mortgage options

Why 30 Year Amortization Mortgages Are Good

I know, this is against what I stand for: achieving mortgage freedom and building long term wealth, but let me explain why 30 year amortization mortgages are good.  The exception is for home buyers putting less than 20% downpayment, the maximum allowed amortization is 25 years per government requirements.

Why 30 Year Amortization Mortgages?

Lately, I have been coming across clients where certain events have dictated changes in their housing situation:

  • A couple where one spouse has gone back to school to upgrade their skills. The are down to one income for a few years. Having 30 year amortization mortgage instead of 25 year amortization mortgage makes a difference in their cash flow requirements.
  • A first time home buyer who wants to move up the home ownership ladder by renting their existing home instead of selling. Having a 30 year amortization mortgage would improve the cash flow on the income property (current home) which helps in qualifying for the next home.
  • A couple where one spouse has lost their job and have young children. This is another case of a 30 year amortization mortgage would make a big difference for cash flow purposes.
  • A homeowner who bought a home with 25 year amortization mortgage is looking to move prior to mortgage maturity. To save client penalty money, my recommendation was to port mortgage and increase mortgage amount. However since original mortgage is amortized over 25 years, they qualify for a lower amount than they desire.
  • Real estate investors who got financing through institutions that required investment properties to be amortized over 25 years are having issues acquiring further properties since 25 year amortization mortgages result in lower net cash flow.

With today's low interest rates, porting a mortgage and doing and increase & blend will be more popular in the future. It doesn't make sense to break a mortgage at 2.99% in 3 years from now.  Having a 30 year amortization mortgage provides the qualification flexibility for future moves.

Mortgage Freedom

I have arranged mortgages for clients who wanted to amortize their mortgage over 10 years. So how can a 30 year mortgage be paid off in less than 10 years? Mortgages, typically, come with 20% pre-payment privileges. If the homeowners utilize this privilege they can be mortgage free in less than 5 years by applying the 20% pre-payment privilege every year.  Here is an example:

Mortgage Amount: $400,000 Mortgage Interest Rate: 2.99% Annual Pre-Payment: $100,000 Mortgage paid off in 4 years

I realize the above example is extreme, where very few homeowners can pre-pay $100,000 annually of after tax dollars. This example illustrates homeowners shouldn't focus on shorter amortization mortgages since the pre-payment feature is a more powerful tool.

Oh and you can still get a 35 year amortization mortgage in Canada today!

To discuss your mortgage financing needs whether you are buying a home, an investment property or renewing your mortgage, please contact Nawar.

The End Of Mortgage Brokers?

In today's do it yourself world from DIY renovations, DIY buying & selling homes, DIY investing, DIY looking for the lowest mortgage rate....is this the end of mortgage brokers?

Recently there have been a few articles in the media regarding mortgage brokers and banks:

As a mortgage broker, believe it or not, I am arguing for the need of a mortgage professional arranging the financing for a homeowner for the following reasons:

Mortgage Options

A mortgage professional provides different mortgage products and options to suite homeowners' needs. Here are 3 examples:

1. Young Family

A couple are expecting children and their income will be reduced to one income, cash flow is important for them in the near future. Hence, a mortgage product with 35 year amortization would be beneficial with generous pre-payment and increased payment options to help them catch up once they go back to two incomes.

2. First Time Home Buyer & Real Estate Investor

First time home buyers buying with 5% downpayment but have the intention of renting their existing home in 4-5 years time frame once they move up the homeownership ladder.  A good option to consider is a 10 year fixed mortgage to set the cost of borrowing and eliminate the need for the first time home buyers to requalify their first home as a rental property in 5 years time frame at higher interest rates which would restrict their ability to qualify for their next home.

3. Business Owner

Self employed who wants to access their home equity as they pay down the mortgage without the hassle of qualifying. An option to consider is a re-advanceable mortgage where as the mortgage principal is paid down, the secured line of credit increases by the paid principal amount providing additional secured equity if needed by the homeowner

Clearly, one size does not fit all. 5 year mortgage term is the most recommended product, I wonder why?

Mortgage Terms & Fine Print

This is very important since I believe the majority of homeowners sign without really knowing what they are signing for. Per the article mentioned above (Client uses Twitter to Challenge TD Bank), it is probable the client didn't know what the mortgage restrictions (penalties) were. Either he didn't ask or the mortgage professional did not explain the details. Many homeowners focus on lowest rate (What's Your Lowest Rate?) without considering the mortgage product fine print which could cost them thousands of dollars on the back end.  This is a result of confusing lowest rate as saving money.

Mortgage Strategy

When choosing a financial planner or advisor, one wouldn't choose based on the price of mutual fund or stock on that specific day, they would choose based on the plan they provide and one's belief in the planner's ability to execute the plan. As for mortgages, a homeowner gets a quote, signs the paperwork and doesn't hear till mortgage renewal time or they might they get an offer for a credit card, mutual fund or chequing account in the mail. Why would a homeowner choose their asset advisor any different from their debt advisor?  What separates the true mortgage professional from the "application filler and rate quoter" is providing a sound strategy to help the homeowner achieve their financial goals. One wouldn't give a financial planner $50,000 and talk them after 5 years, so why would one borrow hundreds of thousands of dollars and not expect a proactive approach?

Professional Mortgage Brokers

I hope I have laid out the case why mortgage brokers are needed.  A word of caution: there are good and bad mortgage brokers. To find a mortgage professional ask lots of questions of the mortgage broker or banker regarding the mortgage options, terms, fine print and strategy.  To get a copy of the 4 questions one should ask when shopping around for a mortgage, go to: Shopping Around Questions 

If you are looking for a professional mortgage broker whether you are buying a home, an investment property or renewing a mortgage, please contact Nawar.

How To Save on Your Land Transfer Tax

 

As mortgage lending rules have become more strict and real estate prices have appreciated over the last few years, it's becoming more challenging for some first time home buyers to qualify for a mortgage without a co-signer.

I was approached by a first time home buyer who was interested in buying her first home, a condo in downtown Toronto, and she needed her mother to co-apply in order to qualify for the mortgage.  As a first time home buyer in Ontario, she would qualify for up to $2,000 land transfer tax rebate and up to $3,725 from the City of Toronto depending on her purchase price.  Since her mother, who is a homeowner, is on title, the first time home buyer would have lost 50% of the rebates (since she's 50% owner in the property).

In order to save the buyer a few thousand dollars, with the lender's approval, the buyer was registered with 99% interest in the property and her mother with 1% interest.  This setup allowed the first time home buyer to maximize the land transfer rebates available from the Province of Ontario and the City of Toronto.

It's important to work with a professional who is experienced and understands how to reduce their clients homeownership costs.

To discuss your personal mortgage needs, please contact me.