Questions for Your Mortgage Broker

Ask these questions to your mortgage broker or financial advisor.

Q. Is my mortgage portable?

If you have a portable mortgage and want to sell your current home to buy another one before the term of the mortgage is up, you can transfer or port your current mortgage to your new home.  This has obvious benefits.  You won’t have to pay any penalties for cancelling a mortgage and you won’t have to re-qualify.  For a minimum of fees, you will be able to put your current mortgage on your new home and carry on making the same payments as before. Should you require additional financing for your new home, we can show you how to keep the mortgage you have and increase funding to make buying your new place affordable.

 Q. Is my mortgage assumable?

If you have an assumable mortgage, you can sell your property before your mortgage term is up and not have to pay any penalty for discharging your mortgage.  An assumable mortgage means that the purchaser of your property can step into your shoes and continue making the payments until the mortgage expires.  The lender must approve of the purchaser, but, unless the purchaser is financially unable to make the payments, you will usually get the lender’s approval.  But beware that you are still liable, if the purchaser defaults, for any balance owing to the lender.  Of course, if the purchaser and lender agree to different terms and payments, without your consent, then you have no liability. One word of caution: variable rate mortgages are not usually assumable.

Q. Can I make any pre-payments without penalty?

Most lenders allow at least one pre-payment each year, usually on the anniversary date of the mortgage.  The amount you can pre-pay is set as a percentage of the original mortgage amount.  Usually it is at least 10% and may even go as high as 20%.  Some lenders will also insist on a minimum dollar amount such as $100 or $500.

 Q. Can I make payments more frequently than once a month?

You can make weekly, bi-weekly, semi-monthly or monthly payments, whatever works for you.  The rationale behind making payments more frequently than once a month is that you pay down the balance more quickly and so save in your interest costs.  But be careful to make sure that your lender is letting you make accelerated payments.  What is the difference, for example, between a bi-weekly and an accelerated bi-weekly payment?  The first type simply divides the monthly payment into two parts. You therefore make 24 payments each year instead of 12 payments.  The second type means that each year you will be making 26 payments, or the equivalent of one month’s additional payment each year, and so you will be reducing your outstanding balance more quickly.  You, therefore, pay less interest over the term of the mortgage than you would if you choose either the monthly payment or standard bi-weekly payment.  But beware of those advertisements that show a huge interest savings amount.  They are true only if you hold the mortgage for the full time it takes to pay it off (now usually 25 years) without changing the rate or any of the terms of the mortgage. If the rate changes or the terms are altered, then the huge interest savings advertised will change as well.  And since most Canadians do not keep their mortgages for the full 25 years, they will save some interest by making accelerated payments, but it won’t be nearly as dramatic as the amounts shown in advertisements. Follow this link and click on the prepayment calculator.  You can enter any amount and find out the effect of making a prepayment on your mortgage.

Q. Are there any penalties if I have to get out of my mortgage before the term is up?

Unless you have an open mortgage, the answer is yes and the penalties can be substantial.  If you must pay off your mortgage before the end of the mortgage term, you can expect to pay a penalty calculated in one of two ways.  Some lenders will charge you the equivalent of three months’ interest calculated on the outstanding amount you owe them.  Other will use what is called the interest rate differential (IRD).  They take the difference between the rate of interest prevailing when you make your request and the rate specified in your mortgage and then multiply that by the outstanding amount you owe for the unexpired term of the mortgage.  Suppose, for example, that you borrowed at 6%, but that, when you want to get out of the mortgage, the rate is 4% and that you still owe $100,000.  There are two years left on the mortgage.  So:  .02x $100,000 x 2 = $ 4,000. If, however, you had borrowed at 4% and the current rate was 6%, the lender would switch to making you pay three months’ interest.  You won’t get money back.  Just make sure you know which method your lender will use should the time come when you need to pay out what you owe.

Q. What happens if I have been pre-approved for a mortgage at one rate and the rate subsequently drops before I sign my mortgage?  Will the lender give me the lower rate?

Various lenders have different policies.  Most will allow you to take advantage of the lower rate especially if you are a good credit risk. Because policies change frequently, there is no one answer for all time.  Ask us about this and about the policies of the different lenders.

Q. Can I use my RRSP’s for a down payment?

Yes you can.  The federal government has a home buyer program that allows you to withdraw funds from your RRSP account without paying tax on it, but only if you are a first time home buyer or at least four calendar years have gone by since you owned a home.   If this requirement fits you, you can borrow up to $ 25,000 towards buying a home.  If there are two of you, and the other person is also a first time home buyer, then that person can also withdraw $25,000.

But there are conditions attached and you need to think carefully about them.  First, you must repay your RRSP and you have a maximum of 15 years to repay what you took out. Each year you must pay back 1/15thof the amount you borrowed from the RRSP.  If you miss paying this back, the amount you withdrew will be added into your income and you will be taxed on it. Second, the funds you want to use must have been in your RRSP account for at least 90 days before the date on which you want to withdraw them.  Third, you must intend this home to be your principal residence.  Fourth, you must move into the house within one year of drawing out the funds from your RRSP.

If you are good with this, then using your RRSP for your down payment makes a lot of sense.

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