Mortgage/Financial question, calling CP guru's

[Sylvanfan]

I'm wondering if someone can offer me a bit of advice on a mortgage question I have.

Currently I'm on a variable rate mortgage thats amortized over 25 years. I'm permitted to pay off up to 15% of the principal annually without penalty. I have my current payment set to be about 2.75% above my actual rate so I'm basically paying around an extra $420 a month more than what I'm required to. As it works out the current payment has me on schedule to pay the mortgage off in 15 years as opposed to 25.

This got me thinking would it be worth looking into switching to a 15 year mortgage, or would the diffence end up being negligible in the end? Right now what I have is flexible as I can move my payment up and down without any problem. Also the lower obligated payment might be a usefull thing one day in the future if I decide to borrow myself even futher into debt.:D

I've tried calculations using mortgage calculators that the banks have on their website and I don't think it's really come up any different. So the question is it any different to borrow the money over the shorter term as opposed to borrowing it over the 25 year term and putting the extra straight onto the principal? Just wondering if it's something I should maybe consider?

[jamesteterenko]

If your interest rate, mortgage payment, and frequency all stay the same, I can't see how there would be any benefit in switching. Presumably, you have already paid any CMHC fees and would not get a break there. Where would you get any benefit in a switch?

I personally like the flexibility of being able to reduce your mortgage payment in the future, which you have done. When we picked up our mortgage, we set it up with a 35 year amortization. We had enough down that we didn't have any CMHC fees. We plan on paying it off much sooner but want the flexibility. We're planning on making a lump sum payment this year. If my wife gets a new job that pays better, we will probably increase our regular payments similar to what you have done. We anticipate we will use this flexibility to drop our payment back down if I ever change jobs or when we have kids.

[Slava]

I don't see the advantage of re-writing this mortgage? One thing that it would almost certainly do is decrease the extra payment amount that you can put on to the mortgage (15% of a lesser amount now), and it would lock you into paying onto the mortgage as opposed to the extra $420 that you now pay onto the principal.

[GrrlGoalie33]

I don't see any real benefit in switching either. You have $420 a month that you can use elsewhere if required (broken down car, hot water tank explodes etc).

Also, that $420 a month goes directly to principal right now, where if you locked with a higher payment, part of that money would be going to pay interest.

[Sample00]

If your mortgage was originally set up as a 25 year mortgage, you can increase your payment to reduce the amortization, as you have already done.
If you set your mortgage up on a 15 year amortization, if you fall into financial hardship, you would have to rewrite your mortgage to get it back out to 25 years.
If like you have done, is set it up at 25 years and reduced the amortization period to 15 by increasing your payments, if you were to fall onto a financial hardship, you can take your mortgage back out to 25 years without having to rewrite it. At least most of the financial institutions I know of, will let you do that.

hope that makes sense

[Sylvanfan]

I don't see the advantage of re-writing this mortgage? One thing that it would almost certainly do is decrease the extra payment amount that you can put on to the mortgage (15% of a lesser amount now), and it would lock you into paying onto the mortgage as opposed to the extra $420 that you now pay onto the principal.


Yeah, I didn't think there would be any. The only thing I can think of is that by Amortizing over 15 years up front as opposd to 25 the total amount of money is substantially less. With a 25 year mortgage about 28% of your regular payment is going agaist the principal in the first few years. Whereas with a 15 year amortization your getting close to 50% off the bat. I've yet to go through a renewal process with a morgage yet as I've had a bad tendency to sell houses after living in them for a year and needing a new mortgage.:bag:

I was just trying to figure out if I'd accidentally come accross a better way to do things or if I should look into something different. By the looks of it I won't make it to renewal with this mortgage either as a move in in the works again. But I think I'll ask about a 15 year amortization on the next place just to see the difference.

[ken0042]

Just to echo what has been said by others; the other big factor is this: if you do indeed fall into some sort of financial hardship; you don't have to tell your bank about it.

Same thing if you want to get into another property for revenue purposes; you only have to show your obligation of $1000 per month on your current mortgage as opposed to the $1500 per month.

[Lurch]

Also, that $420 a month goes directly to principal right now, where if you locked with a higher payment, part of that money would be going to pay interest.

Not much to add, other than that this statement and one that echoed it are incorrect. A 15 year mortgage and adding money to your monthly payment are identical from an interest paid and total cost perspective. The extra flexibility is a benefit of the longer mortgage, with really no cost associated with it other than a shorter term forces spending discipline on you.

[Sylvanfan]

The extra flexibility is a benefit of the longer mortgage, with really no cost associated with it other than a shorter term forces spending discipline on you.

Yeah, thats sort of what I was trying to determine. Thanks for putting in a good short easy to understand statement.:cool:

[JimmytheT]

Just to echo what has been said by others; the other big factor is this: if you do indeed fall into some sort of financial hardship; you don't have to tell your bank about it.

Same thing if you want to get into another property for revenue purposes; you only have to show your obligation of $1000 per month on your current mortgage as opposed to the $1500 per month.

I would highly recommend against doing this.

If you are delibrately lying about or withholding information about your loans, or financial hardship, when you are applying for any kind of credit is FRAUD!
If you are caught doing so, it is treated as such. For example, if you wish to purchase a revenue property and are applying for a mortgage at a bank to purchase this property, and you tell them that your mortgage payment on your existing property (which I am assuming is at another institution) is $1000, when in reality its $1500, that is a type of mortgage fraud.

[Slava]

I would highly recommend against doing this.

If you are delibrately lying about or withholding information about your loans, or financial hardship, when you are applying for any kind of credit is FRAUD!
If you are caught doing so, it is treated as such. For example, if you wish to purchase a revenue property and are applying for a mortgage at a bank to purchase this property, and you tell them that your mortgage payment on your existing property (which I am assuming is at another institution) is $1000, when in reality its $1500, that is a type of mortgage fraud.


Where is the fraud here? When they look at your debt-service ratio and things like this they are looking what you have to pay, not what you are paying. If you have a huge credit card bill they look at the minimum payments, even if you pay the whole tab every month. Plus, the $420 that he is paying now is optional; if he needed to he could drop this to the normal payment without any hassle at all.

[ken0042]

and you tell them that your mortgage payment on your existing property (which I am assuming is at another institution) is $1000, when in reality its $1500, that is a type of mortgage fraud.

But his payment is $1000. Isn't the fact that he sometimes makes a larger payment irrelivant at that point? I thought they look into your ability to repay a loan. The bottom line is his mortgage payment is still $1000 at that point.

Or at least that's how I see it. Same as when you apply for a loan and they ask how much your monthly salary is. If you try and say "well usually my boss gives me some overtime so I actually make $500 a month more than what HR will tell you" then they take what your actual salary is.

Or conversely if he does want to get another loan, go back to the $1000 payments for a while, get the new loan, and then pay back what you feel comfortable paying afterwards.

[Sylvanfan]

I would highly recommend against doing this.

If you are delibrately lying about or withholding information about your loans, or financial hardship, when you are applying for any kind of credit is FRAUD!
If you are caught doing so, it is treated as such. For example, if you wish to purchase a revenue property and are applying for a mortgage at a bank to purchase this property, and you tell them that your mortgage payment on your existing property (which I am assuming is at another institution) is $1000, when in reality its $1500, that is a type of mortgage fraud.

I think Ken was stating that by keeping the 25 year term that I have the option of moving my payment figure down (almost like my cap hit!). I can phone the bank and tell them to go back to the minimum payment and in a week it's set and than I can use that figure if I apply for a mortgage on another property when they do the credit calculations. Whereas if I go to a 15 year mortgage I'd have to redo the mortgage to get that payment down. Essentially right now I have the flexibilty to move my payment down if I want to in the future to improve my credit. I can still pay the same amount, I'd just have to save the extra money and apply it as separate principal payments which I'm allowed to do once a year.

Banks care how much you're spending per month, and really don't care if you're obligated to that payment for 1 year or 50 years when they hand out credit.

[firebug]

Check to see how your interest is calculated.

Many banks only calculate you interest and amortization twice a year... meaning that if you accelerate your payments (as Syl described or via bi-weekly payments) you are giving the bank an interest free loan for 6 months on the amount that your payments exceed your amortization schedule.

If this is the case, you are wiser to deposit monthly (or bi-weekly) into a short-term interest vehicle (like an MMF but consult your financial advisor) and then make a semi-annual lump payment towards your mortgage principal.

This strategy will provide you with additional capital to apply against your oustanding mortgage and allow you to pay down the loan faster.

Best regards,


~bug

[JimmytheT]

But his payment is $1000. Isn't the fact that he sometimes makes a larger payment irrelivant at that point? I thought they look into your ability to repay a loan. The bottom line is his mortgage payment is still $1000 at that point.

Or at least that's how I see it. Same as when you apply for a loan and they ask how much your monthly salary is. If you try and say "well usually my boss gives me some overtime so I actually make $500 a month more than what HR will tell you" then they take what your actual salary is.

Or conversely if he does want to get another loan, go back to the $1000 payments for a while, get the new loan, and then pay back what you feel comfortable paying afterwards.

Ah I missed the context of the $1000 payment. I thought his required payment was $1500. My mistake.
However my comment about being in financial hardship still stands.

As for the bolded text in the quote, if you are applying for a mortgage, you have to be able to prove on paper what you make. So that does not fly either, unless you are dealing with a shady/incompetent lender.

[Sylvanfan]

Check to see how your interest is calculated.

Many banks only calculate you interest and amortization twice a year... meaning that if you accelerate your payments (as Syl described or via bi-weekly payments) you are giving the bank an interest free loan for 6 months on the amount that your payments exceed your amortization schedule.

If this is the case, you are wiser to deposit monthly (or bi-weekly) into a short-term interest vehicle (like an MMF but consult your financial advisor) and then make a semi-annual lump payment towards your mortgage principal.

This strategy will provide you with additional capital to apply against your oustanding mortgage and allow you to pay down the loan faster.

Best regards,


~bug

Yeah, I could look at something like that. I guess my stance is that I'm maybe looking at getting about $125 interest a year on that money at the end of the year if I was to get like a 4% return (I'm too chicken to invest it aggressively where I could lose it). Than I have to pay tax on it as if it was income which basically would move it down to $90 and than I have to remember to call my advisor to release the money, than go get the money and than physically take it to the bank or put it in my bank account and than to talk to the mortgage people and get them to do the lump sum payment. Might be worth it if I was doing like $1000 a month extra than the numbers might amount to something significant enough to justify the time and effort.

[ken0042]

However my comment about being in financial hardship still stands.

Which was........

If you are delibrately lying about or withholding information about your loans, or financial hardship, when you are applying for any kind of credit is FRAUD!

Once again, you mis-read what I said. What I am saying is this- if SF's payment is supposed to be $1000, and he is paying $1500..... then he loses his job and now can't afford to pay as much..... if he's on the 25 year amortization all he has to do is tell the bank "I'd like to go back to the regular payments now." If he goes for the 15 year amortization, and then finds he can no longer afford it, then he would be forced to disclose his lack of the job; because at that point they would be re-writing the loan.

I do agree, never lie to your bank. That is just bad all around.

[prarieboy]

I've always had mortgages where I can double up each payment and make lump sum payments as well. I keep the amortization at 25 years and double every payment (or a portion at least) as often as I can. It gets taken right off the principal so I'm saving the interest as long as I carry the remaining debt. As Firefly mentioned, check how the interest is calculated.
If your interested I have a cool excel spreadsheet that calculates mortgage payments and you can put in extra payments (double up, or yearly) to see what works the best. Just PM me if your interested.
With that said, I like the flexability of making extra payments or not.