Wednesday, July 21, 2010

Examining No-Frills Mortgage Products

No Frills mortgages are something that started being offered in the market towards the end of my time on the other side of the fence working at a lender. Being in Product Development, I thought and still do think that these products are a fantastic development.

No Frills mortgages are just what the name implies, bare bones with little to no “features”. Most people view mortgages as being somewhat vanilla and free of features but that’s just not the case. Options like portability, assumability and pre-payment options are all things you pay for in your rate. The different features associated with your mortgage are costs to the lender that they need to hedge against and just as you’d figure, that cost gets passed on to you through your rate. IF you’re not going to take advantage of these options, it doesn’t really make sense to pay for them. Most people have the best of intentions and figure they will use the pre-payment options but in most cases it just doesn’t happen. Even if it does, I always ask clients to evaluate what might be reasonable. If a No Frills mortgage offers 5% per year pre-payment privilege, that’s $15,000 per year on a $300,000 mortgage. If you don’t think you’ll be able to pre-pay more than that per year, then it doesn’t make sense to pay an extra 0.15% on rate to have the option.

This type of product will only seem ideal for you if you have no plans or limited plans to take advantage of benefits that will help you pay off your mortgage faster – such as pre-payment privileges including lump-sum payments.

Essentially, this product is only ideal for those who want fixed payments and have limited opportunities to make lump-sum payments during the first five years of their mortgage; and property investors who need a low fixed rate and are not concerned with making lump-sum payments.

No-Frills products also won’t let you take your mortgage with you if you purchase another property before your mortgage term is up – ie, portability is not an option with this product. Portability is an important option that could save you money over the long term if the home of your dreams is within your reach before your mortgage term is up and rates have risen, which they have a tendency to do over a five-year period.

It’s understandable why these products may seem appealing. After all, during tougher economic times who has the extra cash to put down a huge lump-sum payment? And who needs a portable mortgage if they’re not planning on moving until the market picks up? But it’s important to remember that a lot can change over the course of five years – or whatever term you choose for your mortgage.

No-Frills products represent a great example of why interest rates are not the only important factor to consider when deciding whether to opt for a particular mortgage product. Much like buying a car, you get what you pay for. If you don’t want a car with air conditioning, a stereo, a cup holder, and so on, then you can get the cheapest car going. The key is to evaluate your situation properly and sure you only pay for what you need.

Tuesday, July 6, 2010

HST and How it Affects Home Purchases

There always seems to be a certain few questions I always hear when they are a hot topic in the media. Lately the big question has been regarding the HST. The question hasn’t really been what effect it has but rather if there was a lot more activity leading up to July 1st with people trying to make a move before the HST starts.

I attribute the way the question is asked to the fact that people don’t really know what the effect is and just assume it’s bad. The reality is that the HST won’t have the tremendous impact on those looking to make a move as people may think. I think that’s likely true of most things the HST will impact because most people would much rather throw their arms up in the air and curse the Government than educate themselves as to how it will impact their bottom line. Don’t get me wrong, I’m not pro-HST, quite the contrary. What I am is pro-education.

Here are a few things the HST WILL NOT impact:

- Resales – there is not tax on a resale home.
- New Home Purchases – there is no tax on new builds less than $400,000.
- Condo Fees – there is no tax on condo fees.

...and a few things the HST WILL impact:

- New Home Purchases – there will be HST charged on new builds more than $400,000, however builders will include the HST in their “sticker price” so there are no surprises – make sure you read your agreement carefully to ensure this is the case.
- Real Estate Commissions – there will be HST charged on real estate commissions whereas it used to be that only GST was charged.
- Legal Fees - there will be HST charged on legal fees whereas it used to be that only GST was charged.
- Default Insurance – if you make a down payment of less than 20% of the purchase amount, you will require default insurance, which the HST will apply to whereas it used to be only PST.

There’s no doubt the HST has an impact on the Real Estate Market. However, on a typical transaction the impact will be in the hundreds of dollars, not the thousands that I think most people believe. If you’d like to see more of what products and services are affected by the HST, there is a very good list that can be found here