Nick Holloway

By Nick Holloway - When borrowers are assessing their mortgage options with a mortgage professional, one consideration is how long the borrower will need to repay the mortgage loan. This repayment schedule is referred to as an amortization of loan, which spreads the repayment of principal and interest payments over multiple periods until the principal loan amount is reduced to zero. In most instances, mortgages are offered with a 25-year amortization, although this can be made longer or shorter depending on the options available for the specific mortgage product. It is important to differentiate the amortization period from the term of the mortgage, which in Canada is most commonly over a 5 year term, after which time the borrower will be required to renew into a new term or move lenders in order to continue with the amortization of the remaining principal balance. How are my mortgage payments determined? The borrower is provided with options to repay the mortgage weekly, bi-weekly or monthly. For ease of example, I will focus on a monthly payment over a 25-year repayment period. Given a 5-year term of the loan, we can determine the borrower will make 60 monthly repayments of principal and interest payments over the period. Assuming an initial principal amount is advanced on the first day of a given month and totals $400,000 with a fixed rate of 3% compounded semi-annually, the first scheduled payment will be due one calendar month following the advancement of the loan, calculated on the principal outstanding amount of $400,000. The payment would total $1,892.98 and is broken down into a principal amount of $899.18 and interest amount of $993.81, which results in a lower principal amount of $399,100.82. For the second monthly payment, the interest component is calculated on this lower principal amount, so while the payment amount of $1,892.98 remains unchanged, the principal amount is increased to $901.41, with the corresponding interest amount reducing by $2.24 to the amount of $991.57. If we fast forward to the 60th payment at the end of the 5-year term, the proportion paid to principal has increased to $1,040.94, while the interest portion is reduced to $852.04, with an outstanding principal balance of $341,898.42. We can determine in this case that principal has been reduced by $58,101.58, or alternatively by 14.53% from the original $400,000 balance. The interest paid over the corresponding period totals $55,477.34. What if I were to defer my mortgage payment, what happens then? If a borrower needs to defer their mortgage payment to manage their immediate cash-flow requirements, this results in no principal and interest payments are applied to the loan balance at the scheduled payment date(s). The interest is still accruing on the loan however, so it should be expected that on the scheduled payment dates, interest continues to be applied to the loan balance in a similar way to a credit card or line of credit balance would, which results in an increase in the principal amount until a time that principal and interest payments are able to be resumed. To refer back to our original example with the balance at $400,000 and assuming the deferral is made at this point, we should expect the new mortgage balance will increase by $993.81 to equal $400,993.81, in effect this is similar to the above amortization schedule but working in reverse. For the following month, the interest on the new balance increases by $2.47 to $996.28, and assuming this is continued for a 6-month period, the new interest totals $6,000 and resulting principal mortgage balance equals $406,000. The borrowers defined benefit is an increase in cash flow of $11,357.88 realized over the 6-month period which they otherwise would have been putting towards their mortgage payments according to my initial example. If we are to capitalize this interest to the mortgage principal, we want to work out the new mortgage amount going forward. If we assume the repayment is calculated over the same 25-year period, the new payment amount equals $1,921.38, or alternatively if this were calculated over a twenty four and a half year basis, the new payment equals $1,947.81. The increases from the original payment amount of $1,892.98 is $28.40 or $54.83 respectively. What should I do next? In summary, it is important to understand the costs and benefits of deferring your mortgage. If there is an immediate need to increase cash flow to replace a loss of earnings given the current Covid-19 situation, the flexibility of being able to apply to your lender for a mortgage payment deferral will likely come at a substantially lower interest rate when compared to unsecured borrowing options such as through credit cards or lines of credit. The payment deferral provides temporary relief, and it is with anticipation that earning potential will improve following the initial shock and the economy begins to function normally again once restrictions on physical distancing are able to be lifted. Should there be an opportunity in the future to increase your mortgage repayments to reduce your overall interest costs, this can be achieved by utilizing the pre-payment features offered with your mortgage.

By Nick Holloway - One of the first steps of considering a mortgage for the purchase of a owner-occupied property, is the amount of funds available to make the purchase. Commonly referred to as a down payment, this is a percentage of the purchase price required for completing the purchase, with the remaining portion as the principal balance of the mortgage loan. There are primarily two distinct categories of down payment in Canada, a down payment of between 5% and 20%, defined as a high ratio or insured mortgage. Alternatively, with a down payment greater than 20%, this is defined as a conventional mortgage, which is further categorized as either an insurable or uninsurable mortgage. You may alternatively see the amount of the down payment expressed as a loan to value (LTV) ratio, in which case an LTV between 80% and 95% is classed as high ratio, and an LTV less than 80% is classed as a conventional mortgage. Insured Mortgage Should the borrower require a high ratio mortgage, it would be necessary for the borrower to pay a mortgage default insurance premium. There are currently three mortgage insurers in Canada - CMHC, Genworth and Canada Guaranty, who effectively guarantee the repayment of the mortgage to the lender, in case of default by the borrower. It is primarily for this reason that you see the most competitive mortgage rates offered in this space. There are several specific guidelines for all insured mortgages, most notably the current regulations state an insured mortgage cannot have an amortization period of more than 25-years and the property price must be under $1 million. The premium which is charged to the borrower is tiered depending on whether the down payment is up to 5%, 10% or 15% of the property price. Specifically looking at the premium for a 5% down payment, the mortgage default insurance premium is currently 4% of the total mortgage amount and this amount can be added, or capitalized, into the mortgage amount. To run some numbers, on a $400,000 property with a 5% down payment and a fixed 5-year term at a rate of 2.69% over a 25-year amortization period, the mortgage would total $380,000 and results in an insurance premium of $15,200 giving a mortgage amount totalling $395,200. The good news is that after around 16-17 months of repaying the scheduled interest and principal payments, the borrower should expect the contributed principal payments to have paid off the mortgage default premium in full (i.e. remaining principal of around $380,000), and by the end of the 5-year term, the remaining principal is reduced further to a balance of $335,760 from the original total mortgage amount. If we assume a modest appreciation in the property of say $20,000 over the same five-year period, the resulting LTV is under 80% at this moment in time. Insurable Mortgage With a conventional mortgage, most mortgages fall into an insurable bracket, which means the mortgage can be default insured and is required to follow similar insurer guidelines mentioned above. However, the difference is the lender has the option to purchase mortgage default insurance in the back end, commonly referred to as bulk or portfolio insured. With the lender purchasing the applicable insurance, this provides the lender the ability to securitize their mortgage loans which can be sold to investors, therefore reducing default risk which in turn lowers funding costs and those savings are passed to the borrower. The rate offered on insurable mortgages are typically higher than the insured mortgage, however, rates offered by a number of lenders are tiered based on LTV and become more favourable with a lower LTV ratio. This may provide the borrower a good opportunity to switch, or transfer, their existing mortgage to a new lender at the end of their term, to find a lower rate at the time of mortgage renewal. Uninsurable Mortgage The final mortgage to consider is the uninsurable mortgage which doesnt fit any of the above criteria, such as a purchase with an amortization of over 25 years or property value in excess of $1 million. In addition, should the borrower decide to either refinance or extend the amortization period of an existing insured or insurable mortgage, either or both actions would make the new mortgage uninsurable under current guidelines. A refinance, also referred to as an equity take out (ETO), occurs when a borrower withdraws equity from their property and increases the remaining principal of their mortgage. This differs from the definition of a switch/transfer mentioned above, where there is no material change to the mortgage amount or repayment duration. In summary, it is important to seek the counsel of a mortgage professional who is best positioned to assess the specific needs of your circumstances and will help to advise you on the best course of action for both your initial mortgage, as well as subsequent mortgage renewals and overall debt considerations for the lifetime of the remaining loan.