Author Topic: mortgage strategies CANADA  (Read 675 times)

jooniFLORisploo

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mortgage strategies CANADA
« on: September 12, 2017, 11:57:56 PM »
I may be about to buy a place in Canada.
I will carry a mortgage.
What should I look for/consider?

Variable?
Fixed? How many years?
How to avoid prepayment penalties?
Deals out there for reducing fees or interest rates?
Other?

Working with a broker.

Goldielocks

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Re: mortgage strategies CANADA
« Reply #1 on: September 13, 2017, 12:18:38 AM »
Prepayment penalties are quite steep.

Variable rate mortgages only have the 3 months interest penalty, not the abusive formula that costs many times more to get out of a mortgage.

If you have the ability to weather some ups and downs, then get variable.   The discount rate is huge right now.  The variable rate could increase by nearly two percent after 2-3 years, and you would still come out ahead.

This site states the best possible rate people are getting.  It is pretty accurate, within 0.05 percent of stated amount, anyway.
5 year closed variable rate is now at 2.09 to 2.5 percent.  Wow.
https://www.superbrokers.ca/tools/mortgage-rates-comparison/

Obviously a 3 percent fixed would be nice, if your tolerance for fluctuations is low, but the penalty to break is a bastard.  We have always won with variable, when we could afford the chance of it rising above fixed.

jooniFLORisploo

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Re: mortgage strategies CANADA
« Reply #2 on: September 13, 2017, 12:23:43 AM »
Excellent, thank you, Goldielocks!

On my first place, I started with fixed, learned about variable so paid the fee to get out, then ended up selling much earlier than expected. Big loss for no reason (but I came out way ahead anyway).

I'm comfy with variable. I have several contingency plans -ranging from simple to radical- should rates increase at points.

srad

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Re: mortgage strategies CANADA
« Reply #3 on: September 14, 2017, 08:46:26 AM »
I personally like 30 year fixed loans, but i do buy and holds.  Almost all of my loans are less than 4%.  I would consider a variable if the plan was to sell the house in less than the fixed term of the loan.  5 years with a rate in the low 2's, that would be perfect for a live in flip.

shop around for finding reduced fees.  there are lots of brokers out there looking to compete for your business.
I have looked into buying down points, its expensive to reduce the rate.  I have never ended up doing it.
How to avoid prepayment penalities?  thats easy, don't get a loan with one if you are worried about them.

jooniFLORisploo

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Re: mortgage strategies CANADA
« Reply #4 on: September 14, 2017, 08:53:56 AM »
Thanks, srad!

Yeah, there's a perfectly decent chance I would sell after 3 years, or 4.5, or whatever, so I don't want to do fixed if it comes with those prepayment penalties. Are you saying there are some fixed options free of prepayment penalty? (I'm going to do variable anyway, but I'm curious about this.)

So you ask multiple independent brokers to each quote you a rate?

Your strategy sounds wise if you have multiple places. i.e., Wouldn't want to see a surge in rates on four places at once.

srad

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Re: mortgage strategies CANADA
« Reply #5 on: September 14, 2017, 10:21:12 AM »
I can't speak for mortgages in Canada, but in the states, there are plenty of 30 year fixed loans with no prepayment penalty.  I would think a variable would have a bigger chance to have a prepay penalty over a fixed? 

Yes, I always call a few brokers/mortgage companies before getting a loan.  Rates and fees can vary dramatically from company to company.  I have my list of favorites now though, so i don't need to place as many calls as before.  My last few loans have been from online companies (Consumer Direct and Security National)  Consumer Direct was for my primary and i will 100% call them first for owner occupied.   Unfortunately, I can't use them for rentals, I"m over their limit for properties (I'm at more than 4 properties:). 

GuitarStv

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Re: mortgage strategies CANADA
« Reply #6 on: September 14, 2017, 10:29:51 AM »
We got the best rate by going variable and shopping around.  Mortgage brokers all had better rates than any of the banks would offer us, and can help you if you're looking for something without prepayment penalties.  That said . . .

Yeah, there's a perfectly decent chance I would sell after 3 years, or 4.5, or whatever, so I don't want to do fixed if it comes with those prepayment penalties.

Don't buy. Living in a place for less than five years with the plan to sell is a gamble.  I've always figured that you want to be expecting to live in a place for close to 10 years for it to be worth buying.

jooniFLORisploo

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Re: mortgage strategies CANADA
« Reply #7 on: September 14, 2017, 10:44:23 AM »
I can't speak for mortgages in Canada, but in the states...

Oh, yeah... Mortgages in the US are very different than mortgages in Canada. Kinda an "apples vs oranges" scenario.

jooniFLORisploo

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Re: mortgage strategies CANADA
« Reply #8 on: September 14, 2017, 10:47:39 AM »
Don't buy. Living in a place for less than five years with the plan to sell is a gamble.  I've always figured that you want to be expecting to live in a place for close to 10 years for it to be worth buying.

I know. We just have nowhere else to live, and I'm tired now of being on the road. So now I'll go be tired of owning instead ;)
I'm aiming to stay in it 7. We could be in it 20 for all I know. I would only get out earlier than 7 if an extreme circumstance came up or if the value went up (and I was happy to hit the road again).

Canadian Ben

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Re: mortgage strategies CANADA
« Reply #9 on: September 14, 2017, 10:50:17 AM »
Out of curiousity, where does your area fit on the rent/buy scale?

3-4 years is a pretty short time-frame for recuperating the Realtor/lawyer/taxes fees for both selling and buying a place (and possibly buying a 2nd place!); I doubt you'd break-even, unless you are lucky with property values going up.

That said, some banks allow you to "port" your mortgage, so no fees in changing, as long as you keep your mortgage with them.

Lowestrates.ca is another good source for rates by area, and mortgage brokers are always the best idea. It's a win-win for you and them.. with a - for the bank.

Fixed vs variable, sure variable has won in the past, but it depends on how much lower the variable rate is to the fixed. When I got mine, there was only about .25 difference between the two, so I preferred going fixed. It's your choice. Just see which is best in both, and then how rapidly variable could catch up to fixed. (or go down!)

jooniFLORisploo

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Re: mortgage strategies CANADA
« Reply #10 on: September 14, 2017, 11:00:37 AM »
Quote
I doubt you'd break-even, unless you are lucky with property values going up.

Yep. My exit strategy is to sell only when a true net gain is achievable. I'd only sell in a few years if a surge happened to take place in that time (or circumstances forced me out, in which case I'll accept a loss because I'm sick of homelessness).

I relied heavily on the rent vs buy calc. My (very wide) region has run out of housing (market and nonmarket) for a person with a child, so it kinda became moot. The question became not "rent or buy?" but "be housed or don't be housed, or move yet again to a far away place where you know no one?" So I've extremely reluctantly put an offer in, per my answers to those questions.

Great point on looking for the port option!

Thanks very much, too, for the website and additional tips. Will check in with the broker(s) about all those details.

Goldielocks

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Re: mortgage strategies CANADA
« Reply #11 on: September 14, 2017, 04:26:41 PM »
Thanks, srad!

Yeah, there's a perfectly decent chance I would sell after 3 years, or 4.5, or whatever, so I don't want to do fixed if it comes with those prepayment penalties. Are you saying there are some fixed options free of prepayment penalty? (I'm going to do variable anyway, but I'm curious about this.)

So you ask multiple independent brokers to each quote you a rate?

Your strategy sounds wise if you have multiple places. i.e., Wouldn't want to see a surge in rates on four places at once.

Actually, yes.  I think I read that the longer (7 years plus?) fixed mortgages in canada are required to max out with the 3 month penalty, instead of the "take you for all you have" IRD formula based on rate differentials...  This is partly why they are so much more expensive, the other reason is competition pricing.  Even so, you may be able to negotiate a steep discount on the longer fixed rate ones... I have never tried negotiating longer term mortgages in Canada, so let me know how it goes.

Let me go look for the link.
....
AHA!  found it. 
"Most closed fixed-rate mortgages have a prepayment penalty that is the higher of 3-months interest or the IRD. Most variable-rate mortgages do not have IRD penalties."..."The Interest Act prohibits IRD penalties on terms over 5 years, after five years has elapsed.  In such cases, a maximum 3-month interest penalty may apply. For example, someone who has been in a 6-year mortgage for 60 months or more would pay a 3-month interest penalty (maximum) to break it before maturity."

https://www.canadianmortgagetrends.com/calculators/interest-rate-differential-ird/


For our American Friends.   Canadian mortgages typically do not have origination fees, or the ability to "buy points"...Sometimes banks offer to pay all your legal fees, appraisals, too, resulting in only a couple hundred dollars to get a new mortgage at the start, inclusive of everything but the moving truck. 

Instead, they have large penalties if you break the mortgage before your agreed loan term is up.   Most terms taken out are 5 years, but 1 to 10 years are common.  The loan term is different from the amortization, where 15 to 30 year amortizations are common (and I think decreasing by law on some mortgage types to 25 years...).  This means that a person who does not move, may renew their mortgage every 5 years, with decreasing balances and amortizations until paid off.

Portable and assumable mortgages were pretty common (and assumable ones with low rates were advertised by the realtors selling property) when I lived in Calgary, so asking for that option in BC should not surprise an experienced broker or banker... but it may only be offered on some products.
« Last Edit: September 14, 2017, 04:40:40 PM by Goldielocks »

TrMama

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Re: mortgage strategies CANADA
« Reply #12 on: September 14, 2017, 05:03:32 PM »
Good advice so far. It's been a while since we've had to mortgage shop so I only have 2 things to add:

1. Tell your broker you don't want at mortgage that pays your property tax for you (escrow?). You're more than capable of budgeting for your own prop tax, so no need for the mortgage co to charge you monthly and hold it. This becomes an even bigger PITA when there's a large jump in tax. The following year, they'll ratchet up the amount they require, usually well beyond what the following year's tax bill could ever be.

2. If you go variable, make sure increased payments won't sink you. You do not want to lose your house. When we bought 7 years ago, we went fixed because we were way overextended and were concerned even a small bump in interest rates would sink us.

Congrats on the house! I read your other thread and thoroughly approve of your decision to buy you and son some stability. For people reading from outside coastal BC, Joon is correct that the question isn't "rent or buy?" it's "stable housing or transient homelessness?"

jooniFLORisploo

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Re: mortgage strategies CANADA
« Reply #13 on: September 14, 2017, 06:22:12 PM »
Thanks very much, TRMama! Will check out that property tax aspect, yes.

Broker #1 said, "There will always be penalties for paying out early, unless fully open mortgage which would double the interest rate..." Maybe he means only with fixed? Surely not with variable? I will check as we move further along, but wanted to hear from you guys if I'm missing anything.

TrMama

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Re: mortgage strategies CANADA
« Reply #14 on: September 14, 2017, 07:09:30 PM »
I think your broker is correct. However, some mortgages may charge more or less. Definitely ask about the options before signing.

Thought of one more thing. If you plan on paying it down faster, pay attention to the pre payment rules. Some mortgages only let you make an entire extra months payment. Some allow smaller amounts. I think some also charge a fee for making extra payments.

Our last mortgage was one of the better ones we've had in this respect. It allowed extra payments in any amount as long as we didn't pay more than 20% of the original principal annually. We could also increase the monthly scheduled payment by 20%.

 Of course this only applies if you plan on paying it down ahead of schedule.

Goldielocks

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Re: mortgage strategies CANADA
« Reply #15 on: September 14, 2017, 09:48:58 PM »
Yes,   Variable mortgages have the 3 month interest penalty unless fully open.  Fully open is useful for people that are currently trying to sell.

For me, the penalty difference is $2200 for 3 month interest calculation, and up to $13k in penalties with the IRD formula for fixed rate..!
(on approx $400k).   I am not too worried about the 3 month penalty interest.  It is not "nothing", but it is manageable.

Also, most mortgages will let you pay down fifteen or twenty percent, then calculate the penalty, so it would drop.


snacky

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Re: mortgage strategies CANADA
« Reply #16 on: September 14, 2017, 11:14:35 PM »
What if you committed to owning for 5 years, even if it meant being a landlord for some of that time? I know you hate the idea of being a landlord, but if you could put a firm five years down in your brain it would help with planning and also get you a nice, low interest rate.
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jooniFLORisploo

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Re: mortgage strategies CANADA
« Reply #17 on: September 14, 2017, 11:23:50 PM »
Well, my primary concern with landlording (besides the general hassle) is the financial risk. Getting the wrong tenant in can cost far, far more than the prepayment penalty.

Goldielocks

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Re: mortgage strategies CANADA
« Reply #18 on: September 14, 2017, 11:57:52 PM »
Well, my primary concern with landlording (besides the general hassle) is the financial risk. Getting the wrong tenant in can cost far, far more than the prepayment penalty.

If your have wiggle room in your budget, go for the variable rate.

on $100k, at 2.5%, 3 month interest penalty is only $625, which is peanuts...
It is very likely that you will not sell or move before 5 years, i.e., you will remain until LF is out of school...