Mortgage penalties shouldn't shock the pants off you!

We've all heard the stories about the person who wanted a lower interest rate or sold their house and had to pay $1,000's to get out of their mortgage.  When people ask me about a lower rate and I ask what will it take to get out of your mortgage they say "three months interest or some complicated thing I don't really understand".  It's that complicated thing you should understand. 

Today the government took some very important steps to ensure the banks help you understand the IRD (Interest Rate Differential) or "the complicated thing you don't understand".   In fact there are lots of enhancements to the code of conduct that will help the consumer make a more informed decision on their mortgage. 

Before I get too far into it let me explain the IRD in very simple terms.  It works like this.  An investor goes to the bank and invests money.  The bank guarantees the investor a rate of return on their money.  Then they take the invested funds and they give you a mortgage.  The investor makes his interest and the bank puts a little more on the rate to cover their cost of doing business.  After all they found the qualified borrower and will take the risk of you not paying.  So everything is going well and interest rates drop.  The investor is really happy because they are guaranteed the rate of return they invested in.  So when you go to the bank and say "hey, I'm paying way too much interest on my mortgage and I want a better deal" the bank would technically have to go back to the investor and say "you know that rate you're making on your investment? Well they guy we lent the money too wants out so we were wondering if you wouldn't mind taking less on your investment?" 

I think you can imagine there is no need for a bank to have such a conversation with an investor so instead they do this.  They look at the amount of interest they guaranteed the investor and then they look at what they will get by giving you the new rate.  The difference between the new rate and the amount they guaranteed is your penalty or "The Interest Rate Differential".  It's all very legal and has nothing to do with greed. 

So what changed today?   Now the bank will need to explain to you how that works before you sign your firm and legal binding contract.  They will also have to remind you on your yearly statement what a prepayment would look like for you.  Here is the exact wording in the new code of conduct that addresses this issue:
If the lender used the IRD to calculate the prepayment charge, the lender will inform the borrower of :

• the outstanding amount on the mortgage
• the annual interest rate on the mortgage
• the comparison rate that was used for the calculation
• the term remaining on the mortgage that was used for the calculation

I know government documents don't make great reading material but if you feel so inclined to understand this better I encourage you have a look at the actual document.  Before you ask your bank or anyone else to give you a lower rate on your mortgage it would benefit you to at least understand some of the language of banks.

As always if you have any questions you know I'm here. 

Want a Really Good Tax Free Savings Plan?

I often hear people complain that we don't get to deduct mortgage interest on our taxes like they do in the US.  While at tax time that sounds like a total rip off there is an upside to this.

If you bought a home in the US and sold it for a profit you must pay capitol gains tax on the money you made.  In Canada we get to keep it.  (shhhhhhh, don't tell anyone).  Take a look at any amortization schedule and see how much of a payment is going to interest and how much to principal.  The portion that actually pays down the debt is your savings.  When you sell house add up the amount you have paid towards the principal plus what you have made on the sale over and above the purchase price.  Voila - savings!  And it's tax free.

Now I know some would argue that you have paid the bank a whole bunch of interest so to keep everyone happy let's include those numbers.  So add up all the interest you have paid to the bank.  Now try to estimate what a rental would have cost you a month (you have to live somewhere).  Subtract the the interest paid to the bank from the amount of rent you would have paid and see if you win.  Did you pay more in interest than you would have paid in rent?  It's very rarely the case.

My point is owning a home and being sensible about repaying the mortgage loan is the best tax free savings you will ever have.  There is no cap! 

If you have any questions or if you just want to argue the point please feel free to comment and let's start the discussion. 

Let's have Lunch with Gail VazOxlade

One of the greatest champions of women and their money to come along is the straight talking Gail VazOxlade.  I think it's wonderful that Slice gave her a show where she could showcase ordinary Canadians and teach us all a thing or two about money.  I for one love this lady and I know she is one busy bee.  Gail rarely does public appearances and so it is with great pride and pleasure that Mortgages for Women is once again sponsoring "Lunch with Gail" to raise funds for Northumberland Services for Women. 

This luncheon will be held in Cobourg Ontario on March 24th at the Cobourg Lion's Community Center.  The Lunch begins at noon followed by a straight talk from Gail, a chance to ask questions and of course get your books signed.  Last year this was a sold out event and this year will be no different.  We are selling tickets in our office and you can purchase one by calling at 888 372 7367 and work day between the hours of 9:00am - 3:00pm.  Tickets are $25 if you buy them before March 15th and then they go up to $30.

But wait there's more.  Mortgages for Women is gong to have tables reserved so we can all sit together.  We will also be upgrading 2 lucky people to Gail's table for lunch.  In order to qualify for the draw you must let us know you have tickets by commenting on this blog post and follow us on facebook.

This event will be worth the drive to Cobourg.    Let us know if you are coming from out of town because we are planning a Mortgages for Women after party and we want you to be there.  Dont' miss this fun filled afternoon.  Grab your besties and we'll see you in Cobourg!

Here is a copy of the flyer for all the complete details.  Remember, in order to qualify to be upgraded you must let us know here on the blog you are coming and follow us on facebook.