Friday, August 6, 2010

Globe: Mortgage breakage costs: let’s stop the nonsense

I found this article interesting and very relevant. Check it out!

Original Article

Have you ever wondered why the banks list posted mortgage rates that are ridiculously high?

One reason is that it could result in you paying $10,000 or more in extra penalties should you ever break your mortgage with them.

Here is the scenario:

Many people have, at one time or another, looked at breaking their mortgage in order to get a better rate.

With interest rates dropping to historic lows, it is more and more common for homeowners to think about the benefits of breaking their mortgage, paying a penalty, and locking in to a new lower rate mortgage.

Traditionally, the mortgage penalty on fixed rates is either 3 months interest OR something called the Interest Rate Differential (IRD) – whichever is higher. On a closed, variable rate mortgage, it is usually simply 3 months interest.

While the 3 months interest is pretty easy to understand, the IRD is a little mysterious. For help on this, I went to TD Bank's mortgage website. RBC has a similar section.

They both show the following formula:

Step 1: (A) The current interest rate under your Mortgage expressed as a decimal (for example, 6.75% = .0675)

Step 2: (B) The current interest rate that we can now charge for a mortgage term offered by us with the term closest to your remaining term. The interest rate will be our posted interest rate for the term minus the most recent discount you received

Step 3: (C) A - B = C, which is the difference between your current interest rate and the interest rate in B above (write C as a decimal)

Step 4: (D) Amount you want to prepay

Step 5: (E) Number of months for the remaining term of your Mortgage

Step 6: (F) (C x D x E) ÷ 12 = F, F is your estimated Interest Rate Differential Amount


Let’s say you have a mortgage at 4.75%, and it comes due in 2 years, and it has a current principal owing of $400,000. TD’s current 2 year posted rate is 4.1%. Let’s say that you were offered a 0.5% discount off the 2 year rate. The math would work as follows:

.0475 (A) – .0385 (B) = .009 (C)

.009 (C) * $400,000 (D) * 24 (E) / 12 = $7,200 (F)

While $7,200 seems like a lot of money, if you can lock in a 5 year mortgage today at 4%, you are benefiting from 2 years of a 4% interest rate instead of 4.75%, but you are also guaranteeing three additional years at 4%, when it is quite likely that in two years, a 5 year fixed mortgage rate will be a lot higher.

Here comes the evil part.

At many big banks, they don’t use your existing 4.75% rate. What they do is take the posted rate at the time you took out your mortgage. This is a rate that has no relevance to you, as you never paid it. In fact, it likely isn’t listed anywhere on your mortgage contract. Remember the ridiculously high mortgage rate we talked about at the beginning of this article? Now you see what it can be used for.

If we take the same IRD formula, but replace the actual rate of 4.75% with a posted rate of 6.25%, the IRD becomes:

.0625 (A) – .0385 (B) = .024 (C)

.024 (C) * $400,000 (D) * 24 (E) / 12 = $19,200 (F)

Because of this sleight of hand, you would now owe the bank an additional $12,000!

If you try and fight the calculation, you will likely face a long line of staff who don’t understand the calculation themselves. A few months of complaining through the right channels might get you your money back.

In the March budget, the federal government said it would “bring forward regulations” to standardize the calculation and disclosure of mortgage pre-payment penalties. (This applies to federally regulated lenders.) We are still waiting.

This is exactly the type of situation where a good financial advisor can help you avoid or manage. The situation on IRD calculations as it currently stands with the big banks is rotten to the core.

_____

Nice eh?

Ben Sage, Sales Representative. http://www.bensage.com http://www.oxfordcountyhomes.ca Re/Max a-b Realty Ltd., Brokerage. 519-536-7535. 521 Dundas St., Woodstock, ON

Wednesday, August 4, 2010

Chicken Little and Media...

If you're anything like me, you're a compulsive news reader. I have a love-hate relationship with news-media. I feel it is very important to be in touch with the world around me, as it impacts my business on a day-to-day basis, as well as shaping the future of my marketing avenues, and business planning, however, it can be very difficult to overcome the overwhelming, and CONSTANT negativity in the news.

At this time I am in a position, thanks to some wonderful Realtors and Industry analysts, to repeat a prediction that I encountered recently. Brace yourself for it - THERE WILL BE NEGATIVE MEDIA regarding the Real Estate market, very shortly. Yes, I know, this is a shocking revelation!

My goal today is to soften the impact of this sensationalist media by preparing you. By arming you with the facts.

Most of this content is "borrowed" from a gentleman named Doug Hannan, who is a Broker/Manager for RE/MAX West on Bloor st in Toronto (Another universe in Real Estate land, but nevertheless, seemingly the sole focus of real estate media in Ontario).

Doug obviously follows the Toronto Real Estate Market very closely. He has noted that in the month of July. TREB's (Toronto Real Estate Board) sales numbers were slightly lower than expected. He also noted that inventory had dropped a proportional amount, indicating balance in the market. Sales for the month were 6,566 units, down 1,900 from June of the same year (a typical seasonal drop - Vacation time!!). New listings this month are down 3,000 units to 21,096. It is to be noted that RE/MAX Realtors have been predicting a decrease in inventory since late 2009.

Where the media sensationalists will galvanize, is in the Year over Year numbers. It stands to reason that a July 2009 vs. July 2010 drop in sales of 35% would yield some alarm bells, but I am predicting that the media will have a decidedly un-elephant-like memory. They will fail to note (as they have previously failed to note) that July of 2009 was an absolutely ABNORMAL month, even in an extremely hot year. July 2009 Sales set a record at 9,967 sales (up 28% from July 2008). Benchmarking against the best July of ALL TIME is an unfair method of assessing the health of our market. The media won't mention this, save for a tiny disclaimer at the end of their "Real Estate Bubble is HERE, the sky is falling, depreciation is just around the corner, thousands to be left over-leveraged on inflated prices" reports.

The Sky is not falling, friends. Balance and sustainable growth will be the cornerstone of the immediate Real Estate market.

Thanks Doug - for the insight!

To Reach Doug Hannan of Re/Max West, try this:
doug.hannan@sympatico.ca

Thanks for reading!

Ben Sage, Sales Representative. http://www.bensage.com http://www.oxfordcountyhomes.ca Re/Max a-b Realty Ltd., Brokerage. 519-536-7535. 521 Dundas St., Woodstock, ON