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How much?!?! Mortgage pre-payment penalties explained.
If you were hoping the Canadian government had introduced a new law standardizing mortgage penalties, youll be sad to learn no changes yet. Rumours swirl that something has to or will be done in regards to this issues. But, until that time were stuck with what we have. So, it is in your best interest to understand how pre-payment penalties work.
Youll be shocked to know that the average Canadian breaks their mortgages every 3.5 years, and the most common term people take is 5 years. Its easy to see why understanding mortgage penalties can end up saving you thousands. Of course, there are some simple strategies to avoid a penalty:
Wait until your maturity date to refinance, buy and sell, or switch lenders.
Porting Most mortgages include a portability features that essentially allows you to transfer your mortgage to a new property.
Early Renewal Some lenders will allow you to renew up to 6 months early without penalty.
However, when these situations dont line up, or arent available, clients are forced to pay what sometimes can be a massive mortgage penalty. For example, if you started a new mortgage exactly one year ago when rates were around 2.99% for a 5 year fixed closed term and you wanted to pay out your loan in full, here are some numbers to consider:
BMO - $4,640.00
MCAP - $2,167.00
These calculations can be done at home if you want to test your individual mortgage. Each financial institution is now required to disclose a pre-payment calculator or formula on their websites to allow Canadians to calculate their own penalty.
So, youre probably wondering how these penalties are calculated? Well its a method of two formulas, Interest Rate Differential (IRD), or 3 Months Interest. With a Variable Rate Mortgage, it is always 3 months interest. If you have a fixed mortgage, its the IRD or 3-Months Interest and it always depends on which is greater. I should note that No Frills Mortgages, or super low rate mortgages can sometimes have completely different ways of calculating a penalty. Beware of what youre signing!
IRD What it means..
Interest rate differential is the difference of your current mortgage rate and what the lender could offer in todays current market. For example, if you have 4 years left on your mortgage, the lender will compare their rate to what their current 4-year rate is.
This calculation differs between lenders in regards to how they determine what rates to compare. Banks have posted and discounted rates. If you review any mortgage documents from the Big 6 Banks, it shows you the discount offered from the posted rate.
Right now, Scotabank has a 5 year rate of 4.79%, however, you could walk in there today and get 3.09% on the same 5 year term. But, when they go to calculate the penalty, dont think they wont consider the original discount. This is huge when picking your lender, especially if you know you may need to break your mortgage.
Other lenders, especially those available through the broker channel, compare rates at face value. Meaning, the discount rate is compared to the discount rate. That is what you saw MCAP (above) with the lowest mortgage penalty.
In essence, when selecting a mortgage lender, be sure to consider all your options. It could end up saving you thousands.
Mortgage Agent in Kingston, Ontario, License #M13000201
Housing Market Digest by Will Dunning, Economist for Mortgage Professionals Canada
The Office of the Superintendent of Financial Institutions (OSFI) now requires that all residential mortgages by federally-regulated lenders must be stress-tested, at two percentage points above the contract interest rate (or the 5- year posted rate, if that is higher). In combination with the requirements for mortgage insurance, about 90% of all new mortgages will be tested.
This can be expected to reduce housing activity by 10-15%. It is on top of the impact from recent rises for mortgage interest rates (another 5-10% drop in activity). The combined 15-25% drop in housing activity will affect the broader economy.
In two years, employment could be 150,000-250,000 lower than it would otherwise be. There is a risk that house prices will fall. In a modern economy, a sustained drop in house prices is one of the most dangerous things that can happen: as happened in the US a decade ago, falling house prices can turn into widespread economic decline.
Resale activity recovered a bit more in September, to 492,900, due to partial rebounds in BC and Ontario. Activity is flat in most other areas.
CREAs House Price Index was flat in September. The year-over-year change is now 10.7% (down from the peak of 19.7% that was seen in April).
The sales-to-new-listings ratio (SNLR) was 55.7% in September, slightly above the balanced market threshold of 51%. This indicator points to an outlook for stable prices (at worst). But, as noted, OSFIs stress test policy creates a risk of falling prices.
We should, in general, expect that resale activity will trend upwards over time, because the population is growing and the housing inventory is expanding. Therefore, it is useful to look at sales on a per capita basis. Recent activity is below the long-term average.
Employment increased by 35,000 in October
In October, employment rose for youth aged 15 to 24, while it was little changed for the core-aged population of 25- to- 54 year-olds, and for people 55 and older. The largest employment increase was in Quebec, followed by Alberta, Manitoba, Newfoundland and Labrador, and New Brunswick. At the same time, there was a decline in Saskatchewan.
Employment rose in several industries, led by other services; construction; information, culture and recreation; and agriculture. Employment declined in wholesale and retail trade.
The number of private sector employees increased in October, while public sector employment and self-employment were little changed.