meet the Gross Debt Service Ratio and Total Debt Service Ratio of the lender, you may qualify for high ratio mortgage.

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Rent A Room To Increase Income
If your income is not enough to qualify you for a mortgage, some lenders may accept that you rent part of the house to increase your income level to meet the GDSR and TDSR ratios.

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Save Interest With Debt Consolidation
If you have debts all over the place: credit card debt, personal line of credit, overdraft, car loan, consumer loan, department store loan that charges very high interest rate, you may consider consolidating all the debts into one single loan that offer much lower interest rate. If you have a home that still have some equity, you may consider refinancing your mortgage for a larger amount and for a longer amortization period and pay off all your other debts. Your can save much on interest expense.

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Check If You Are Exempt From British Columbia Property Purchase Tax
If you are a Canadian citizen residing in British Columbia for at least 12 months and you have never owned a principal residence before, you may be exempt from B.C. Property Purchase Tax under the following conditions:
1. Your downpayment cannot be more than 30%.
2. The value of the property cannot be more than $275,000.00 if located in the lower mainland, and $225,000.00 if located in the rest of B.C.
3. You must live in the house for at least 1 year.
4. You must choose a mortgage term of at least 1 year.
5. If you sell your property within 1 year, the exemption is void and you have to immediately pay back the tax.

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Disclaimer
It is not our intention to advise you which types of mortgage and term to choose.
We are merely trying to bring up some of the points to consider and let you make the final choice yourself with the help of your lender.

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