As a
mortgage broker, I also have access "bank" mortgages at no extra cost
to my clients. I can access TD Canada Trust, CIBC, and Scotiabank to mention a
few. I stay unbiased for my clients, because as a mortgage broker they expect
unbiased advice.
Here are
some things that irritate me about mortgages and the hidden costs & fees:
Skip a payment option
I sometimes
cringe when I'm waiting in line at my bank and they advertise "skip a
mortgage payment" or "take a holiday" from your mortgage. Most
financial institutions have an option built into the mortgage to "skip a
payment." It's designed for people who are facing financial difficulties,
allowing for some flexibility. Skipping a mortgage payment on your home may not
seem harmless but there are often extra administrative costs that the borrower
is charged. If you need to skip a payment because you're under financial
hardship then this is indeed a viable option for you. However, If you want to
skip a payment just because you want to take a vacation - you'll want to
reconsider the vacation.
The
"skip-a-payment" option is also means to increasing monthly cash flow
on a rental property that is vacant. I've had some real estate investors who
owned several rental properties, where mortgage payments on the properties
where close to $20,000 per month. By skipping a payment on all their rental
properties, they managed to generate enough cash flow that they were able to
increase the down payment on another rental property purchase.
Interest rate differential
penalty calculations
Penalties on
fixed-rate mortgages are calculated two ways: 1) three months interest; or 2)
the interest rate differential or IRD (whichever is greatest). Without getting
too technical there are a few banks that calculate the IRD based on the
original discount that the borrower received on the mortgage. For example most
chartered banks posted rates are just over 5%. Borrowers know this isn't the
rate they will pay and negotiate a better one.
For example,
if they negotiated a 1.5% discount off the posted-rate the penalty will be
significantly higher. I've run this calculation on a $200,000 mortgage that had
an IRD penalty and the penalty based on the original discount was almost $5000
more. That's one of the reasons why I recommend going with a wholesale bank,
especially if you may need to sell the property before the five year term is up.
You could also consider going with a shorter term to avoid the IRD penalty.
Refinancing a mortgage
The bank
promises to "pay you" if you bring your mortgage to their branch.
It's not a secret that one of the most profitable sectors for banks are
mortgages. Although rates are at historical lows, they
are higher than they should be. Five year fixed rate mortgages are based on the
bond market and bond yields; given that the bond yields have been below 1.5 %
in the last three months, and the premium that is charged is typically 1.5%.
Therefore a five year fixed rate mortgage could be closer to 2.5%. Although
banks are charging most clients close to 3%, there’s still is a little wiggle
room with the rate.
If there is
a penalty with the mortgage, banks will often tell you they won't charge you
but rather capitalize the penalty by charging you a slightly higher interest
rate. Ensure your mortgage professional reviews the option of staying with your
existing mortgage lender, and reviews another option available on the market.
I'd love to
hear your feedback on mortgages and your own "pet peeves" please
e-mail me at lastovic.s@mortgagecentre.com or comment below!
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