BANK VS. BROKER
Want choice? Don't use a bank, use a broker!
One of the greatest advantages of using a mortgage broker is getting access to over 50 lenders. A bank will only offer you access to their products, while a mortgage broker can offer you more choices through multiple lenders. With this vast product selection, brokers help homebuyers and owners get the best mortgage for their needs.
What is the best mortgage?
- The right rate
- The right mortgage privileges
When selecting the right lender your broker will consider:
- Rate - variable vs. fixed
- Payment flexibility
- Pre-payment privileges
- Restrictions, fees and penalties
- Mortgage portability or assumability
- Qualifying with no income verification (self-employed)
Focusing on a rock-bottom rate can mean higher fees and penalties with more restrictive terms when you want to move, refinance or use your mortgage for a debt consolidation. A mortgage broker will give you a sound evaluation of product choices and together will help you decide what option suits your need.
Other Mortgage Factors To Consider Besides "Low Rates"
When shopping for a mortgage it’s hard to get “low rates” out of your head. Of course you would like the lowest rate you can get, but focusing solely on one aspect of your mortgage is a common mistake many people make. Many mortgages with low rates often have a catch, knowing what to look for can save you a ton of money in the long run.
Rather than focusing entirely on rates, take a look at things such as pre-payment privileges and mortgage portability to really save you money on your mortgage.
Pre-payment privileges allow you to pay a certain amount of money toward your mortgage on top of your current monthly payment without having to pay a pre-payment charge. These payments can be in the form of lump sums or increased monthly payments. Having this option will allow you to pay down your principal mortgage amount, the lower your principal is the lower your interest will be.
Mortgage portability allows you to transfer your mortgage over to a new property without having to pay a penalty. The benefit of this option is the ability to lock into a low interest rate by carrying over the exact terms you currently have on your mortgage.
Knowing what to look for in your commitment can help you negotiate, allowing more flexibility throughout your term. Have a strategy and know the conditions of your mortgage to get the most out of your money.
FIXED VS. VARIABLE RATE MORTGAGE
Fixed-rate vs. a variable-rate mortgage: choosing which one is right for you can be a difficult decision.
Historically low interest rates have prompted many Canadians to opt for variable-rate mortgages. Variable rates float up and down with your bank’s prime rate and are often a better deal on paper: in recent year they've carried a lower interest rate (0.50% lower or more, in some cases). But if the Bank of Canada raises its overnight lending rate and your bank increases its prime rate in lockstep, that variable rate will climb. Not the case for a fixed-rate mortgage - its interest rate stays the same for a pre-determined amount of time. There are pros and cons to both options.
Lenders have begun to raise their mortgage rates slightly. The increase is small: variable-rate mortgages have inched up just 0.10% - 0.20% in most cases, but even a small rate increase like this means many mortgage holders saw their monthly costs increase. Still, the cost of a variable-rate mortgage remains cheaper than fixed rate.
So what's the best options for you, right now?
The case for variable-rate mortgages
- It's cheaper: interest rates remain lower for variable-rate mortgages. If you're looking for the best possible deal on a mortgage, you'll find it with a floating interest rate
- Historically, variable-rate mortgages have been much better deals. A York University study found homeowners with variable-rate mortgages saved $22,000 in interest over 15 years compared to those with fixed rates
- Rate increases will happen gradually. If the Bank of Canada raises its lending rate and your bank follows suit, increases will be slow to minimize its effect on the economy
The case for fixed-rate mortgages
- It's more stable: you know exactly how much interest you'll be paying over the term, so it's easier to budget
- Rates now sit at a historic low. It's not likely they will go much lower, so chances are you are locking in at the best possible time
- Interest rates have fluctuated dramatically in the past. In the early 1980s, for example, interest rates topped 20%. Locking in insulates you from those change completely
For anyone with a variable-rate mortgage who'd like to shield themselves from future rate increases, the option of ‘locking in’ your mortgage is there. Most lenders will allow you to switch your variable-rate mortgage to a fixed-rate option. Mortgage Architects Professionals brokers are there to provide advice and help the switch go smoothly.
If you're going to lock in, do it now
The cost of fixed-rate mortgages could rise another 0.60 - 0.70% (60 to 70 basis points) in the near future, TD Bank economist Diana Petramala told The Globe and Mail. This would be a reaction to the U.S. central bank raising its interest rate for the first time in a decade (a move that would affect the Canadian bond market, and your bank’s financial position as a result). If that happens, as it is widely expected to, Canadians should prepare for rates to rise.
What you need to know
Locking in may come with some extra costs and restrictions. Here are a few things to be aware of:
- You may have to pay a fee to switch to a fixed rate
- You may have to wait a certain amount of time before you’re able to lock in
- Your new mortgage may come with restrictions on refinancing
Make sure to get all the details from your lender in writing before you lock in your rate.
Get personal advice and make sure 'locking in' goes smoothly, contact an MA Professionals broker today
COLLATERAL CHARGE MORTGAGES
A different kind of mortgage with unique pros and cons: find out if it’s right for you
A collateral charge mortgage is a very different kettle of fish; unlike a traditional mortgage, a collateral mortgage makes it easier to borrow against the property you’re buying without refinancing. The main advantage for many people is access to a home equity line of credit: the bank can ‘re-advance’ you cash after closing with your mortgage as collateral. This doesn’t require refinancing and you don’t have to pay a lawyer. Unlike a traditional mortgage, you can also get a collateral charge mortgage worth more than the current value of your home, 125% of its value in some cases. That’s the amount you can borrow against.
Let’s break it down. Say you’re buying a home worth $250,000. You make a 20% down payment of $50,000 and get a traditional mortgage for the remaining $200,000. The registered home value is still $250,000, but if you opt for a collateral charge mortgage instead you could end up with a boosted registered home value courtesy of your bank. If your bank registers your home value at 125%, that would mean $312,500 on the books. You can borrow up to 80% of this value ($250,000 in this case) minus what you still owe on the mortgage ($200,000). The end result - you get a line of credit worth $50,000.
That may sound good, but there are downsides to choosing a collateral charge mortgage over a traditional one. For starters, the mortgage is non-transferable. It can’t be moved to a new lender without paying hefty legal fees, even when your mortgage term is up. This takes some of your bargaining ability off the table; your lender knows if you don’t like the interest rate it’s offering, it’s going to cost you a lot of money to move.
Collateral charge mortgages allow lenders to change your interest rate after closing (for example, if you miss a payment). Your lender can also increase your loan amount and use your mortgage payment to pay down other debts you owe (if you default on payments). These things don’t happen in a traditional mortgage.
You should also be aware having a collateral mortgage means you may have more debt on paper than you do in reality (because your mortgage has been registered for an inflated amount). Good if you are borrowing against your mortgage, bad if you’re trying to secure a loan from another lender.
If you are in good financial position and you need access to cash for home improvements, business investments etc., having a collateral mortgage can be an easy way to get your hands on capital while buying your new home at the same time. It’s certainly not for everyone, so be sure to go over the pros and cons in detail before you opt for a collateral charge over a traditional mortgage.