The term breaking your mortgage often has a negative meaning to it, but that’s not necessarily the case. The main reason why someone might decide to break their mortgage is to get a lower rate with their bank or another lending institution. When the Investor’s Group cut its three-year variable mortgage rate to 1.99% last month, many of my clients wondered if breaking their mortgages and switching would be a wise decision. The question is, do the long-term savings outweigh the initial interest penalties? It is possible, however let’s have a closer look at the various considerations.
The number one factor to consider before breaking your current mortgage is the interest penalty you will incur. The interest penalty depends on the type of mortgage you have (fixed or variable) and which bank or lender you’re with.
You can find mortgage penalty calculators online such as at Ratehub.ca - simply enter in your remaining mortgage balance, the type of mortgage, your mortgage rate and term and the calculator will provide you with an approximate calculation for your mortgage penalty amount. As an example if you are breaking a $200,000 mortgage with TD and have a fixed mortgage rate of 2.99 percent, you would have an interest penalty of approximately $9,800.
With a fixed rate mortgage, the interest penalty is calculated using what’s called “interest rate differential calculation.” The penalties are also different if you have a variable rate mortgage or a cash-back mortgage – check with your financial institution for details and be sure to read and understand the fine print. Some lower rate mortgages may have a provision that the mortgage cannot be broken unless you sell your home.
Once you've determined your penalty, it’s just a matter of working out if the interest savings will be greater than the penalty paid. In general, if the offered rate is greater than two per cent less than your current mortgage rate, it might be worth paying the penalty and switching.
The real estate market in Toronto is still red hot and if you are looking to buy a home or condo I have some tips that will save you time and energy (and money!) and put you in a favourable position to buy in today’s market.
First and foremost - don’t get caught up with the newspaper headlines. You’ll still hear about the “house that got 36 offers” or on the flip side about how “the market is poised for a slowdown”. Ignore the “noise”, and with my help as your real estate agent and become a local market expert.
Here is what you can do to arm yourself in today’s market:
Be knowledgeable. Once you’ve narrowed down a neighbourhood to buy into, get to know the inventory. Study the sales history over the past several months and understand the trend in that particular neighbourhood. Keep track of the houses you view and understand their eventual sale price. The list price in today’s market can be deceiving and bidding wars are still very much prevalent. Understanding value of the product you’re buying into is key.
Be prepared. Get all of your ducks lined up and make sure you’re prepared with your mortgage financing. Meet with your mortgage broker ahead of time and understand your mortgage options. Also, make sure you have all of the documentation in place to get your mortgage approved. A good mortgage broker is vital in today’s market.
Be flexible. You may not get everything on your house hunting wish list, so make sure you’re realistic of what you can get in today’s market. After seeing the 10th home or condo, compare your wish list with the properties features you’ve seen thus far.
Be aggressive. In a seller’s market you sometimes need to use your elbows to get to the front of the line. Consider your options with me and I will evaluate the various strategies with you. Consider submitting a pre-emptive offer (before the offer review date) to beat out other offers. Also think about doing a home inspection prior to submitting an offer to understand the home’s deficiencies ahead of any offer.
Be patient. You may make several offers before securing your “perfect” house or condo but using the above strategies will help you tremendously and have you better prepared.
If you have any friends or family that are thinking of buying a home or condo in today’s market please feel free to forward them these helpful tips. I would welcome the opportunity to speak with them.
I met with a prospective client, Janet who wanted to sell her cute bungalow just north of the Danforth. She was looking to move into the better school district just West of where they were. When I viewed her home, I asked her to point out many of the upgrades she had done since she bought it. As we sat down, I asked her to tell me a little more about her motivation to sell, as I wanted to get a better idea of the bigger picture.
Before asking me what I thought her home was worth, she said that she needed $450,000 to make the move. She must have seen my facial expression completely change as she asked me if that was realistic. I gave her a copy of the Home Selling Guide that I wrote and included in it was a list of recent sales. I pointed out that the range in her neighbourhood for a similar type of property was between $410k to $420k. No bungalow in her area has ever sold for more.
She kept going back to what she “needed” to sell for to make the move. I could tell she was getting very emotional. I felt like her dream-squasher, telling her the price was not realistic.
I said to Janet that the only people that would benefit by listing her home at $450,000 would be her competition.
“What do you mean – the competition?” She asked.
I explained that an average buyer views 12.4 homes in a particular neighbourhood before submitting an offer. If her house was priced outside the range of what it is worth, then it would make the other homes on the market more appealing and help those sell – not hers!
I invited Janet to view 3 homes for sale in her neighbourhood with me the following day to see what I was talking about. I asked her try to view these homes as a possible buyer and compare against her home priced at $450,000.
Janet was very quiet and didn’t say much during these viewings. Once we left the third home Janet turned to me and said: “My house won’t sell for $450,000. I can see that now.”
Janet agreed that it’s very important to know who you’re competing against. On the advice of her mortgage broker, Janet decided holding off on selling her house until the spring. By that time she’ll have full-time hours at work, which will help her qualify for the mortgage she needs to make the move.
I know Janet really appreciated the honest no b.s. advice that I gave her. My business is completely built on referrals and I will not make any unrealistic promises I can not keep.