Prepayment – Terms and conditions apply

General Brian Turner 9 Mar

prepayment terms

Pay close attention to the prepayment terms and conditions in your mortgage commitment.

Prepayment penalties apply to almost every mortgage

All of the banks have what they call customer retention programs. In the mortgage fine print of a fixed rate mortgage, it is called a prepayment penalty. In more positive terms, a prepayment privilege. Most lenders have a 15% annual prepayment privilege, and some have 20% prepayment privilege.  If you exercise your annual prepayment privilege, you don’t encounter a penalty. If you go beyond the privileged prepayment, you will incur a penalty.  These penalties  exist because the mortgage holder has either contracted with GIC holders and offered them a guaranteed rate of return. Alternatively the lender may have sold your mortgage on the bond market and needs to buy it back.  

Not all prepayment penalties are created equal

The big five banks often use a sleight of hand in their interest rate differential. This takes the form of factoring a discount between their posted rate and the rate that they issue you in your mortgage contract. I have seen this go as high as 7% of the outstanding principal. The monoline lenders where I place most of my clients’ mortgages have a simpler way of calculating their interest rate differentials. Their interest rate differential is the difference between your current rate and the rate on a similar time period remaining in your mortgage. Usually, this amounts to about 1% or less of the outstanding balance.

Variable rate may be an option

In contrast, the easiest way to avoid prepayment penalties is to go with a variable rate mortgage. Unfortunately, for the first time in 30 years, these are more expensive than the fixed rate mortgages (by about 0.8%) . A variable rate mortgage has a simple three months of interest penalty. If you’re likely to need to break your mortgage before the term is up, talk with me to see if this makes sense.

No such thing as free cash

Also, be aware also of cash-back mortgages. The lender gives you a set amount of percentage of cash at the start of the term. Then, you pay for this cash throughout the term with a higher interest rate. There is at least one big 5 bank that if you repay your mortgage at any point before the end of the term, even the day before, you owe them the entire cashback amount that they advanced at the start of the term. This is despite the fact that you’ve been paying for this cash throughout the term with a higher interest rate.  The lesson here is to use a mortgage professional such as myself to walk you through the terms and conditions of the lender’s mortgage commitment. This helps guarantee that you’re not surprised if life happens and you need to repay the mortgage.

Brian Turner
249-353-3278
bturner@nextdayapprovals.ca

When does a reverse mortgage make sense?

Mortgage Tips Brian Turner 1 Mar

Is a reverse mortgage right for you?

The first ever reverse mortgage that I did was for an existing client.  Dave and Lisa were retirees who had taken on a bit too much debt. I helped them find a second mortgage on their home to consolidate their debts and get their monthly payment down. We planned to combine the first and second mortgage with a refinance when the term on the first mortgage came due.  Unfortunately, in the eighteen months between funding the second mortgage and the end of the term of first mortgage, Lisa got quite ill and passed away.

Our original plan was no longer workable. Dave could no longer  qualify for a mortgage with only his pension income. I proposed a reverse mortgage. The lender would  pay off the existing first and second mortgages. The lender would become the mortgage holder against the title of his home. Dave would not have to make payments on the mortgage, instead interest would be added to principal monthly. I urged Dave to carefully discuss it with his and Lisa’s children.  

Pros and Cons of a Reverse Mortgage

Together they came to the conclusion that a reverse mortgage made sense. Firstly, it would allow Dave to stay in the house he had shared with Lisa. This was important because Dave had looked at the housing market and quickly realized that even with a sizeable down payment from the sale of his house, there was little he could afford. Secondly, with a reverse mortgage, Dave would not have to make monthly mortgage payments that were at the time eating up his pension and not allowing him any disposable income. Finally, they considered that his and Lisa’s children would not receive as much in the form of an inheritance. For Dave’s immediate quality of life however, a reverse mortgage made sense.

Months later Dave called to thank me. Lisa’s passing had caused him significant financial stress. With only one pension coming in, almost all of his income was going to service the mortgages.  The reverse mortgage freed Dave up from this stress and allowed him to start navigating this new phase of his life.  

If any of this resonates with you, please get in touch with me at: bturner@nextdayapprovals.ca or 249-353-3278