MORTGAGE TIDBITS

Most mortgages are closed, meaning paying out or paying down the mortgage cannot be done without paying so kind of penalty. The normal wording for the above penalty is likely to sound something like the following: "prepayment is permitted by paying a penalty equivalent to (the greater of) a three months’ interest or the interest rate differential between the rate on the document and the then going rate for the remaining term." Some lenders will restrict prepayment altogether until the third anniversary. Because today’s rates are as low as they are, the penalty will probably be the three months’ interest. To calculate the penalty, simply multiply the remaining balance on the mortgage by the interest rate percentage, divide by twelve and multiply by three.

(Example: $100,000 balance @ 8% = $8000 divided by 12 = $666.67 times 3 = $2000.)

To avoid the penalty you must have negotiated an "open" mortgage or be at the end of the term of the mortgage or get someone to assume your outstanding mortgage. To get someone to assume your mortgage may be inexpensive today (no penalty) but you are responsible for the purchaser of your home until at least the end of the term. If something goes wrong with the purchasers, you may end up having to pay their mortgage payments. There are two kinds of "open" mortgage. If you want a fixed rate of interest (rate guarantee) you probably can only get short term (ie. 6 months or 1 year). There is also a floating rate of interest (goes up & down with bank prime) through a "secured line of credit". Both these are fully open for repayment at any time without paying a penalty. The first one offers very little comfort for long term planning, since you can only get short term; the second offers no comfort whatsoever since your rate will go up immediately if bank prime goes up.

In the past, lenders insisted on getting a building location survey on every property mortgaged. The survey would identify that the house was indeed on the lot in question, and that your property was not being adversely affected by your neighbours, and your property was not encroaching on your neighbours. A survey today will cost $1000 in the city. Most first time buyers don’t have an extra $1000 to throw away, simply to satisfy a lender’s prerequisite. Following the example of the USA, Canadian lenders will now accept "title insurance." This insurance protect the lender if there is a problem with property title. It should be noted that title insurance does not give you any kind of protection. It simply protects the lender from title defects. This writer still strongly recommends you get a survey.

There is some confusion with bi-weekly payments. Most Consumers feel the bi-weekly payments will save them thousands of dollars over the length of a mortgage. There are two kinds of bi-weekly payments, one good & one bad. The good one is called accelerated bi-weekly. You would take the normal monthly payment & divide by two (ie. if your monthly payment was $1000, then the bi-weekly payment would be $500. If you multiply the $500 by 26 pay periods in a year, you end up having paid $13,000, or 13 months worth of monthly payments. The net effect of this method of payment will save the Consumer about 7 years of payments in the long run.

Some lender’s now know that Consumers think paying bi-weekly is good, so they have come up with a "bad" bi-weekly payment, called "non-accelerated." Their method is to take the normal monthly payment, multiply by 12 and divide by 26. As in our example above, $1,000 X 12 = $12,000, divided by 26 = $461.54. While these Consumers think they are saving money, they are not. If the latter group were to pay off their mortgage over time, it would take them the full 25 years. Be aware.