Mortgage Advice

[MJK]

I told him I will stay in the North 2 more years and want to pay off as much as I can in those two years and he sent me this:

I suggest 5 year open variable 3.25% OPEN (pay as much as you want!) In 2 years you can then lock in a fixed rate and renegotiate. Works well!

Thoughts?

[albertGQ]

Originally Posted by MJK

I told him I will stay in the North 2 more years and want to pay off as much as I can in those two years and he sent me this:

I suggest 5 year open variable 3.25% OPEN (pay as much as you want!) In 2 years you can then lock in a fixed rate and renegotiate. Works well!

Thoughts?

How much is your mortgage and how much did you want to pay down? You should negotiate that 10% prepayment clause. Most lenders go up to 20%

[MJK]

Mortgage is $208,000

I really only want to pay 10% down right now and would prefer not to use a credit line as I am trying to pay one of those off as well.

I can put about $20,000 combining cash and rrsp money.

But I would try and double up my biweekly payments for the next two years if possible. Paying down a lot is really only an option while I live in the North. As soon as I go back to Newfoundland my pay gets cut in half and I will be making regular payments.

[Peanut]

Originally Posted by MJK

Mortgage is $208,000

I really only want to pay 10% down right now and would prefer not to use a credit line as I am trying to pay one of those off as well.

I can put about $20,000 combining cash and rrsp money.

But I would try and double up my biweekly payments for the next two years if possible. Paying down a lot is really only an option while I live in the North. As soon as I go back to Newfoundland my pay gets cut in half and I will be making regular payments.

If all you're doing is making double-up payments (not that that's not an awesome plan, because it is), you could lock in for 5 years and have the security of 3.75% for 5 years. Going closed with RBC you can make a double-up payment every time, AND still do the 10% lump sum once per year (and maybe you can negotiate the 10% lump sum to be higher - I've never tried personally). So it seems like they would have enough flexibility within the closed for the extra payments you want to do.

It'd just be the risk of locking in the rate vs. not. Your choice, really.

[MJK]

I think I would personally rather lock in that rate. I can't see it going much lower but I can see it going higher.

If I wanted to do more than double payments do I have to go with an open?

Is there such thing as a 5 year fixed open mortgage where I can pay as much as I want biweekly>?

[Peanut]

I don't know much about opens - maybe PM one of the brokers who've been in the thread?

The 10% down option allows you to put $20,800 (on a $208,000 mortgage) every year. Plus all your double up payments - say you're allowed a double-up semi-monthly payment of $500, that'd be $12,000 over the year. So you could always add up the $20,800 + $12,000 (or whatever the double-up payment value actually is) and decide if you're really going to be able/want to put much more accelerated payments towards your mortgage.

Again I'm not an expert at all, maybe other people have better opinions on here. But that's what I'd do.

[Mike Oxlong]

Originally Posted by MJK

I think I would personally rather lock in that rate. I can't see it going much lower but I can see it going higher.

If I wanted to do more than double payments do I have to go with an open?

Is there such thing as a 5 year fixed open mortgage where I can pay as much as I want biweekly>?

I agree with you that rates won't get much lower but they will be going up for sure.

If your mortgage amount is approx $200,000 and we find a lender that will allow you to put down 20% a year without penalty that means you can dump $40,000 per year on that mortgage penalty free. Do you think it is realistic that you will be putting more than $40k a year extra down on the mortgage? If so fantastic, good for you, you'll have a lot of the mortgage paid off by the time you get to NL. If not then I think a fixed is the way to go.

[pepper24]

Originally Posted by MJK

Mortgage is $208,000

I really only want to pay 10% down right now and would prefer not to use a credit line as I am trying to pay one of those off as well.

I can put about $20,000 combining cash and rrsp money.

But I would try and double up my biweekly payments for the next two years if possible. Paying down a lot is really only an option while I live in the North. As soon as I go back to Newfoundland my pay gets cut in half and I will be making regular payments.

I'd be careful about using RRSP money. You get charged a withholding tax of a minimum of 10% for up to $4,999 and up to 30% for larger amounts and it'll count as income so you will most likely be paying tax on that portion as well.

Paying up to a 30% penalty to pay down a mortgage at historical low rates of under 5% doesn't seem like a good trade-off in my books.

[MJK]

Here is some info I got from the RBC guy on CMHC fees after asking about possible downpayments. Ideally I don't want to completely wipe out my RSP's so I was thinking of putting down a smaller initial downpayment and then making large payments.

5% downpayment .......$5486

7.5% downpayment ....$5342

10% downpayment ....$3780

[MJK]

Originally Posted by pepper24

I'd be careful about using RRSP money. You get charged a withholding tax of a minimum of 10% for up to $4,999 and up to 30% for larger amounts and it'll count as income so you will most likely be paying tax on that portion as well.

Paying up to a 30% penalty to pay down a mortgage at historical low rates of under 5% doesn't seem like a good trade-off in my books.

Well I am thinking along the same lines as this BUT I would have to deal with higher CMHC fees if I make a smaller initial down payment. Is it worth it?

[albertGQ]

Originally Posted by MJK

Well I am thinking along the same lines as this BUT I would have to deal with higher CMHC fees if I make a smaller initial down payment. Is it worth it?

Is this your first home? If so, you can use the First Home Buyers Plan and not have any withholding tax. Then I'd recomend using as much of your RSPs as you can for the initial down payment

[MJK]

Originally Posted by albertGQ

Is this your first home? If so, you can use the First Home Buyers Plan and not have any withholding tax. Then I'd recomend using as much of your RSPs as you can for the initial down payment

Yes this is my first home.

[albertGQ]

Originally Posted by MJK

Yes this is my first home.

Then you're allowed to take up to $25,000 ($50,000 for a couple) for your DP. Repayable over a 15 year window with a grace period of two years, interest free.

No withholding tax

[pepper24]

Originally Posted by albertGQ

Then you're allowed to take up to $25,000 ($50,000 for a couple) for your DP. Repayable over a 15 year window with a grace period of two years, interest free.

No withholding tax

+1

You can utilize your RRSPs with no withholding tax and you cut down or eliminate the CHMC fee.

All first homeowners with RRSPs should utilize this IMO.

[MoneyGuy]

Rates will definitely go up, but probably not anytime soon. The Bank of Canada is on record as saying that interest rates will not increase for 12 months. I met with a mutual fund manager yesterday and asked him about this and he confirmed it.

^ No all first-time buyers should not access their RRSPs. If that's the only way you can do it, then fine, or if it helps you to reduce the CMHC then maybe, but otherwise do not touch your RRSPs. There is the opportunity cost of the money not being in the RRSP.

[onetwo_threefour]

Originally Posted by MoneyGuy

Yes. Most places require that funds be in your hands for a certain period of time, after which it's considered to be your funds, regardless of source.

You're confusing one company's requirements for industry requirements.

I don't think I am. I talked to one of my broker associates this morning who confirmed that it's a CMHC requirement that there not be a loaned down payment. All you guys are talking about is subverting that rule by saying that if the client gets the money more than 90 days in advance, you can pretend it's their own resources even if you know it's really a loan from the parents. I am not saying it doesn't happen, but as far as I am concerned it is over the line ethically speaking as a lawyer for me to act in that scenario. I'm not as clear on the Broker's obligations to the lender, but at a minimum I would think it to be borderline unethical for a broker not to advise the lender that the client is borrowing their down payment if it potentially violates CMHC requirements.

As a lawyer representing the lender and the purchaser it is definitely over the line for me not to disclose it to my lender client if I know that it's a CMHC requirement.

Others may feel differently, but in my view that's the kind of thing that should not be happening.

[albertGQ]

Originally Posted by onetwo_threefour

I don't think I am. I talked to one of my broker associates this morning who confirmed that it's a CMHC requirement that there not be a loaned down payment. All you guys are talking about is subverting that rule by saying that if the client gets the money more than 90 days in advance, you can pretend it's their own resources even if you know it's really a loan from the parents. I am not saying it doesn't happen, but as far as I am concerned it is over the line ethically speaking as a lawyer for me to act in that scenario. I'm not as clear on the Broker's obligations to the lender, but at a minimum I would think it to be borderline unethical for a broker not to advise the lender that the client is borrowing their down payment if it potentially violates CMHC requirements.

As a lawyer representing the lender and the purchaser it is definitely over the line for me not to disclose it to my lender client if I know that it's a CMHC requirement.

Others may feel differently, but in my view that's the kind of thing that should not be happening.

But the thing is CMHC is aware that most "gifted" down payments are to be paid back anyway.

[MJK]

CMHC Fees:


5% downpayment .......$5486

7.5% downpayment ....$5342

10% downpayment ....$3780

Are these normal?

[MoneyGuy]

Originally Posted by onetwo_threefour

I don't think I am. I talked to one of my broker associates this morning who confirmed that it's a CMHC requirement that there not be a loaned down payment. All you guys are talking about is subverting that rule by saying that if the client gets the money more than 90 days in advance, you can pretend it's their own resources even if you know it's really a loan from the parents. I am not saying it doesn't happen, but as far as I am concerned it is over the line ethically speaking as a lawyer for me to act in that scenario. I'm not as clear on the Broker's obligations to the lender, but at a minimum I would think it to be borderline unethical for a broker not to advise the lender that the client is borrowing their down payment if it potentially violates CMHC requirements.

As a lawyer representing the lender and the purchaser it is definitely over the line for me not to disclose it to my lender client if I know that it's a CMHC requirement.

Others may feel differently, but in my view that's the kind of thing that should not be happening.

Trust me on this. Borrowed money in your account for 90 days means it is your funds. And who said anything about not disclosing? This is how it's disclosed: Of course, all debts are reported. The lender sees this as a debt. They know about these debts. All they're concerned about is your ability to repay. If you can handle the mortgage and the other loans, why do you think this is unethical. Believe me, I'm the most above-board person there is. I'd never suggest this if it was wrong. IT'S NOT! I'm not a broker but I refer lots of clients to brokers and am well versed in these matters.

[MoneyGuy]

To MJK ^^, here is how fees are calculated:

Originally Posted by MoneyGuy

CMHC fees are calculated on a sliding scale based on the down payment and amortization period. On a 5% down purchase CMHC fees are 2.75% of the mortgage amount on an amortization period of 25 years or less. For a 30-year amortization add 20 basis points and for a 35-year amortization add another 20 basis points. So for a new home buyer where qualifying is tight they typically will pay 3.15% of the mortgage amount which is added on to the mortgage total.

For 10% down the fee is 2% with the same additions for an amortization over 25 years. For a 15% down mortgage the fee is 1.75% with the same additions of an amortization over 25 years. If you put 20% down you do not require CMHC fees or typically the lender will pick them up on your behalf. Your goal should be to have a 20% down payment, if possible. This isn't feasible for a lot first-time homebuyers, of course, so then fees will apply.

On a typical home purchase of $350,000 with 5% down and an amortization period of 35 years, the fees are $10,473. This fee protects the lender, not the buyer. A strong consideration should be given to avoiding the fee.