MORTGAGES VANCOUVER  
Tips, Advice, and Explanations from a Vancouver Mortgage Broker  

Posts Tagged ‘closed’

What Makes a Broker Different Than The Bank – Vancouver Mortgage Broker

Thursday, March 22nd, 2012

Transcript of Video Blog:

Hi everyone. Rowan Smith from the Mortgage Centre. I want to talk today about what differentiates me, a broker, from just walking into your bank. If the only thing in the world you care about is rate then perhaps the bank is the best place for you to go. They may not have the best rate for you, though. I’m just saying that if that’s the only concern you can shop with them first.

However, there’s often many other things that we need to look at. We need to look at prepayment privileges. We need to look at can you get out of the mortgage if you need to? We need to look at how does that stack up against the competition in other financial institutions. We need to know if you’re going to live there for the next few years or if you need a line of credit as part of your package.

We need to know the sources of your income to know if you fit under specific programs that will get you additional discounts. We need to know a lot more information than just what is the best rate. There’s many questions that you can ask us as brokers and what is your very best rate while it is one of those questions it’s often not the most important.

I’m going to give you a case in point. Today I had a client come to me who had been chomping on a couple of different mortgage brokers and was getting pulled in a lot of different directions. When I looked at the situation I realized that many of the options that they were being offered didn’t even apply to them based on how they reported their income. I clarified the situation for them, had the deals packaged and arranged within a couple of hours, sent off to my lenders, and already received a response in the same day.

Now, I can’t promise a same day response every time. There’s just a number of factors that prevent that depending on individual deals. It is possible in a very clean situation. What I can do and the value I provide is not just a great rate, although I’m always going to try to get you the best rate, it’s also advice on the other elements of the mortgage and on your lifestyle. We, as mortgage brokers, are specialists on the debt side of the equation.

We’re looking out for your best interest in a fiduciary duty to try to get you the best terms, rate, and product to satisfy your needs. We’re not product salesmen. We don’t just sell the best rate like a canned product that we take off the shelf and hand to everybody. If everybody qualified for the best rate all the time they wouldn’t need us. There’s a lot of us out there for a reason and that’s because we can help provide an immense amount of value in selecting a good lender or getting a deal done in a timely fashion or under specific guidelines or times of day that your bankers can’t match.

If you or someone you know would like additional advice and would like an independent third party, which is what we are, to look at the situation please have them see me. It’s Rowan Smith from the Mortgage Centre.

Can I Roll My Other Debts Into My Mortgage?

Friday, February 18th, 2011

Transcript of Video Blog:

Hi everybody, it’s Rowan Smith with the Mortgage Centre. We’re going to do something a bit little different here this week. It’s where I’m going to answer one of the most common questions I receive, which is “Can I roll my other expenses into my mortgage?” So let’s look at exactly how that would go down. Read the rest of this entry »

A “Variable” Mortgage is NOT and “Open” Mortgage – There is a difference

Friday, February 18th, 2011

Transcript of Video Blog:

Hi, everybody. I want to address a very common myth, and that’s that people think their variable rate mortgage, because it is open to fluctuations, is in fact an open mortgage. That’s not the case. There’s a lot of confusion as to what is an open mortgage versus a variable mortgage versus a closed mortgage or a fixed mortgage. Read the rest of this entry »

How Are Mortgage Penalties Calculated?

Sunday, April 25th, 2010

I’m getting lots of questions about why bank penalties have fallen in the last three weeks. This blog explains the calculation methodology behind it:

Transcript of Video Blog:

Hi, everybody. It’s Rowan Smith from the Mortgage Centre. I wanted to address penalties, and interest rate differentials, and three month interest penalties and how it all works today in this blog.
I’m getting a lot of inquiries about it. There’s some confusion as to why rates have gone up and penalties have gone down. Well, let’s look at the standard mortgage terms.

For variable rates mortgages, most institutions, the way that it’s going to work is if you break the term at some point during any time; now most variables are five year terms, but some of them are three years.

That means that during that period of time, your discount or your premium on your rate will not change. For example, if your rate was prime rate plus a quarter, for five years you would always be prime plus a quarter regardless of where prime went. Up or down, you would follow it with a quarter percent.

You’re guaranteed that, so should banks go with prime plus a half or prime plus one, you’re still guaranteed to retain the prime plus a quarter throughout that five year term.

In exchange for that security, if you break that term, that five-year term, to sell your house, or you need to refinance, take equity out and end up doing it with a different lender, you’re going to pay a three month interest penalty.

That said, it’s a non negotiable. It’s going to happen at every single institution. However, the three-month interest penalty is the only one that will apply to a variable rate mortgage. In the event that you’ve got a fixed rate mortgage, it will be the greater of three months’ interest or the interest-rate differential.

Interest rate differential is a complicated formula that essentially looks at how much time is left in your term, what rate you’re paying now, what rate the bank could get on money now, and they charge you that difference. That’s a simplification, or perhaps an oversimplification of it.

But if you visualize being at six percent, and let’s say rates went down to the 3.69 they were at and you wanted to get that rate, that bank would be giving up on six percent for the remainder of your five year term and letting you out into the lower term.

So they’re going to look at their loss/profit and are basically going to charge you that amount or three months’ interest, whichever is greater.

You can guarantee that in cases where rates have gone down, your penalty is going to be dramatically larger under the interest-rate differential. Now how far down? It depends. It’s a complicated formula.

How much time is left in your term? If you’re within the last year, it’s generally only ever three months’ interest. There are a lot of different variations in how these penalties can be calculated from bank to bank to bank.

So if you’re looking at your penalty, not quite sure if the penalty is worth paying it to get the new lower rates, give me a call and I can walk through the math with you on it and make sure that you’re making a correct decision.

Also, if you’re looking at that penalty and wondering why did the penalty go down from last month when I had a quote, it’s because rates came up. That means that the bank could get a greater rate from money loaned at the same point at time.

So if you were three years into a five year term, there are two years left. The bank will compare their profit and loss of what they would get on a two-year mortgage.

Imagine, for example, that rates have gone in two years from, let me grab a number here, 2.25 to 2.9. If you were previously paying five percent, that spread, the difference between what they could be getting and what they are getting, got smaller, thus your interest-rate differential penalty will be smaller.

As you can see, there’s quite a bit to penalty calculation. If you have any questions, give me a call. For the Mortgage Centre, I’m Rowan Smith.

What is an Open Mortgage? – What is a Closed Mortgage?

Friday, October 17th, 2008

This is a very common question, and one that I have addressed before, but have taken three calls from all around North America this week.

Usually the question runs like this: “I would like a fixed mortgage, but I want it to be open. What is your best rate?”

This is a confusion of two common terms. Let me first address the different types of mortgages. For simplicity sake, there are four common types of mortgages, that all combine with one another. They are:

1. Fixed Mortgage
2. Variable Mortgage
3. Open Mortgage
4. Closed Mortgage

Let’s address each in turn. NOTE: these terms are being described as they relate to the CANADIAN mortgage market, not the US:

FIXED MORTGAGES:

A fixed mortgage is one where the rate is fixed for the entire term of the mortgage. For example, if you have a 35 year amortization (pay it off over 35 years) but a 5 year term, that means that you will have a fixed rate for 5 years, with a fixed payment for 5 years, and a fixed rate for 5 years. The mortgage rate and payment are FIXED for the term. Terms vary from 1 to 10 years (a couple lenders do longer) and the average term people choose is 5 years (which is also the length of time over which the banks compete most aggressively).

VARIABLE MORTGAGES:

A variable mortgage is one where the rate varies with some other rate. The most common rate that the mortgage moves with is the “Prime Rate.” Traditionally, the Band of Canada (BOC) sets their prime rate, and the banks then follow and set theirs at the same rate. The prime rate is the rate that preferred borrowers with clean credit and good income can receive. There is no law that says that the banks must follow what the BOC does, and in the current market in Sept / Oct 2008 the banks have chosen on a couple of occasions to NOT follow the BOC right away or to follow them precisely. A variable rate mortgage usually results in a payment that also varies with prime rate (often making budgeting difficult), and a rate that varies according to the market. While most variable rate mortgages are convertible into a fixed rate at any point in time, the rate you can convert at is “usually” quite high relative to what you would get on the open market.

OPEN MORTGAGES

An Open Mortgage is a mortgage that has no pre-payment penalty. With most mortgages in Canada, if you pay out the mortgage before the end of the term, you will pay an interest penalty (usually equal to 3 months interest payments but there are alternative penalty calculation methods). Open mortgages do not face the interest pre-payment penalties that other mortgages face.

CLOSED MORTGAGES

With a Closed Mortgage, you WILL face an interest penalty to pay it out prior to the end of the term. For example, if you have a 5 year term, and you pay off the mortgage in 2 years (whether it is due to a sale of the home, lump sum of cash, or any other manner) you will face an interest penalty usually equal to 3 months of interest. There are other methods of determining pre-payment penalties, but the 3 month interest is the most common unless rates have fallen dramatically during the term of the mortgage.

So why would anyone take a closed mortgage? Answer: Because they (typically) have far, far better rates when you commit to a set term. Also, that is the industry standard in Canada.

So, based on the info above, you can combine the terms (no more than 2 per combination) to get a feel for what is available in the Canadian market place.

You could have:

Fixed Closed Mortgage
Fixed Open Mortgage
Variable Closed Mortgage
Variable Open Mortgage

You may wonder, “Why doesn’t EVERYONE get a fixed OPEN mortgage?” As that seems like the best combination of security (fixed rate) and no penalty (open). The answer is: the rates are far higher. If the banks are going to go through all the effort and time to do a mortgage for you, and commit the money, they want to know they are going to get that stream of income for the length of the term. When you purchase a term deposit fromt he same bank for, say, 2 years, you expect to get 2 years interest, not get 1 year and have the bank cancel after 12 months because they can pay less to someone else! What’s fair is fair. If you commit to a term, expect a penalty.

Often people say to me, “yes, but what rates are available for each product?” I’ll show you my best rates currently for each product below:

5.35% – Fixed Closed Mortgage (based on a 5 year term)
8.10% – Fixed Open Mortgage
5.25% – Variable Closed Mortgage (Based on Prime rate plus 1%)
5.25% – Variable Open Mortgage (Based on Prime rate plus 1%)

Clearly, taking a Fixed Open Mortgage is the best in terms of flexibility, but the rate is far higher and thus payments of a huge obstacle. Also, the difference between a fixed and variable rate is not much. In fact, you can get a 0.10% lower rate by taking a variable rate! This might sound like a good deal, but how much is your peace of mind worth? If rates shoot up by 1% due to an economic crisis, your payment will jump substantially (by 1%) and this will result in a much much higher payment.

How much higher?

Assuming a $300,000 mortgage, the savings of taking a variable rate mortgage (0.10% savings) will result in a savings of $22.14 per month. Assuming rates stay steady for ALL FIVE YEARS you will save $1,328.40 by taking a variable rate mortgage. Not bad, right?

Wrong. If you assume that prime rate moves up by 1% due to a shocking economic crisis (much like we are facing now) your payment would jump from $22.14 lower to $203.85 HIGHER simply due to factors beyond your control. This, by the way, assuming it happens 2 years into the mortgage, will result in 3 years of higher payments equaling $7,338,60 more. So you would be out by THOUSANDS of dollars just for trying to save $22.14 a month.

My advice: In this market, take a fixed rate. Enjoy the fixed payments, and sleep easy at night knowing your payment will be the same this month as it will next month for the entire term.

With respect to Open vs. Closed mortgages, unless you are buying with the intent of flipping it off (and NOT buying another property) ignore this. Take a fixed closed mortgage, and you’ll be glad you did.

If you are considering buying an investment property which you may quickly sell, THEN, and only then, do I recommend an open term.