Ajax Pickering Real Estate Blog

James Pasternak, Financial Post

It is a legal document that stretches about 30 pages and runs about 10,000 words. Its execution takes no more than a couple minutes and when the ink dries on the signature lines, more times than not it is never read and gets slipped into a file folder, largely forgotten.

But despite its casual handling, the residential mortgage agreement governs the largest debt of over 5 million Canadians and within its fine print are the provisions that can make or break a household’s financial future. There’s a lot at stake. At the beginning of 2004, Canadians held $517.7-billion in mortgages.

“I think most of the major bank representatives do a good job of explaining these provisions to their clients but I think most people zone out and don’t really listen. All they think about is getting a mortgage at 3.8% and ‘I want to get this done’,” says Len Rodness, Partner, of Toronto-based law firm Torkin Manes (www.torkinmanes.com)

But beyond the interest rate there are a wide range of options and clauses in the mortgage agreement that deserve scrutiny. In a competitive lending environment, shopping for the right mortgage can bring significant savings and peace of mind through the amortization period.

Take the case of Hamilton, Ont., couple Kathy Funke and Dan Perryman. When they were shopping for a home in 2003, the interest rate was the top priority. They also wanted flexible prepayment options and accelerated weekly mortgage payments. To leverage the competitive interest rate they received, they went with a variable rate mortgage. They paid off a $230,000 mortgage in 5 ½ years.

“The power in these things comes from people who know how to manage [the] various privileges. It has a huge [savings] effect on amortization….The ideal thing is to understand what your privileges are and then combine them to your advantage — to what you can afford to do; to fit your lifestyle and ability to pay,” says Jeff Atlin of Thornhill, Ont. based Abacus Mortgages Inc.

And privileges there are. You just have to shop for them.

Accelerated Payment Options: Getting the loan paid earlier

It just seemed like yesteryear when everyone was paying their mortgage on the 1st of every month. Now, in addition to the first of the month option, some of the more common options are accelerated weekly and biweekly or semi-monthly options.

These frequency options result in long term savings. For example if one selects the accelerated biweekly option one is making 26 payments in a year, the equivalent of two prepayments per year over the monthly option. When a $150,000 mortgage amortized over 25 years is paid under an accelerated bi-weekly option, the debt is retired in 21 years and the interest savings are around $18,000.

Toronto resident and electrician Karl Klos, 26, selected “weekly rapid” payments on a mortgage amortized over 35 years. The mortgage payments are made each week but he added the “rapid” option by increasing the amount paid. Mr. Klos says that the payment frequency will pay off his mortgage in 25 years instead of 35 years.

“I can’t understand why anybody would do monthly payments anymore now that the banks offer the ability to have weekly payments. It may be a cash flow situation. If you do a weekly mortgage payment it could save you a significant amount of money,” says real estate lawyer Len Rodness.

Restating mortgage agreement vows

It doesn’t take long after one signs a mortgage agreement to hear from a neighbour or friend that they received a better rate. So when you dig out the mortgage agreement see if there’s a clause that allows borrowers to renegotiate their agreement before the end of the term. The bank might use a model called “blend and extend.” For example, if one has a $100,000 mortgage at 6% mortgage with two years to go they might blend it with the current five year rate of 3.79%. So according to mortgage broker Atlin when they average out 2/5 of the mortgage at 6% and 3/5 are at 3.79%, the customer will get a new reduced rate of about 4.6%. But the borrower is tied to the bank for another 5 years.

Putting spare cash against the mortgage with no penalty

Almost all mortgage agreements have options for mortgage prepayment without penalty. Klos’s mortgage agreement allows prepayments of up to 15% of the annual balance. Most financial institutions provide prepayment options in the 10-20% range. Some lenders allow borrowers to make the prepayment any time during the year while other agreements restrict the prepayment to the anniversary date.

Also, some financial institutions allow customers to make multiple smaller prepayments during the year as long as they don’t exceed the annual limit. Funke and Perryman were able to retire their $230,000 mortgage in 5 ½ years primarily because of the prepayment provisions in their mortgage.

Coming up with more money for each payment

Some lenders will allow borrowers to increase the payments without penalty. Depending on the wording of the mortgage agreement the increased payments can range from around 15% to 100% of the current payment. So if one is paying $1,000 per month under the 15% rule, a borrower can raise it to $1,150 per month. Klos’s weekly rapid payment plan was based on him raising the weekly payments by 5%.

“Payment and amortization are a function of each other. Any time you raise the payments you shorten the amortization; any time you shorten the amortization you raise the payment,” says Mr. Atlin.

The mortgage prenuptial: Penalties for getting out of your mortgage

“A mortgage is a contract first and foremost. It is a contract between a borrower and the lender,” Atlin says. And if someone hasn’t felt that cold business approach during the course of their mortgage, they certainly will if they try to leave early. Most borrowers pay out their mortgages when they sell their house, win a lottery or are offered a better interest rate by another company. Until recent years, the standard penalty for breaking a mortgage agreement was three months of interest. Paying out a $200,000 mortgage could amount to a $2,500 penalty.

In many current mortgage agreements, the penalty for an early exit (and not extending) is either three months of interest or an interest differential, whichever is greatest.

The mortgage differential penalty can be quite expensive. If a mortgage is at 5% interest rate and you have three years left in your term, the bank will use the difference between the agreement rate and the current market rate to calculate the penalty. Using the 5% case above, let’s say the current 3-year mortgage is available at 3.5%. The bank will charge the difference between 5% and 3.5% for the balance of your term.

Bank customers who have an open mortgage with a variable rate can usually pay them out with little or no penalty. Some mortgages are closed for the first few years and then revert to an open option. The penalties, if there are any, would be much lower once the mortgage converts to an open one. If one can, it would be best to wait until the mortgage kicks into open status.

When paying out the mortgage try to have some of it calculated as your annual no-penalty prepayment option. Therefore, if you are paying out a $200,000 mortgage and you also have a 20% per annum prepayment option you might be able to save penalties on $40,000. If the mortgage prepayments can only be done on the anniversary date, make sure that is the day you select to pay out the mortgage.

Mortgage Lifelines

Mortgages are often signed and sealed with the borrower having every intention to pay. However, the world is paved with best intentions and recessions are everyone else’s problem until the boss comes into your office with the bad news.

“That is something that nobody turns their attention to at the time. The original document is done. The legal issues are in that original document. For a practical point of view given the state of the economy these [clauses] might be something beneficial,” said Len Rodness of Torkin Manes.

Some mortgages include a Rainy Day option. This option allows the borrower to skip one principal and interest payment each mortgage year. The interest portion of the skipped payment or payments will be added to the outstanding principal balance.

Changing amortizations

Although financial institutions can change the amortization with the click of a mouse, they are reluctant to do so. In fact, some say outright that they don’t allow it and this is written into the mortgage agreement. If there are any requested changes it’s much easier to go from a higher number (lets say 25 years) to a lower number (lets say 15 years), than the other way around. But the inside scoop is not to take no for an answer. If you are looking to increase the amortization, keep going up the chain of command until the CEO says no.

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Contact the Jeffrey Team for more information  -  416-388-1960

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By Sharon Singleton, QMI Agency

Canada’s real estate market showed no sign of losing steam in February, with housing starts rising faster than expected and a new survey showing 10% of Canadians expect to buy a home in the next two years.

Seasonally adjusted housing starts were 196,700 in the month, up from 185,400 in January, according to figures from the Canadian Mortgage Housing Corp. That was above analysts’ forecasts for a 190,000 gain.

RBC’s 17th annual home ownership study found that the number of Canadians saying they are very likely to buy a new home rose from 7% two years ago to 10%. The number of people who view their house as a good investment rose to a 12-year high of 91%.

Canada’s real estate market has been one of the main drivers of economic growth, with housing construction helping to power a 5% expansion in gross domestic product in the fourth quarter.

Some economists have forecast that the property market will begin to cool from the second half, when the Bank of Canada is expected to begin raising interest rates and demand and supply of available housing becomes more balanced.

“The gain in February housing starts was concentrated in the multiple starts segment, particularly in Toronto,” said Bob Dugan, chief economist at CMHC’s Market Analysis Centre.

Urban multiple starts, or condos, increased by 19.1% to 89,900 units while single urban starts increased by 0.5% to 89,200 units.

Urban starts rose 28.6% in Ontario, 14.3% in Atlantic Canada, 10.8% in the Prairie region and 8% in British Columbia. In Quebec, urban starts dropped 14.1%.

Rural starts were estimated at a seasonally adjusted annual rate of 17,600 units in February.

According to the RBC poll, younger Canadians between the ages of 18 to 24 are likely to lead the market. About 15% said they were likely to buy, almost double the number in 2009.

About 60% also believe housing prices will continue to rise this year, up from just 25% this time a year ago. They also expect mortgage rates to rise, with two-thirds expecting to have to pay more, the bank said.

That belief is being reflected in the choice of mortgage, with 16% opting for a variable rate loan compared with 20% last year.

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Contact the Jeffrey Team for more information  -  416-388-1960

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By Ka Yan Ng – Reuters

Canadian housing starts rose a better than expected 6.1% in February, reinforcing views that the residential housing sector is a major force pulling the economy out of recession.

Starts on new homes rose to a seasonally adjusted annualized rate of 196,700 units in February from a downwardly revised 185,400 units in January, Canada Mortgage and Housing Corp said on Monday.

The number of starts in February surpassed the average forecast of analysts for 190,000. The January figure was a slight downward revision from the previously reported 186,300 units.

“Overall, with the better than expected gain in residential construction activity in Canada, it appears that the new homes market is slowly coming back to life and may finally be benefiting from the resurgence in overall housing market activity,” said Ian Pollick, economics strategist at TD Securities.

The Canadian dollar rose to a six-week high of 97.49 cents, following the housing data. Its currency pared gains as details showed most of the strength was due to a 19.1% surge in the volatile multi-dwelling group.

That group, which includes high-rise condos, soared to 89,900 units in the month. The closely watched single-family home component showed starts increased by a muted 0.5% to 89,200 units. Still, single-family housing starts have advanced for 10 straight months.

The mounting activity was in line with a strong rebound in sales and prices in the broader housing market, spurred by consumer confidence and low interest rates, after the market hit bottom during the global financial crisis.

Analysts expect the market has the legs to advance further this spring before the arrival of new mortgage rules in April and changes to provincial sales tax regimes in British Columbia and Ontario in July cool things down a bit.

“Housing starts continue to chase surging home sales, which appear to have a green light through the spring,” said Robert Kavcic, an economist at BMO Capital Markets. Along with the tax and mortgage rule changes to come, he said he expected interest rate hikes should temper demand.

Meantime, Canadian home-buying intentions for the next two years has risen to 10% from 7% two years ago, according to a home ownership survey by Royal Bank of Canada.

Six in 10 Canadians also believe home prices will increase this year, up from 25% in 2009, the survey found. Similarly, 64% think mortgage rates will be higher over the next year, up from 33 per cent a year ago.

The RBC study also found that 91% of homeowners believe a home is a good investment, the highest level in 12 years, while 26% expect their home to be their primary source of income when they retire.

Regionally, CMHC said Ontario led February’s gain in housing starts, jumping 28.6% from January, followed by a 14.3% advance in the Atlantic provinces. The Prairies rose 10.8%, while British Columbia was up 8%. Only Quebec saw a decline, with a 14.1% fall.

Rural starts were estimated at a seasonally adjusted annual rate of 17,600 units in February.

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Contact the Jeffrey Team for more information  -  416-388-1960

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