Tag Archives: amortization

More Mortgage Changes Coming?

May 13, 2013

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The OFSI (Office of the Superintendent of Financial Institutions – crazy-long name, eh?) is thinking about continuing to tighten the mortgage rules in this country. Last year the reduced the maximum amortization of insured mortgages from 30 to 25 years (which had previously been reduced from 40 to 35, then from 35 to 30). Now they’re considering lowering amortizations on uninsured (or “conventional”) mortgages (mortgage insurance is mandatory for mortgages with less than 20% down). Canada’s Finance Minster, Jim Flaherty, has been taking steps to curb the growth of consumer debt and inflated housing prices, and he’s using the mortgage-insurance rules as his tool of choice.

But should the OFSI really be intervening when it comes to conventional mortgages in which only the lenders (not the mortgage insurers) are taking the risk? There are many legitimate reasons for conventional mortgages to have extended amortizations (up to 35 years is common) – the oft-used reason being cash flow. With a longer amortization, payments are lower allowing those with more than 20% equity in their homes to spend or invest money elsewhere.

What do you think? Is the OFSI and Finance Minister Jim Flaherty being prudent, or have they already gone to far?  Let me know what you think in the comments below.

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 Little Off the Top

April 29, 2013

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There’s a fantastic article on CanadianMortgageTrends today (read: A Little Extra) that touches on how much could be saved if as little as $20 was added to a monthly mortgage payment. For fun, here are a couple of examples to show how far a little extra money could go (for all examples, assume a mortgage size of $200,000, a rate of 2.99% and a 25-year amortization).

Example #1:
Prepayment Amount: $25/month
Interest Savings: $3,464.11
Amortization Savings: 11 months

Example #2:
Prepayment Amount: $50/month
Interest Savings: $6,644.71
Amortization Savings: 21 months

Example #3:
Prepayment Amount: $100/month
Interest Savings: $12,289.53
Amortization Savings: 40 months

So even with an extra payment of $25/month over 25 years, you’d save almost $3,500 in interest, and shave almost a full year off your mortgage. If you could squeeze out $100 extra per month on your mortgage, you’d take off almost 3.5 years from your mortgage, and save over $12,000 in interest!!

If you think you can spare a little extra each month, the savings can really start to add up quickly. If you’d like to discuss how you can start chipping away at your mortgage, contact your favourite mortgage broker, and we’d be more than happy to help you put together a plan (for FREE!) to pay off your mortgage faster (and save you a bunch of money!).

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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Interest Adjustment – Getting Up to the Starting Line

February 13, 2012

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Article courtesy of MCAP.

 

The best way to understand the concept of interest adjustment is to start with knowing and understanding the term “Interest Adjustment Date” or IAD. Every fixed rate mortgage has an IAD and the name implies that this is the date upon which an interest adjustment will take place but that’s not really what it is.

The Interest Adjustment Date represents the beginning of the amortization period. For a mortgage with an amortization of 25 years, for example, it will be fully repaid exactly 25 years from the Interest Adjustment Date. It also represents the date upon which semi-annual compound interest calculations begin. Think of it as the “starting line” in a race. Many mortgage advances (closings) take place before the IAD – in some cases, close to a full month before the IAD. The Interest Adjustment applies to this period between the advance date and the Interest Adjustment Date.

Let’s consider an example: Our borrower, Barry, is closing the purchase of his new house on January 10th and to do this, he is borrowing $200,000 at 6% for a five year term based on a 25 year amortization. He will make his mortgage payments monthly on the first of each month. Because he has chosen to pay monthly on the first of each month, Barry’s 25 year amortization period will actually begin on the next “first day of the month” – in this case, February 1st. Unlike renting, where rent is paid in advance (tenants pay for the month of January on January 1st), mortgage payments are made in arrears – or for the period which has just passed. Barry will therefore make his first mortgage payment (with blended principal and interest) on March 1st for the month of February. That payment will reduce his principal balance as will all future payments, until his mortgage is fully paid exactly 25 years later.

But Barry’s mortgage company will advance the funds to him on January 10th – or 21 days before his Interest Adjustment Date. Will Barry receive the benefit of having the funds for three weeks without having to pay interest in exchange for the benefit of having the funds? Obviously, the answer is no. He will have to pay interest at 6% on the money he borrowed for this 21 day period. The amount will be $690.41 and this will cover the period required to get Barry up to the “starting line” of his 25 amortization – or his IAD which is February 1st. He will pay only interest during this period to compensate his lender for the use of the money. The interest which Barry will pay during this period is known as an Interest Adjustment. For Barry, it will be like having an interest only mortgage for a period of three weeks. He will have an amortizing mortgage after February 1st.

Depending on which lender Barry has chosen to deal with, there are three possible ways for his Interest Adjustment to be paid. Different lenders have different policies on how Barry would be required to pay the $690 he will owe:

  1. Barry could pay the Interest Adjustment to his lender on closing – either by making the payment directly to his lender or by way of the lender deducting the Interest Adjustment from the mortgage advance. If it is deducted from the advance, his lender would only advance $199,310 and Barry would make his first mortgage regular payment on March 1st. Since the amount he is receiving from his lender is less than the face amount of his mortgage, Barry will have to ensure that he has enough to cover the balance due on closing for his house purchase. He may have to simply provide the $690 himself anyway.
  2. The Interest Adjustment of $690 could be added, as a one-time adjustment, to his first regular mortgage payment on March 1st. Barry’s lender may only allow this option if the Interest Adjustment is very small as they will not receive it until a month after it is really due.
  3. Barry’s lender could require him to make a one-time interest payment of $690 on February 1st. This could be by automatic withdrawal from the bank account Barry chooses to make his future mortgage payments or by way of a manual cheque.
The only scenario under which an Interest Adjustment would not apply is if Barry’s closing date and his Interest Adjustment Date were the same date. In this case, if his closing date was February 1st, then his amortization would begin on the day of closing and Barry would make his first regular mortgage payment on March 1st. With many lenders offering flexible payment frequencies and with borrowers often choosing payments dates which correspond to their payroll deposit dates, very few mortgage closings actually take place on their Interest Adjustment Dates. Most borrowers will find themselves having to deal with an Interest Adjustment to get themselves up their amortization starting lines.

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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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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Consumer and Industry Perceptions

January 16, 2012

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As part of its commitment to understanding perceptions about the Canadian mortgage industry, CAAMP (Canadian Association of Accredited Mortgage Professionals) surveyed both consumers and industry members this past fall. I thought it might be interesting to look at some of the results of that survey (my comments in italics).

  • Canadians have approximately 68% equity in their home, compared with 43% in the US (probably a combination of our financial prudence as a nation, and our continually increasing house prices)
  • 71% of homeowners say they are in a good position to weather a potential downturn in the housing market
  • 81% of Canadians would classify mortgages as “good debt” (good debt is called good, because many people believe that the outcome justifies borrowing the money)
  • 84% of mortgage-holders could withstand a mortgage payment increase of $200 per month (this is good because with the rock-bottom rates we currently have, interest rates will eventually have to increase, which will mean increased mortgage payments)
  • Among those who have paid off their mortgage, the average home was paid off 7 years quicker than the original amortization
  • In the past year, nearly four times more people made accelerated payments (36%) than withdrew funds from their mortgage (10%) (a clear indication that Canadians continue to strive to pay down their mortgages more quickly than scheduled – also due to the stricter refinance rules introduced last year)
  • 27% of outstanding Canadian mortgages originated through a mortgage broker (33% of first mortgages, but only 20% of renewals/renegotiations) (great to see more 1st-time home buyers use a mortgage broker, but mortgage brokers definitely need to make improvements helping more people get better rates and terms on their renewals and renegotiations!)
  • 90% of mortgage broker customers are satisfied with their mortgage experience – higher than the overall industry average of 87%
  • Customers of mortgage brokers expect to pay their mortgage off 5 years quicker (compared to 3 years among bank customers) than the original amortization (it’s like I mentioned last week – The Best Mortgage Rate is Not Always the Best Option – advice from a professional mortgage broker can help you pay off your home faster!)
  • The average mortgage broker customer received 2.8 mortgage quotes, significantly higher than 1.8 among bank customers (mortgage brokers do the shopping around for you – that’s how we get you the best rates and options: more selection!)
  • 82% of customers found out about their mortgage broker from one or more referral sources (if you’re happy with your mortgage broker, make sure to tell your friends and families about them, too – let us help everyone you know save money on their mortgages!)

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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