Financial Consultant

" NO FAMILY LEFT BEHIND "
" NO FAMILY LEFT BEHIND "
" NO FAMILY LEFT BEHIND "

Ingredients of Mortgages

Following are the ingredients of a mortgage

  • Fixed Vs Variable
  • Simple interest (SI) Vs Compound interest (CI)
  • Renewal
  • 5% vs 20%
  • Portable mortgage
  • CMHC/ Genworth/ Canada Guarantee/ Segan
  • Reverse mortgage

1) Fixed Vs Variable

Fixed: Interest rate is same throughout the entire mortgage. It is very popular in the central provinces of Canada.

Variable: Interest rate varies (increases/decreases) during time. This type is popular in the provinces like Ontario & BC.

  • If you check the history of mortgages in Canada for  last 40 years, variable is better than fixed.
  • Variablehas low penalty if you break the payment.

2) 25 years Vs 30 years

  • Best to go for 30 years term.
  • It can keep monthly payments low.
  • For qualifying this, downpayment of at least 20% is the must.

3) Simple interest (SI) Vs Compound interest (CI)

  • If you gets CI and pays SI you are in profit.
  • In CI, money makes money.
  • Examples for Simple interest (SI) : Credit cards, line of credit, HELOC (Home Line Of Credit) etc:-
  • Examples of compound interest (CI) : Mortgages, Personal loan, car loan etc:
  • The interest of Mortgage is calculated in CI, that is why it takes so many years to pay off.

4) Refinancing

  • It is just like snake and ladder game. You reach at 99 and you starts again from 1.
  • If an individual wants have debts/investments/ or want to reduce monthly payments, that lumpsum amount can be added to existing mortgage.
  • Then the mortgage starts again for 25 year term.

5) Renewal

  • Can renew the existing mortgage with same financial institution or different institution considering the interest rate.
  • Normally the renewal period is  5 years.
  • If you want to break the renewal period, there is penalty.

6) RRSP

  • Always the best tool for the first time home buyerfor down payment
  • Always advisable to buy first homeusing RRSP
  • It is interest free
  • Can get up to $35,000/- from RRSP for first time home buyer. (Spouses can get up to $70,000/-).

7) 5% vs 20%

The following table describes the difference between making 5% & 20% downpayment.

5%

20%

· CMHC fee is 4%.

· Thus the amount you payback is 99% of house value

· CMHC fee is 2.4%

· Amortization period can be maximum 25 years

· Amortization period can be 30 years

· Thus monthly payments can be lower

· Will not qualify for HELOC (Home Line Of Credit)

· Qualify for HELOC

· By using HELOC, it is able to invest in other field

· Monthly repayments will be higher

· Monthly repayments will be lower

· It is a liability

· It is an asset

8) Portable mortgage

  • If you buy  another property, selling the first property on the same price, you can transfer the existing  mortgage to new property’s mortgage .
  • You can pay the new mortgage from the point where you have reached in the existing mortgage.
  • Before getting mortgage , you have to make clarity on this point.
  • Make sure it is a portable one.

9) CMHC/ Genworth/ Canada Guarantee/ Segan

  • This insures your mortgages.
  • Following are the charges :-

Down payment

Fee

5% – 9.99%

4% of mortgage amount

10% – 14.99%

3.1% of mortgage amount

15% – 19.99%

2.80% of mortgage amount

20% – 24.99%

2.40 of mortgage amount

25% – 35%

0.60% of mortgage amount

 

Note : If you are buying a home with 5% down payment,  the mortgage amount is 99%

  • That is, literally you made 1% downpayment,
  • The bank can sell the property for 80% of price if you fail repay the mortgage for 3 months.
  • In other words, it is the insurance amount for 20%.

10) Reverse mortgage

Applicable to those who already paid of their home. After age 65, if there is no other source of income, they can exercise Reverse Mortgage and they can get income from their property until death.