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Many Canadian homeowners pay too much for their homes because they are not getting the best mortgage financing available in the market.
The mortgage process can be intimidating for homeowners, and some financial institutions don't make the process any easier.
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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
Almost no annual growth for national HPI
The national HPI has grown at a below-inflation rate of 0.5% over the last 12 months, the smallest gain since November 2009. Moreover, the fact that monthly gains are reported for May and June does not mean that the market recently turned the corner. These two months typically register the strongest growth rates in a year. Indeed, the two latest rises were among the weakest in history for months of May and June. If seasonally adjusted, the national HPI would been down in both months this year. However, the weakness is not regionally broad-based. The national HPI was dragged down by 12-month home price declines in Western Canada metropolitan areas (Vancouver, Calgary, Edmonton and Winnipeg) and a tiny increase in Victoria. In Central Canada and in the East, home price growth ranges from decent to strong (left chart). This is consistent with the state of home resale markets. For example, the Vancouver market turned favorable to buyers at the end of last year, while the Toronto market remained balanced and Montreal’s market has never been this tight since 2005. That being said, a rebound in home sales recently occurred in Canada which was also felt in the largest Western metropolitan areas. This should help limit home-price deflation in these areas.
The Teranet–National Bank Composite National House Price Index increased 0.8% in June, a second gain in a row after an eight-month string without a rise.
On a monthly basis, the index rose in 8 of the 11 markets covered: Winnipeg (0.1%), Quebec City (0.3%), Montreal (0.8%), Toronto (1.3%), Halifax (1.5%), Hamilton (+1.6%), Victoria (+2.1%) and Ottawa-Gatineau (+2.2%). The index was down in Calgary (-0.1%) and Vancouver (-0.3%), and flat in Edmonton.
From June 2018 to June 2019, the Composite index rose 0.5%, the smallest 12-month gain in ten years. The HPI declined in Vancouver (-4.9%), Calgary (-3.8%), Edmonton (-2.6%) and Winnipeg (-0.4%). It was up in Victoria (0.3%), Quebec City (1.5%), Halifax (2.7%), Toronto (2.8%), Hamilton (4.8%), Montreal (5.4%) and Ottawa-Gatineau (6.3%).
Source: National Bank Financial Markets; Marc Pinsonneault
NORTHERN STAR (FOR NOW...)
In contrast to the US, Canadian growth is accelerating sharply going into the second quarter, following a solid gain in domestic demand to start the year.
Fast, and accelerating, population growth, and remarkably strong employment growth are providing a solid underpinning to consumer spending and the housing market.
Positive export data suggest that the ongoing strength in domestic demand will be buttressed by net exports in the second quarter, and possibly beyond.
Canadian inflation is at the Bank of Canadas target, in sharp contrast to the US, where it has moved away from the Feds objective. This gives the BoC room to keep rates on hold if inflation remains on target.
Downside risks remain important and are all linked to US-centric developments, with worries about US trade policy ongoing despite the pause with China.
Recent Canadian developments stand in sharp contrast to events in much of the rest of the world. Whereas US growth is clearly decelerating, Canadian growth is on an upswing, with recent indicators pointing to a very sharp rebound from a somewhat sluggish start to the year. Canadians appear to be, for the time being, largely insulated from the broader malaise facing the global economy as consumer and business confidence has improved sharply in recent quarters, owing to strong sales and job creation. While there are a number of factors suggesting that the growth rebound observed will persist through 2020, there is a risk that a divergence between Canadian and US outcomes may not last.
Source: Scotiabank Economics