There was a change in the Canadian mortgage industry last week. It was a quiet one, at least from a consumer standpoint, but I believe it will have a big impact down the road. The change, in a nutshell, is that TD Canada Trust has changed the way they register mortgages.
Up until October 18, TD registered their charges the same way other institutions did using a “conventional charge” for the amount of your mortgage. Registering your mortgage is something that you pay your real estate lawyer to do. Under TD’s new process, they are using what is called a collateral charge that is registered at up to 125% of the value of your home. The reason behind the change, according to TD, is to give homeowners easier, cheaper access to the equity built up in their homes.
It is very important to understand that this change does not mean borrowers can access 125% of the value of their homes. The same policies remain in effect, that limit all borrowers to a maximum of 95% LTV for a purchase and 90% LTV for a refinance. What it does mean, is as the value of a borrower’s home increases, if they refinance their mortgage, it will not have to be re-registered, avoiding legal fees. In the case of a refinance, clients will still have to adhere to the 90% maximum LTV policy and re-qualify for the desired amount. For example, somebody buying a house for $300,000 can borrow up to $285,000 (95% LTV) and the collateral charge would be registered for $375,000. If after 3 years, the property value has gone up to $400,000, the borrowers would be able to refinance their mortgage up to $360,000 (90% LTV) and not have to incur legal charges, provided the borrower qualifies.
The ONLY benefit I see for consumers is that they are able to avoid some legal fees, which would make just about anybody happy unless of course you’re a real estate lawyer. The drawback however, is far greater in my opinion and that is a lack of choice. What I mean by this, is there is some limitation at the time of that refinance or a renewal at the end of a term, if a client wants to switch to another lender. You see, other lenders will not accept a TD collateral charge on assignment (if you switch lenders at renewal or mid-term for a better rate), therefore switching lenders either at renewal or refinance will mean incurring legal fees. So, if you’ve got a TD collateral charge mortgage and want to refinance or have a renewal coming up, your choices are to stay with TD or pay legal fees to switch lenders.
The prohibitive aspect I can already see is the way in which it will be positioned. Upfront, I can hear clients being told that registering to 125% means “easier access to equity”. It doesn’t. The property still has to have increased in value and clients still have to qualify for the amount requested, no different than if your mortgage is not a collateral charge. The ONLY difference is that IF you refinance you avoid legal fees...but you also pay whatever rate TD is charging, no opportunity to shop for a better rate. At refinance or renewal, I can hear clients being warned about the fees. As it is, I hear it all the time when clients say their bank told them they would have to pay a “big fee” to do this or a “big fee” to do that without ever quantifying what the fee is or fully analyzing the options. I would fully expect that clients will be told they will incur a “big fee” to go to another lender. In reality, legal fees on average for a refinance are $600-$1000. I’ve even had a client whose lawyer charges $400 for a refinance. That’s the “big fee” you’ll be made to feel scared of. I’m not saying $400 or $600 or $1000 isn’t a lot of money. It is, but it may not be as much as the added interest you end up paying. The real downside for people who aren’t fully aware of their options and are successfully scared of the “big fee” is they will end up paying whatever rate TD is charging, without shopping the market. This is where analyzing your options comes into play. If TD’s 5-year fixed rate is 3.89% but you can get 3.59% at a different lender, it may be worth paying the legal fees to switch lenders. It may not, but at least doing the analysis will help you make an informed decision, rather than being scared of the “big fee” and paying whatever rate is being charged. Either do it yourself or have a professional do it for you, preferably someone without bias as to which lender your mortgage is with.
As always, my opinion is that education is paramount. Understand the conditions of your mortgage and what it is you’re signing. If you don’t understand something, ask for clarification. If you still don’t understand, ask again or ask somebody else. If you feel you’re not getting straight answers, you’re not talking to the right person. And for the love of God, don’t listen to things like “big fees” or “lots of interest” without getting it quantified.
Monday, October 25, 2010
Tuesday, October 12, 2010
Looking Beyond Mortgage Rates
It’s easy to get caught up in the idea that comparing mortgage rates will guarantee you get the best bang for your mortgage buck, especially when rates are at historic lows. While this may be true for particular situations, there are many scenarios where this strategy is not effective. Following are three reasons why it doesn’t always pay to make a decision based solely on rates.
Reason #1
Your long-term plan and risk tolerance should determine which mortgage product is right for you. This product may or may not have the lowest rate.
For instance, there are cases where lenders will offer lower rates for insured mortgages. With insured mortgages, however, you’re charged an insurance premium, which is usually added to the mortgage amount. But if you’re not planning on keeping the property for a long enough time to offset that cost, it may be better to take an uninsured mortgage with a slightly higher rate. The cost difference you will pay with the higher interest rate may still be less than what you may pay in insurance premiums.
As another example, if you prefer to budget for a consistent payment and can’t handle rate fluctuations, it may be better to go with a higher fixed-rate mortgage. If you think current rates are low enough and you will be living in your property for at least five years, it may be wise to also opt for a mortgage with a longer term.
Reason #2
One of the biggest mistakes people make when merely comparing mortgage rates is failing to consider important factors such as prepayment options to help pay off the mortgage faster, whether secondary financing options are allowed, early payout penalties, or what fees are involved.
It’s not enough to simply compare mortgage rates because you have to know what “clauses” are contained within the mortgage deal. There are also a lot of bait and switches out there where rates will be advertised but the fine print details all the potential reasons you may not get that rate. When looking at rates, make sure you ask what rate “you” will get, instead of what the best rate is…they may not be the same.
Reason #3
Lenders can change their rates at any time. As such, if you’re shopping for rates with one lender and then approach another that gives you a lower rate, it’s quite possible that the first lender has also dropped its rates. This is why it’s important to get pre-approved with a lender once you a mortgage that fits your needs. In some cases, you can secure your rate and conditions for up to 120 days.
These are just three reasons why it’s not enough to merely compare mortgage rates. The mortgage rate you may qualify for is also highly dependent on your credit score among other things. In order to get the best mortgage deals, you need to have solid credit.
It’s prudent for everyone to do their rate homework. The better informed you are, the more likely you will make a good decision. Just ensure it’s the whole product and it’s features that are best suited to you and not just the rate.
Reason #1
Your long-term plan and risk tolerance should determine which mortgage product is right for you. This product may or may not have the lowest rate.
For instance, there are cases where lenders will offer lower rates for insured mortgages. With insured mortgages, however, you’re charged an insurance premium, which is usually added to the mortgage amount. But if you’re not planning on keeping the property for a long enough time to offset that cost, it may be better to take an uninsured mortgage with a slightly higher rate. The cost difference you will pay with the higher interest rate may still be less than what you may pay in insurance premiums.
As another example, if you prefer to budget for a consistent payment and can’t handle rate fluctuations, it may be better to go with a higher fixed-rate mortgage. If you think current rates are low enough and you will be living in your property for at least five years, it may be wise to also opt for a mortgage with a longer term.
Reason #2
One of the biggest mistakes people make when merely comparing mortgage rates is failing to consider important factors such as prepayment options to help pay off the mortgage faster, whether secondary financing options are allowed, early payout penalties, or what fees are involved.
It’s not enough to simply compare mortgage rates because you have to know what “clauses” are contained within the mortgage deal. There are also a lot of bait and switches out there where rates will be advertised but the fine print details all the potential reasons you may not get that rate. When looking at rates, make sure you ask what rate “you” will get, instead of what the best rate is…they may not be the same.
Reason #3
Lenders can change their rates at any time. As such, if you’re shopping for rates with one lender and then approach another that gives you a lower rate, it’s quite possible that the first lender has also dropped its rates. This is why it’s important to get pre-approved with a lender once you a mortgage that fits your needs. In some cases, you can secure your rate and conditions for up to 120 days.
These are just three reasons why it’s not enough to merely compare mortgage rates. The mortgage rate you may qualify for is also highly dependent on your credit score among other things. In order to get the best mortgage deals, you need to have solid credit.
It’s prudent for everyone to do their rate homework. The better informed you are, the more likely you will make a good decision. Just ensure it’s the whole product and it’s features that are best suited to you and not just the rate.
Monday, September 20, 2010
Buying vs. Renting
At some point in their lives, most Canadians have probably asked themselves whether it is better to buy or rent. Unfortunately most people look at it solely from the perspective of comparing monthly payments, but there is so much more to it than that. Ultimately, the decision is a personal choice, but it helps to look at ALL the pros and cons of buying to determine whether home ownership is right for you.
Some advantages of buying a home
Owning a home is generally considered to be a sound, long-term investment that can provide satisfaction and security for you and your family.
Each month when you make your mortgage payment, you are building equity in your home.
Equity is the portion of the property that you actually build through your monthly payment versus the portion that you still owe the lender.
At the beginning of your mortgage, more of your payments go toward paying off the interest and less toward paying off the principal. But the longer you stay in your home and the more mortgage payments you make, the more principal you pay off and the more equity you accumulate.
Most mortgages also offer you the option of making additional monthly or annual payments to reduce your principal faster. Some prepayment privileges, for instance, enable you to pay up to 20% of the principal per calendar year. This will also help reduce your amortization period (the length of your mortgage), which, in turn, saves you money.
There is also a tax advantage. If your home is your principal residence, any profit you make when you sell it is tax-free. A home can appreciate – or increase in value – as time passes, building more equity. As you build up equity, it’s usually easier to upgrade to a more expensive home in the future thanks to the profit you’ll make when selling your current home.
As an owner, you can also decorate and improve your home any way you like. Ownership tends to give you a sense of pride and can offer you and your family stronger ties to the community.
If you do decide that home ownership is right for you, it’s important to choose a home you can afford. If you can’t afford to buy your dream home, purchasing a more modest home can be a great place to start building equity that one day may allow you to buy the home of your dreams.
Since we’re currently in a buyer’s real estate market and interest rates have been dropping, now may be an ideal time to enter into home ownership for the first time.
Some disadvantages of buying a home
Since it’s easy to get caught up in the excitement of buying a home, it’s important to remember that home ownership has some additional responsibilities as well.
For one thing, a home can be expensive. Chances are, your monthly payments will be more than what you are currently paying in rent when you factor in such things as your mortgage, property taxes, repairs and general maintenance.
Owning a home ties up some of your cash flow and is likely to reduce your flexibility to move to a new location or change jobs.
While your home might increase in value as time goes by, don’t expect to get a big return quickly. There are no guarantees that your home will increase in value, particularly during the first few years. In the beginning, you could actually lose money if you sell because your home may not have appreciated enough to cover the real estate fees, and moving, renovation and other selling costs.
Real estate is, however, usually considered a good investment over the long term.
When making the decision about whether to buy or rent, it’s important to carefully choose a home you can afford, and then weigh the pros and cons. Millions of people enjoy the rewards of home ownership but, ultimately, it’s a personal decision based on your own priorities.
Some advantages of buying a home
Owning a home is generally considered to be a sound, long-term investment that can provide satisfaction and security for you and your family.
Each month when you make your mortgage payment, you are building equity in your home.
Equity is the portion of the property that you actually build through your monthly payment versus the portion that you still owe the lender.
At the beginning of your mortgage, more of your payments go toward paying off the interest and less toward paying off the principal. But the longer you stay in your home and the more mortgage payments you make, the more principal you pay off and the more equity you accumulate.
Most mortgages also offer you the option of making additional monthly or annual payments to reduce your principal faster. Some prepayment privileges, for instance, enable you to pay up to 20% of the principal per calendar year. This will also help reduce your amortization period (the length of your mortgage), which, in turn, saves you money.
There is also a tax advantage. If your home is your principal residence, any profit you make when you sell it is tax-free. A home can appreciate – or increase in value – as time passes, building more equity. As you build up equity, it’s usually easier to upgrade to a more expensive home in the future thanks to the profit you’ll make when selling your current home.
As an owner, you can also decorate and improve your home any way you like. Ownership tends to give you a sense of pride and can offer you and your family stronger ties to the community.
If you do decide that home ownership is right for you, it’s important to choose a home you can afford. If you can’t afford to buy your dream home, purchasing a more modest home can be a great place to start building equity that one day may allow you to buy the home of your dreams.
Since we’re currently in a buyer’s real estate market and interest rates have been dropping, now may be an ideal time to enter into home ownership for the first time.
Some disadvantages of buying a home
Since it’s easy to get caught up in the excitement of buying a home, it’s important to remember that home ownership has some additional responsibilities as well.
For one thing, a home can be expensive. Chances are, your monthly payments will be more than what you are currently paying in rent when you factor in such things as your mortgage, property taxes, repairs and general maintenance.
Owning a home ties up some of your cash flow and is likely to reduce your flexibility to move to a new location or change jobs.
While your home might increase in value as time goes by, don’t expect to get a big return quickly. There are no guarantees that your home will increase in value, particularly during the first few years. In the beginning, you could actually lose money if you sell because your home may not have appreciated enough to cover the real estate fees, and moving, renovation and other selling costs.
Real estate is, however, usually considered a good investment over the long term.
When making the decision about whether to buy or rent, it’s important to carefully choose a home you can afford, and then weigh the pros and cons. Millions of people enjoy the rewards of home ownership but, ultimately, it’s a personal decision based on your own priorities.
Tuesday, September 7, 2010
Switch After 12 Months?
One of the advantages of variable rate mortgages over fixed rate mortgages is they are easier to get out of...or at least a lot cheaper. To get out of a fixed rate mortgage, you need to pay what’s called an Interest Rate Differential. Ultimately it’s a formula that most people won’t understand, which typically results in a ridiculous penalty to get out of the mortgage. Variable rate mortgages are a little more straight-forward in that the penalty to break them is three month’s interest. Still not a “cheap” exit but there are times where it makes sense to pay the penalty to break the mortgage.
One year ago, people were paying prime rate for new variable-rate mortgages and 18 months ago it was prime + 0.60%. Today, the market is down to prime – 0.70%, or thereabouts.
For those who got their mortgage 12-18 months ago, many wouldn’t even consider refinancing as an option. But, I would argue it could be a very financially smart option.
Let me illustrate.
First, let’s assume our hypothetical borrower has:
• A 5-year variable-rate term
• A $300,000 mortgage amount
• A 25-year remaining amortization
Now, suppose:
• Our homeowner's mortgage is at prime rate (2.75%) today
• She switches to a new variable-rate mortgage at prime – 0.70% (2.05%)
• Prime rate increases 25 bps on Sept. 8
• Rates then stay put until June 2011 (according to most economists)
Here are the results:
• Interest savings: $10,014 (hypothetical over 60 months)
• Penalty: $2,062 (three-months of interest)
• Discharge Fee: $250 (depends on lender and province)
• Net benefit of breaking early: $7,702 (roughly)
Remember, the savings is in the spread against prime so whether prime goes up or down over the remaining term of the mortgage, the savings is the same. For most people, saving thousands over 3-5 years isn’t exactly the worst idea. So, if you’re currently in a variable at prime rate or above, find a mortgage planner to see if it makes sense to switch.
One year ago, people were paying prime rate for new variable-rate mortgages and 18 months ago it was prime + 0.60%. Today, the market is down to prime – 0.70%, or thereabouts.
For those who got their mortgage 12-18 months ago, many wouldn’t even consider refinancing as an option. But, I would argue it could be a very financially smart option.
Let me illustrate.
First, let’s assume our hypothetical borrower has:
• A 5-year variable-rate term
• A $300,000 mortgage amount
• A 25-year remaining amortization
Now, suppose:
• Our homeowner's mortgage is at prime rate (2.75%) today
• She switches to a new variable-rate mortgage at prime – 0.70% (2.05%)
• Prime rate increases 25 bps on Sept. 8
• Rates then stay put until June 2011 (according to most economists)
Here are the results:
• Interest savings: $10,014 (hypothetical over 60 months)
• Penalty: $2,062 (three-months of interest)
• Discharge Fee: $250 (depends on lender and province)
• Net benefit of breaking early: $7,702 (roughly)
Remember, the savings is in the spread against prime so whether prime goes up or down over the remaining term of the mortgage, the savings is the same. For most people, saving thousands over 3-5 years isn’t exactly the worst idea. So, if you’re currently in a variable at prime rate or above, find a mortgage planner to see if it makes sense to switch.
Tuesday, August 17, 2010
Pay Down Your Mortgage or Contribute to Your RRSP?
A fantastic question and like most in the world of finances, the answer won’t be the same for everyone. An old friend of my parents once told me, “keep your mortgage and your RRSP separate, don’t focus on one or the other but rather on both”. Very good advice but not necessarily for everyone or every economic climate. At the time, GIC’s were paying about 10% and mortgage rates were in the area of 6-7% over five years. Makes sense that if you can get a guaranteed return that exceeds your mortgage rate by 3-4% that you max out your RRSP contribution, take the tax deduction and the return on your investment and run. However, fast forward to 2010 when GIC’s are paying 2-3% and mortgage rates are around 4% over five years. The same approach doesn’t seem so appealing anymore. Aversion to investment risk and debt will be the determining of which approach is best.
There was an excellent article in the Toronto Star last week that discusses this topic in great detail. I strongly encourage taking a few minutes to read it to help you decide which approach is best for you http://www.thestar.com/business/personalfinance/article/844358--paying-down-debt-makes-sense
There was an excellent article in the Toronto Star last week that discusses this topic in great detail. I strongly encourage taking a few minutes to read it to help you decide which approach is best for you http://www.thestar.com/business/personalfinance/article/844358--paying-down-debt-makes-sense
Tuesday, August 3, 2010
Mortgage Life Insurance Explained
As part of my licensing requirements, I must offer every client a mortgage life insurance policy.
Mortgage life insurance is simply a life insurance policy on the homeowner which will allow their family or dependents to pay off the mortgage on their home should something tragic happen to them. This is not to be confused with mortgage default insurance, which lenders require to cover their own assets if you have less than 20% equity in your home. Mortgage life insurance is meant to protect the family of a homeowner and not the mortgage lender itself.
While it is nice to think that if you were to pass away your mortgage would be paid off, is it really necessary for you to pay for this service? My wife will tell you that insurance is something I often complain about as I think as a society we are over-insured. Different little bits of insurance here and there that essentially overlap each other because the big picture is not considered.
If you are the primary breadwinner in your home and your death would leave your family without the means to pay for the mortgage, then mortgage life insurance might be a good option. However, take a look at all of your insurance requirements to see what is already being met. Do you already have a life insurance policy? Are you covered through your work benefits? What would be required should there be an untimely death in the family? These are all questions that need to be answered before deciding whether or not you need mortgage life insurance.
Trust me when I say I know what it’s like when you’re at your bank (been there, done that) and they go down their checklist of all the products to try to cross-sell you and they treat you like you’re making a huge mistake if you say “no” to the insurance. If you’ve done your analysis and don’t think you need it, be confident that you’re making the right decision for your family. I have many clients that I deal with that have had their mortgage with a bank with mortgage life insurance and when I ask them why they accepted it, more often than not they don’t have an answer aside from “my banker told me I should have it”. One recent client stands out...she’s single, no dependents, no extended family to speak of, she has about $200k of insurance through her work benefits and she was paying over $100 for mortgage life insurance because her banker told her she should have it. When I asked her who her beneficiary was she didn’t even know.
One of the issues I have with mortgage life insurance specifically is that you’re paying a constant premium to insure a declining sum. As your outstanding mortgage balance drops with your regular payments, you continue to make the same payments to insure it. Does this make sense? While I’m not able to sway clients’ decisions and can explain the pros and cons of mortgage life insurance compared to topping up or taking out a life insurance policy, I always recommend looking at the big picture to ensure that needs are being met on a whole instead of just when it comes to a mortgage.
As always, when in doubt, consult a professional. Just like me, the services of an insurance professional are no cost to you. If you’re not absolutely certain your insurance needs are being met or don’t really know what they are, I strongly recommend consulting a professional.
Mortgage life insurance is simply a life insurance policy on the homeowner which will allow their family or dependents to pay off the mortgage on their home should something tragic happen to them. This is not to be confused with mortgage default insurance, which lenders require to cover their own assets if you have less than 20% equity in your home. Mortgage life insurance is meant to protect the family of a homeowner and not the mortgage lender itself.
While it is nice to think that if you were to pass away your mortgage would be paid off, is it really necessary for you to pay for this service? My wife will tell you that insurance is something I often complain about as I think as a society we are over-insured. Different little bits of insurance here and there that essentially overlap each other because the big picture is not considered.
If you are the primary breadwinner in your home and your death would leave your family without the means to pay for the mortgage, then mortgage life insurance might be a good option. However, take a look at all of your insurance requirements to see what is already being met. Do you already have a life insurance policy? Are you covered through your work benefits? What would be required should there be an untimely death in the family? These are all questions that need to be answered before deciding whether or not you need mortgage life insurance.
Trust me when I say I know what it’s like when you’re at your bank (been there, done that) and they go down their checklist of all the products to try to cross-sell you and they treat you like you’re making a huge mistake if you say “no” to the insurance. If you’ve done your analysis and don’t think you need it, be confident that you’re making the right decision for your family. I have many clients that I deal with that have had their mortgage with a bank with mortgage life insurance and when I ask them why they accepted it, more often than not they don’t have an answer aside from “my banker told me I should have it”. One recent client stands out...she’s single, no dependents, no extended family to speak of, she has about $200k of insurance through her work benefits and she was paying over $100 for mortgage life insurance because her banker told her she should have it. When I asked her who her beneficiary was she didn’t even know.
One of the issues I have with mortgage life insurance specifically is that you’re paying a constant premium to insure a declining sum. As your outstanding mortgage balance drops with your regular payments, you continue to make the same payments to insure it. Does this make sense? While I’m not able to sway clients’ decisions and can explain the pros and cons of mortgage life insurance compared to topping up or taking out a life insurance policy, I always recommend looking at the big picture to ensure that needs are being met on a whole instead of just when it comes to a mortgage.
As always, when in doubt, consult a professional. Just like me, the services of an insurance professional are no cost to you. If you’re not absolutely certain your insurance needs are being met or don’t really know what they are, I strongly recommend consulting a professional.
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.
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.
Subscribe to:
Posts (Atom)
