27 Jul

Renewing Your Mortgage

Mortgage Renewal

Posted by: Brett Nugent

Mortgage Renewal

Is your mortgage coming up for renewal soon? Are you prepared to renew your mortgage? Many people are not sure what to do when their mortgage comes up for renewal. They simply wait for their lender to call them and then accept the first offer they are given. This is ok, but it is not always the best possible solution for you. There are many variables to consider when renewing your mortgage. This may be able to help you understand the process a little more when your mortgage is up for renewal.

Things to Consider Before Renewing Your Mortgage

One thing to consider when renewing your mortgage is the rate you are being offered. Rates can vary from lender to lender. Every lender has a variety of mortgage products and each product can be different from the next depending on the situation. Things that affect mortgage rates include; length of the term, fixed vs variable, if the property is owner occupied or a rental, in the case of a rental how many units there are, etc. People often feel like they should just renew their mortgage keeping the same product they were already in. However, lifestyles and personal life stages can mean that a different mortgage product may suit you better. Let’s explore the different situations you should think of when renewing your mortgage.

Mortgage Renewal Date

The first thing to understand is when your renewal date actually is. Lenders often call a few months ahead of your renewal date to lock you in to a new term. While this is not a bad option, there are sometimes better solutions available. Lenders want to retain your business, but a mortgage professional can often find a solution more suited for you. Most lenders have a 90 – 120-day rate hold. Rates can change a lot in 120 days. You can benefit from speaking with a professional ahead of time so you may get a lender commitment with a rate hold ahead of your renewal date. If rates go up prior to renewal, you will still have a rate that was locked in before. If rates decrease you simply get the updated rates being offered. Either way it is best to start looking into your mortgage several months before renewal.

Mortgage Term

The mortgage term is also very important to think of upon renewal. The standard term most people select is a typical 5-year term. If you plan to remain in your home for a long time and are getting a good rate, this is a good option. But what if you don’t plan to stay in this home for 5 years? Perhaps you plan to upgrade to a different home in the near future. If you have kids maybe a home closer to schools or with a larger property is needed. Maybe you plan to refinance soon within a couple years to pay debts or renovate your home.

It’s always difficult to know what your future has in store, but if you know that your life will have many changes happen within 5 years, it is a good idea to look at alternative solutions when it comes to your mortgage term. You can sign a 2- or 3-year term if you plan to move soon. A shorter term may also be ideal if you plan to refinance in the near future. The reason for doing this is to avoid paying hefty break penalties when you sell or refinance your home. Instead, you use the shorter term to your advantage to sell or refinance at renewal.

Fixed vs Variable Rate

What if you aren’t sure of your future plans for the next 5 years? Or perhaps you plan to sell/refinance, but you are unsure when you might make that decision. This can sometimes help you decide if you prefer a fixed or variable rate. Fixed rates can give you peace of mind knowing your rate will not change for the entire term of your mortgage. However, breaking your mortgage early in a fixed rate can result in high penalties. This can make the timing of a sale or refinance difficult.

Variable rates are an alternative that can be beneficial if your future plans are uncertain. You can break your mortgage at any time throughout the term and pay much less in penalties for doing so. This allows you to remain flexible with your mortgage. The downfall being that your payments can fluctuate and this can make monthly budgeting difficult. (See post on Fixed vs Variable for more info about these rates)

Your mortgage rate is obviously a big deciding factor when it comes to choosing a lender. However, it should not be the only determinant in your decision. There are many different things that you should consider when you renew your mortgage. Some of the more important information to understand before renewing your mortgage is covered here. For more information about your mortgage renewal situation, call me today and set up an appointment. I’ll make sure you are prepared for the future and get the best possible solution available!

7 Jul

Fixed Rate vs Variable rate

Rates

Posted by: Brett Nugent

Fixed vs Variable

Ever wonder what is better, a fixed or variable rate mortgage? There is no right or wrong answer to this question. The fact is, when it comes to mortgages, everyone’s situation is different. What might be best for your situation may be different for someone else’s. It’s important to understand the differences so that you can make the right choice when it comes to YOUR mortgage. In order to decide what the right rate is for you, first you need to know how each type of rate works.

Fixed Rate

Let’s start with a fixed rate mortgage. As you may already know, a fixed rate mortgage means that your rate is fixed and does not change. It remains constant for the entire term of your mortgage, therefore so does your mortgage payment. Your payments will not change until your renewal date unless you make any changes to the mortgage prior to that. Fixed rates are calculated by the lenders and change as prime rate changes. However, these don’t effect your rate once you have a rate hold or are locked in to a contract.

Variable Rate

The alternative to a fixed rate is a variable rate. How a variable mortgage works is by the lender offering a certain discount rate which is subtracted from the prime rate or the lender’s base rate. The resulting amount is your interest payment. To recap: Variable Rate = Prime rate – discount rate. As you can see from the formula, as the prime rate changes so does your interest payment.

For example: if prime rate is 3.2% and your lender is offering a discount of 1% your current rate is as follows. 3.2% (prime) – 1% (discount) = 2.2%

Now if the prime rate changes from 3.2% to 3.7% your current rate changes and is recalculated. 3.7% (new prime) – 1% = 2.7%

Your payments will fluctuate with the changes in prime rate. What does not change is your discount rate. You maintain the same discount throughout the term of the mortgage. If you know your discount rate it is easy to calculate your current mortgage rate even as prime changes.

Variable Rate Mortgage (VRM) and Adjustable Rate Mortgage (ARM)

Variable Rate Mortgage

What you may not know is that there are actually TWO types of variable mortgages. The first is just called a Variable Rate Mortgage or VRM. In a classic VRM your payments do not change. You maintain the same payments throughout the term, but the amount of payment going towards paying the principal balance and paying interest changes.

For example: let’s say your monthly payment is $2000. $1200 is being paid towards the principal mortgage balance and $800 towards interest. If prime rate increases your payment remains $2000, but now only $1100 goes towards the balance and $900 towards interest.

The only time your mortgage payments change is if you reach the TRIGGER rate. The trigger rate is essentially the rate at which point too much of your payment is going towards interest. If the rate has gotten too high where you are no longer paying off enough of the principal balance on your mortgage, then your lender must adjust the payments to make sure you can still meet the amortization schedule. You must still be able to pay your house off by the end of the amortization. The trigger rate is noted in your mortgage agreement and is not the same for everyone. It is important to know what your trigger rate is if you have one.

Adjustable Rate Mortgage

The second variable mortgage is an Adjustable Rate Mortgage or ARM. This is the more common variable mortgage and the one most lenders offer. Unlike a VRM, in an ARM your payments fluctuate more frequently with the change in the prime rate. When prime goes up so do your payments and when it goes down the payments decrease. This ensures that your balance is always being paid off accordingly as rate changes occur. There is no trigger rate with an ARM because your payments are always changing.

Advantages and Disadvantages

Fixed Rates

Fixed rates are great for first time home buyers and people who plan to remain in their home long term. Payments don’t change and this is beneficial for people who would to stick to a monthly budget. If you know exactly what your payments are every month it is simple to budget your expenses appropriately. It also helps create ease of mind knowing you won’t be hit with any unforeseen changes to your payments. First time home buyers are often trying to limit expenses after such a large purchase and this allows them to do so.

With a fixed rate there are high penalties for breaking the mortgage however. If you sell or refinance your property before the mortgage term is up you could pay a hefty penalty. If you are only in year 2 or 3 of a 5-year term when you sell/refinance, you will pay an interest rate differential penalty (IRD). This penalty includes the difference in your current rate and the rate at the time the mortgage is broken. The number of months remaining in the term and the mortgage balance owing are all used to calculate the penalty. This could be a VERY LARGE sum of money you will pay for breaking your mortgage.

Variable Rates

Variable rates are often for people willing to take on fluctuating payments and have the flexibility to do so. With your payments changing it can be hard to budget. If you are already stretching your budget and rates increase it may be difficult to make payments on time.

The positive part of a fluctuating payment is if rates start to decrease then your benefit with a low rate. The rate decrease along with your discount rate can mean you pay very little in interest. This can then lead to more flexibility in your budget and having extra funds for the time being. If you wish to switch to a fixed rate then you have that option as well. You can often switch from your variable rate to a fixed rate any time throughout the term with no penalty. If fixed rates become more favourable or you no longer want the fluctuating payments it is easy to switch.

Additionally, variable rates have a much lower prepayment penalty than fixed rates. If you break your mortgage early in a variable rate you only pay 3 months interest penalty. This gives added flexibility if you plan to refinance in the future or have plans to sell the property. The 3 months interest penalty is significantly lower than paying out the fixed rate IRD penalty.

It is very important to understand the difference between fixed and variable rate mortgages. One rate is not better than the other and it is not a “one rate fits all” situation either. Everyone has a preference and is in a different situation. Speak with a professional and they will help find out what he right solution is for you!