March 2016


Your Home Should Be Where You Enjoy a Lifetime of Memories

Your mortgage shouldn’t be along for the ride

With House prices at historical highs, mortgage balances are growing with them.

When looking for a mortgage, the most common things people are provided are:

  • A good rate (which should be a given)
  • An affordable payment
  • A brief (very in most cases) explanation of terms, privileges, penalties (see my blog entry).
  • A handshake and a 25 or 30 year plan

The most overlooked and in my opinion the most important; is a customized strategy to be mortgage free faster.

Simple strategies with small changes to payments can have a massive impact.  We tend to take what we are offered when walking into the bank when it comes to amortization and payments.  30 years is the new 25 because the payment is lower.

The real cost is much higher

Image result for dollar sign

Let’s look at this example (*calculations using 5 year 2.59%):

25 Year Amortization 30 Year Amortization Difference
Mortgage Amount $500,000 $500,000
Monthly Payment $2,262.30 $1,995.45 -$266.85
Interest Paid Over 5 Years $59,692.37 $60,749.75 +$1,057.38
Balance After 5 Years $423,954.37 $441,022.75 -$17,068.38

This is a common scenario, most people can generally afford the higher payment. but, choose the lower because they don’t understand the true cost.

You will “save” $266 per month, but, owe $17,068 more at the end of 5 years.  Principal is your money.  Much the same as a monthly investment contribution. The faster you pay off your mortgage, the faster you can keep the mortgage payments in your pocket

The real secret to being mortgage free faster is creating a repayment plan that is both realistic and affordable.

 

Secret

Strategy Number 1 – Accelerate Your Payments

Monthly Payments

Bi-Weekly Accelerated Payment

Savings/Gain

Initial Amortization

25 Years

25 Years

 
Mortgage Amount

$500,000

$500,000

Payment

$2,262.30

$1,131.15

 
Balance End of 5 Years

$423,954.37

$411,632.87

+$12,321.50

Revised Amortization

25 Years

22 Years  3 Months

2 Years 9 months

This is a powerful and simple start to your plan.  By accelerating you payments bi-weekly you reduce the life of your mortgage by 2 years and 9 months!!

Strategy Number 2 – Accelerate Your Payments and Make an Annual Lump Sum

Bi-Weekly Accelerated Payment

Bi-Weekly Acc. & Annual Lump Sum $2,500

Bi-Weekly Acc. & Annual Lump Sum $5,000

Initial Amortization

25 Years

25 Years

25 Years

Mortgage Amount

$500,000

$500,000

$500,000

Payment

$1,131.15

$1,131.15

$1,131.15

Balance End of 5 Years

$411,632.87

$398,136.93

$565,522.06

Revised Amortization

22 Years 3 Months

20 Years 6 Months

18 Years 9 Months

Again, very powerful.  If you are able to put aside an extra $416 per month and apply it to your mortgage, you have reduced your mortgage by 4 years!

Strategy Number 3 – Accelerate Your Payments, Make an Annual Lump Sum and Increase Your Regular Payment Once Annually

Bi-Weekly Accelerated Payment

Bi-Weekly Acc. & Annual Lump Sum $2,500, Increase Regular Payment by 2% for the first 5 Years

Bi-Weekly Acc. & Annual Lump Sum $5,000,Increase Regular Payment by 2% for the first 5 Years

Initial Amortization

25 Years

25 Years

25 Years

Mortgage Amount

$500,000

$500,000

$500,000

Payment

$1,131.15

Increase Payment approx. $45 once per year

Increase Payment approx. $45 once per year

Balance End of 5 Years

$411,632.87

$388,641.40

$375,145.49

Revised Amortization

22 Years 3 Months

18 Years 5 Months 16 Years 11 Months

Now, this is significant!

This is just the beginning.  A well thought out and diligently executed strategy can and will reduce most people’s mortgages by up to 10 years faster.  Mortgages are big numbers and most of us tend to resign ourselves to what seems like a lifetime of mortgage payments.  In fact most people joke about it in passing.

If you consider how much money we pay towards our mortgage payments each year, the above scenario is $30,000 per year in regular payments on a 25 year mortgage.  Imagine if you got to keep that money in your pocket 10 years sooner!

Every extra dollar you pay to your mortgage is creating equity in your house, it’s not an expense, it’s an investment.  Interest is the expense.  You pay interest on what you owe.  You owe it to yourself to stop paying interest.

Not every strategy will work for every person, but, the key to this is to sit down with a professional, create a plan and execute the plan.

 

The mortgage broker industry has evolved dramatically over the last 25 years.

A common misconception remains today that the a Mortgage Broker can only help when your bank turns you down.  This is entirely untrue.  Today’s mortgage market offers more choice and complexities than ever before for consumers.  A mortgage broker provides expert advice and service and ensures that you can easily navigate the lending landscape.

Here are some important points when considering using the services of a mortgage broker:

  • Get Independent, Unbiased advice – in my mind this is the most important thing to consider.  As a Mortgage Broker I work with many different lenders, but, not for them.  I work for you, my client.  If you go to your bank for a mortgage, they can only offer you their mortgage products.  This may or may not be a fit for you.  You have no choice in the terms & conditions, penalty clauses, etc..  This is where it really matters and most consumers never even consider the potential costs.

Can an employee of a bank really have your best interests in mind? They have one brand to sell regardless of your needs and wants.  Really think about that, you decide…

  • Choice – much like the previous example.  A mortgage broker has access to upwards of 30 – 40 lenders and 100’s of products.  As a truly independent adviser I can assess what factors of a mortgage are the most important to your situation and provide the right solution with the right lender.

           i. Do you want a great rate, large prepayment privileges that are available anytime throughout the year? We have that.

           ii. Do you need the flexibility to payoff the mortgage early with little penalty? We have that.

           iii.  Are you self-employed showing little income? No problem, we have that.

  • Expertise –  Mortgages are all I do,  everyday.  We provide expert advice and guidance on products, rates and strategies. Many consumers go to their bank account manager for their mortgage, bank accounts, loans, insurance, etc… not the expert you need.

Jack of all trades, Master of None

  • Best Rates and Terms – Mortgage brokers have the negotiating power with all of our lenders as they are competing for your business.  Many lenders have rate/product specials which are not advertised to the general public.  A broker has access to these specials and is constantly updated on the upcoming specials
  • No Cost to You – In most cases the Mortgage Broker gets paid by the bank who ultimately does your mortgage, which means my service to you is free.

These are just a few of the reasons that you need to consider using a mortgage broker for your next mortgage transaction.  For the single largest financial transaction most will make, you cannot afford not to consult with a professional.

Contact a licensed Mortgage Broker for true choice when getting your mortgage.

Morgan Vaughan is a licensed mortgage broker with over 14 years in the mortgage industry.  Providing excellent service, expert advice.

Contact Morgan or call at 416-481-2903 to discuss your situation or get a second opinion.

People always tend to ask “What’s Your Best Interest rate?”

I hear this question all the time, it’s not that I don’t think it’s important, quite the opposite.  I believe that a great rate combined with the absolute best terms and conditions for my clients are more important.

Many clients spend so much time shopping for the best rate, they can wear blinders when considering what can in the end cost them big dollars.  I like to ask, “what does a lower rate really mean to your bottom line?”

The extra principal paid (over 5 years) on a $350,000, 5 year fixed year mortgage at 3.34% versus 3.39% is $279.00

While the interest you save is $830.00 over that same 5 year period, that is $166 per year

To be clear, that is your hard-earned money, I do believe that you should keep or make the best use of that money.  The Banking Industry have done a great job of making a mortgage a commodity that’s easy to sell.  The lowest common denominator always comes down to rate.  Time and time again ‘Bank A’ offers 3.49%, ‘Bank B’ offers 3.45% and so on.

The problem with that approach is that we have been conditioned to care only about rate.  Most people never ask the question what happens if I need to break my mortgage for any reason or maybe you do ask;  Your banker gives you a short answer about 3 months interest or Interest Rate Differential.  What does that really mean?  Why should you care?

Here’s why you need to care…

Lenders use a variety of methods when calculating a penalty on a fixed rate mortgage, let’s use a 5 year mortgage at $250,000.00, 3.55% original rate, 20 months remaining for the following exercise, remember fixed rate penalties are the greater of 3 months interest or Interest Rate Differential (IRD). How IRD is calculated is the thing:

Step 1. How to calculate 3 months interest penalty

  • $250,000.00 x 3.55% = $10,725
  • ($10,725.00/12) x 3 months = $2,681.00

Step 2. Discounted rate to discounted rate Interest Differential is the best possible option for clients

  • the lender will consider the closest discounted rate to your remaining term, in this case 2 years at 3.19%
  • The calculation 3.55% – 3.19% = 0.36% differential
  • $250,000.00 x 0.36% = $900.00
  • ($900/12) x 20 months = $1,500 Penalty
  • In this example 3 months interest is greater than the Interest rate differential, so, you would pay $2,681.00 penalty

Step 3.  Posted Rate to Discounted Rate Interest Differential is typical of the big five banks (with slight variations with each of them), this is best for the bank.

  • The lender will look at the original discount that you received off of the 5 year posted rate to arrive at your discounted rate (2.30% at the time)
  • Then subtract the artificial discounted rate (2.30% from the 3.19% = 0.89%) from your existing rate to calculate the differential
  • $250,000.00 x 2.66% = $6,650.00
  • ($6,650/12) x 20 = $11,083.33 Penalty
  • The method uses the large discounts banks provide on 5 year mortgage, which you would never receive on a new 2 year fixed mortgage

Wow!!!  The numbers are real.  Every bank has their penalty calculation on their websites, but, they are difficult to find, difficult to understand and generally not explained when you sign on the dotted line.  Here are links to the major banks penalty calculators:

In the fight to give you the best rate, I bet this information was overlooked, if you knew the details of their penalties would you have considered other options? There are far better options available.

I want to clarify that I am not opposed to banks charging penalties, after all,  a mortgage is a contract and you are breaking that contract, so, there is a cost to doing that.  I really believe that clients need to understand what is involved in calculating the penalties of their mortgage.

The argument I hear is that I just took this mortgage  I won’t be paying it out.  The truth is you may not, but, Life is full of unknowns and uncertainty.

IF is the middle letters of LIFE, the thing about life is you don’t know if something will happen whether good or bad in 1 year, 2 year, 5 years

Contact a licensed Mortgage Broker for true choice when getting your mortgage.

Morgan Vaughan is a licensed mortgage broker with over 14 years in the mortgage industry.  Providing excellent service, expert advice.

Contact Morgan or call at 416-481-2903 to discuss your situation or get a second opinion.

Interest rates have been (and still are) at historical lows, many consumers are taking advantage of low payments to purchase the homes they love.  When I ask most people how they are using this low rate environment to their advantage, there is usually a short (or long) pause while they try to figure out what that means.  

Let’s make a comparison:

How much faster will you pay off a $350,000 mortgage amortized over 25 years at 3.50% versus 2.50%? 3 years, 5 Years, 10 Years?

  • The answer may surprise you, you won’t.  They will both take 25 years!
  • To clarify, you will pay a lot less interest, $174,218.73 (3.50%) versus $119,548.30 (2.50%), so, $54,548.43 less over that time, but, you will have the same debt for the same amount of time

How is this possible?

Head Scratch

Here’s what happens:

  • In the above example the monthly payment at 3.50% is $1,747.45, while the monthly payment at 2.50% is $1,565.19, a difference of $182.26, not too much really.
  • Most people just take the 25 year amortization because that is what they are offered without any advice as to how to reduce this .

Banks earn money when you owe them money. Is it realistic to assume the ‘Specialist’ employed by the bank will recommend you pay them off faster?

It’s two opposing forces, the bank wants you to owe them money for as long as possible and you want to pay them off as soon as possible.

How to beat the bank:

Plan Ahead

Using the numbers above, what if:

  1. You take an interest rate at 2.50% (remember the 25 year payment is $1,565.19), but, you make payments as if your interest rate was 3.50% ($1,747.45) adding $182 to your payment. Your amortization is reduced immediately to 21.5 years. That’s 3.5 years sooner!
  2. Let’s take that a step further, what if you can afford to pay an extra $300 per month? Your amortization becomes 17.5 years. That’s 7.5 years sooner! 7.5 years is a long time, what could you do with 7.5 years of mortgage payments in your bank account? That is $184,270.50 ($2,047.50 per month x 12 months x 7.5 years) that you don’t have to put towards your mortgage.

money stack

What people seems to forget is that everything extra you pay goes to the principal of your mortgage, that is your equity in your house.  As a bonus, mortgage interest is generally calculated semi-annually (twice a year), not in advance, so, the faster you pay down the mortgage, the less interest you pay the bank.

A lot of people have the  good intention of paying down their mortgage faster, they say to themselves, yes, I have the extra money in my budget, but, I will pay extra in a few months. The sad truth is that only around 17% of Canadians even pay any extra money at all towards their mortgage.

Think of paying down your mortgage as paying yourself, many people have regular RRSP contributions, insurance payments and they don’t even miss the money.  It is usually directly withdrawn from their account, guess what, so is your mortgage.

The amount of money isn’t the important thing, you don’t need to put tens of thousands extra towards your mortgage every year, most people don’t have that much extra money.  What is important is that every extra dollar you put towards your mortgage principal is your money!

You have to create a realistic strategy that fits your budget and goals.  Working with an experienced, independent Mortgage Broker will provide you with the best of all worlds when planning a strategy: the best rates, the most flexible prepayment privileges and most importantly, unbiased advice.

If your not happy and you don’t go with my recommendation, I don’t get paid.  Can the salaried employee at the bank say that?

Morgan Vaughan is a licensed mortgage broker with over 14 years experience in the mortgage industry.  Providing excellent service, expert advice.

Contact Morgan or call at 416-481-2903 to discuss your situation or get a second opinion.