Archive | January, 2012

Mortgage Amortization – A Common Sense Overview

January 30, 2012

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Article courtesy of MCAP.

 

A good way for a borrower – let’s call our borrower Barry – to understand the concept of “amortization” in the context of mortgage repayment is to look forward to a time when the mortgage is fully re-paid. How much is Barry borrowing and how much can he afford to pay each month? What interest rate can Barry get on his mortgage? The answers to these questions will help determine Barry’s amortization period and will give him an idea of when he can be mortgage free.

Let’s first look at the root of the word. To “amortize” is to decrease and account for an amount of money over a period of time. Amortization is a basic element of a loan re-payment plan where the principal amount of the loan is reduced to zero at the end of a prescribed period.

In the mortgage world, we think in terms of amortization being measured in years – 25 years or 20 years or maybe 30 years. What does this mean? It means that at the end of the amortization, the principal amount of a mortgage is reduced to zero. The number of years refers to the total amount of time required to pay off the mortgage. During the amortization period, mortgage payments are set at a constant amount throughout the entire period. This method relieves a borrower from having to track the progress of their principal reduction or think about the amounts of interest and principal included in each payment. The payments remain the same and, at the end, the loan is paid in full. The amortization schedule sorts out the ratio of interest and principal for each payment.

Let’s look at an example: Barry takes out a $200,000 mortgage with an interest rate of 6% (let’s ignore the concept of compounding which we covered a couple of months ago). If this mortgage were an “interest only” mortgage, Barry would owe annual interest of $12,000, or $1,000 every month just to “rent” the $200,000. If Barry wanted to pay down the principal amount of the loan, any amount paid in excess of $1,000 per month would be allocated to the principal. Let’s say that Barry earns a bonus from his employer and decides to pay $5,000toward his mortgage the following month instead of $1,000. This means that, after the first $1,000 is allocated to interest, his principal balance would be reduced by $4,000 to $196,000. If Barry resumed paying only interest the following month, the 6% interest rate would be calculated on the new principal balance of $196,000, making Barry’s monthly interest payment $980. But if Barry then decides to maintain his monthly payment of $1,000, he would pay his interest of $980 and the remaining $20 would further reduce his principalbalance. If Barry continues to pay $1,000 every month, he will have essentially created his own amortization schedule – although it’s a slow one – by maintaining a constant payment amount which results in him paying an ever increasing amount toward principal every month.

Most fixed rate mortgages do not allow the kind of payment flexibility which Barry enjoys in the example above. Rather, an amortization schedule, based on the interest rate and the amortization period (such as 25 years) is created when the loan is first made. What happens when a mortgage is made for an initial 5 year term, with an amortization of 25 years, is renewed? If the interest rate is different for the renewed term, then the payment schedule must change in order to maintain the original amortization of 25 years. What if the new rate is lower and the borrower wants to maintain the payment amount from the initial term? In this scenario, the lower interest rate means that less interest is owing on each payment so if the payment doesn’t change, the additional amount is allocated to principal. This reduces the principal balance more quickly and that means a shorter amortization period. The borrower who maintains the same payments with a lower interest rate will pay off their mortgage faster. If rates are higher at renewal and a borrower cannot afford the higher payment amount, they could choose a lower payment amount which would then lengthen their amortization (if their lender allows them to do so).

A longer amortization period means lower payments over a longer time and vice versa.

When “extended” amortizations became available in Canada over the last few years, they made housing more affordable – on a cash flow basis – for many borrowers because of the lower payments. Borrowers who choose extended amortizations pay more interest in the long run because they are taking a longer time to fully re-pay the principal. Mortgage professionals often advise borrowers to consider the option of choosing an extended amortization in order to initially qualify for a larger mortgage and, when their incomes rise in the future, to increase their payments, reduce their amortization period and re-pay their mortgage faster.

Tim

Tim is a mortgage agent in Barrie who specializes in helping first-time home buyers. He works with a variety of lenders and can help customize a mortgage with the best rates & options that fit the needs of each customer.

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A Picture is Worth 1000 Words

January 27, 2012

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You’ve seen the listings on realtor.ca. The ones with photos that are dark, off-centre, fuzzy, maybe with dirty dishes in the sink…you know what I’m talking about! Some listings don’t have any photos at all!!! Check out Hooked on Houses for a variety of incredibly terrible MLS photos 🙂

You may think that if you don’t put pictures of your house online when you sell, more people will come because they’re curious. Don’t be deceived. This is old-world thinking. 10 years ago this was acceptable. Most buyers hired an agent first to find them a house. If you’re thinking about selling, you’re probably also going to buy another house. You’re probably on realtor.ca every day, maybe multiple times a day!

Pictures are so important when selling your home in this predominantly online market. Most buyers look online for months before even talking to a REALTOR! People are used to doing their own research and being in control before they ask a professional’s opinion. And this isn’t necessarily a bad thing, but it’s something that you – the seller – has to be aware of. Now since November, in Barrie, we are allowed to post a total of 25 photos of a single property; this is an increase from the previous 7 photos! This is a direct result of the demand from you, the consumer, as well as us REALTORs.

We live in a visual society. We are on computers and cell phones almost constantly. Realtor.ca now has an app. This is the way of the future. Most buyers are looking at photos before they even check to see if there are enough bedrooms!

If your REALTOR is taking pictures to put online, make sure they take good ones. Anybody can edit photos by brightening up a room, or cropping out the cat. Ask to preview the photos before they go online! You have the right to do that. Better yet, hire a professional photographer. I hire Rowell Photography for my listings, and you will not believe the difference in the number of showings! They are incredible.

I’m not a photographer, nor do I pretend to be. Just like I’m not a mortgage agent or a real estate lawyer! I have a basic understanding of it, but in my opinion, leave the work to the professionals. They know what they’re doing, and chances are it will help sell your house sooner and for more money!

Laura

Laura Keller of Century 21 B.J. Roth Realty is a real estate agent with a business philosophy of nurturing relationships with her clients. She will walk you through the process of buying, selling, or investing step-by-step so there are no surprises at the end of your transaction.

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10-Year Mortgage Below 4%

January 23, 2012

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The 10-year term in Canada is pretty rare these days (less than 1% of mortgages in Canada have a term 10 years or longer), but a 10-year term below 4% is unheard-of.  Or, at least it was until last week.

Gone are variable rates with “prime-0.9%” discounts (now they’re hovering right around prime which is currently holding steady at 3%), in are the 10-year fixed rates as low as 3.84%.

With rates pretty much as low as they have ever been, there’s no place for them to go but up.  For a lot of people, locking in for 10-years at under 4% just makes a lot of sense.  Not only does a 10-year term give you peace-of-mind and cost certainty for a whole decade, but it’s less than 1% above prime, and less than 1% above a 5-year term.  To quote Rob Carrick of the Globe and Mail, “It’s like freezing time at the exact best moment ever to finance the purchase of a house.

Now with rates this low (especially the 5-year 2.99% “specials” floating around), you’re going to want to make sure to read the fine print.  A lot of these specials are filled with restrictive contracts (can’t break the mortgage early, low pre-payment options, etc.).  As always, my advice is to get in touch with your favorite mortgage broker – we can help walk you through the various options out there, and help you decide the best one for you.  Some people wouldn’t want to be locked in to a mortgage for 10-years, while others would sleep better at night knowing their mortgage payments will be exactly the same until 2022.  😉

Tim

Tim is a mortgage agent in Barrie who specializes in helping first-time home buyers. He works with a variety of lenders and can help customize a mortgage with the best rates & options that fit the needs of each customer.

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Pushing your boundaries

January 18, 2012

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Last week, I posted about the two types of property registration systems in Ontario. One element of the Land Titles system is that it generally cancels out any possibility of adverse possession, or squatters’ rights, so this week I’m going to delve a little further into what exactly adverse possession is.

If you live in an urban subdivision built in the past ten or 15 years, chances are the borders of your property are exactly where they appear to be – right down the fence line and to the edge of the street. There is an extremely low likelihood that part of your deck is on the neighbour’s property, or part of their fence is on yours. This can be drastically different, however, when it comes to older properties or properties in more rural areas.

Adverse possession occurs when the person encroaching onto the neighbouring land knows he or she is doing so, and does so without permission. An example would be if you built a garage over the edge of your property knowing that it was not your property. After ten years, if the adverse possession continues, you can bring a court application claiming the extra strip of property as your own. In order to be adverse, the use of the property must be open, continual (which includes seasonal use, where relevant), notorious and exclusive to the actual owner. It must also be without permission; if at nine years and 11 months the owner stops you and says that you have permission to be there, then the adverse possession claim is blocked.

A further wrinkle to possible adverse possession claims in Ontario is the land titles system, because properties in land titles are exempt from adverse possession claims unless the adverse possession started before the property went into land titles. If you want to claim that extra strip, you have to prove the date that your adverse possession started was before the conversion out of land registry.

Cesia

Cesia is a real estate lawyer at Wall-Armstrong and Green, a boutique law firm in Barrie focusing on real estate and estates. When she's not online, she can usually be found in her garden.

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Student Housing in Barrie

January 17, 2012

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There is definitely a stigma attached to student housing. Some investors shy away from that market due to the high turnover rate and the idea that students will damage the property. There’s a new reality, and investors should take note.

In Barrie, there has been a lot of discussion surrounding the rentals around Georgian College. One year ago in January, I attended the Ward 1 Town Hall meeting hosted by Mayor Jeff Lehman and Ward 1 Councillor Bonnie Ainsworth. One of the primary concerns was the student housing situation in our neighbourhood. Many people who own homes near the College reported that many of the student houses were basically slums with disenfranchised and often seemingly non-existent landlords. This image can be changed, but we need some local investors!

The need for good student housing in Barrie is great. According to a Barrie Examiner article on rental housing, Georgian supplies 525 on-campus beds for students – less than 10% of the full-time student population! If you ever drive down Duckworth St, you will have noticed that, last year, two new student apartment buildings were built which visibly helps the lack of student housing.

Remember that college and university students are generally good citizens. I remember when I started living in off-campus housing at university about 10 years ago. It’s an exciting time, and living on my own was a big step toward my independence. Although we didn’t own the house, us four girls felt like we owned a small part of it; we had pride of renter-ship!

So many students are like us. They’re growing up, and they want to prove to themselves, their friends, and their parents (when they visit!) that they can take care of themselves.

If you’re considering buying an investment property, consider this: most students rent by the room. If you’re renting a small 4-bedroom house in Barrie, you may pay around $1500 a month. According to an employee from Georgian College’s Housing and Student Life, students generally pay about $450 per room on average. If you multiply that by four rooms, that’s $1800! Granted, it may cost you a bit more for upkeep than renting to a family, but that’s still a larger profit margin for you.

Here are some tips from Georgian College’s Housing and Student Life Department if you’re considering ANY rental property as an investment:

  • Pick up a copy of the Residential Tenancies Act (RTA) and take some time to read it and understand the rights and responsibilities of both a landlord and a tenant
  • Join a landlord association and understand what being a landlord means. It is important to understand the pros and cons of being a landlord
  • Pick up a copy of the City of Barrie’s Rooming, Lodging and Boarding House By-Law.
  • If after doing all of the above, the potential investor is still interested in becoming a landlord, then s/he should speak with City staff to make sure the property s/he is interested in can be licensed under the City By-Law

Certainly there are varying points of view on this potential investment. As with anything, make sure you do your research. There are even some financial incentives for you to become a student landlord in Barrie! There is no denying that Barrie has a rental shortage in general, but you can make the conscious decision to rent to students. Good luck!

Laura

Laura Keller of Century 21 B.J. Roth Realty is a real estate agent with a business philosophy of nurturing relationships with her clients. She will walk you through the process of buying, selling, or investing step-by-step so there are no surprises at the end of your transaction.

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