What you will need to know.
Are you planning to transfer your mortgage to another property? If you’re trying to sell, chances are you still have a mortgage on the home you currently own. So what happens to your existing mortgage when you want to move on from your current home and purchase a new one?
Well, the reality is you still must repay the remaining mortgage balance, and this will need to be either paid off or transferred to your new home. You will also need to consider that since you are repaying your mortgage early, if you do not have an open mortgage, you may be required to pay a prepayment penalty.
Ask Your Lender
Here’s some information you should speak with your best mortgage rate lender about:
- What amount do I have remaining on my mortgage balance?
- Can the buyer assume or take over my mortgage? If so, what are the requirements for the buyer?
- Am I able to pay off the total mortgage balance? If so, is there a prepayment penalty?
- Can you transfer this mortgage to my new property?
Sometimes your lender will waive the penalty if you or the buyer takes out a new Canadian mortgage rate with them. Getting the answers to these questions in writing will avoid any unpleasant surprises later on.
Still have questions? Not a problem, speaking with a low mortgage rate specialist can help you determine what’s best for your personal situation. It’s free and there are no obligations.
Open or Closed? Do you know which option is right for you?
Closed mortgages provide lower interest rates than open mortgages. Nonetheless, open mortgages include a smaller amount of fees.
What is a Closed Mortgage?
Closed mortgages cannot be prepaid, renegotiated or refinanced prior to maturation without paying a penalty. The majority of closed mortgages do provide a little flexibility by allowing you to pay back the principle through lump sum payments, or by enhancing your monthly payment amount for your best mortgage rate.
When to Consider a Closed Mortgage
Given that closed mortgages have considerably lower interest rates, they are more appealing to the average homebuyer.
When NOT to Consider a Closed Mortgage
If you believe that you will need to break your mortgage early.
What is an Open Mortgage?
Open low mortgage rate terms vary from 6 months to 1 year for fixed rates, and 3 to 5 years for variable rates. They may be settled prior to maturation without penalty.
When to Consider an Open Mortgage
If you are anticipating to get a large amount of money, an open mortgage will offer you the flexibility to settle your loan sooner.
The Beauty of Prepayments with Closed Mortgages
The majority of closed mortgages allow prepayment options, consisting of: lump sum payments as much as a portion of your annual principal, or enhancing your regular monthly Canadian mortgage rate payment.
How Much Does a Closed Mortgage Penalty Cost?
If you do choose to break your closed mortgage prior to completion of your term, you could possibly pay a penalty. The penalty you pay is the higher of either:
- 3 months of interest
- Or the Interest Rate Differential (IRD): the difference between today’s interest rate and the rate you currently pay
Would now a good time to break your mortgage and refinance?
This is a really common concern– when should I break my existing mortgage and refinance for a current best mortgage rate? It’s best to initially weigh out the costs.
Breaking your Mortgage
A Canadian mortgage rate agreement is a fully committed contract. There is an out clause, however it comes at a cost.
How Much is my Mortgage Penalty?
Typically the cost is determined based upon either three months worth of interest payments, or the interest rate differential (IRD).
Step 1: Calculate your IRD (Interest Rate Differential)
1) Use the principal balance and multiply it by the difference between your existing mortgage rate, and the new low mortgage rate.
2) Divide that number by 12.
3) Multiply that number by the remaining months in your term to obtain the approximate IRD owed.
Step 2: Calculate 3 Months of Interest
Just simply multiply the amount of interest you would owe on the present mortgage amount. Multiple this by 3.
Step 3: Find out the Penalty you Would Pay
When it comes to a fixed rate you would pay the greater of the IRD, or 3 months of interest. While in a variable rate, you would generally pay 3 months of interest. Contact your mortgage broker or lender to identify your specific required payments.
Step 4: Calculate Your Savings
1) Calculate the interest on your current mortgage rate.
2) Calculate the interest for your new mortgage rate.
3) Calculate your savings.
Step 5: Find out if it is Worth It
Decide if changing is worth it by comparing your expenses to your savings.
Last Friday, the Canada Mortgage and Housing Corporation issued a statement announcing another round of mortgage restrictions, this time concerning limits on new National Housing Act Mortgage-Backed Securities (NHA MBS). The statement, which was sent to banks, credit unions, and other mortgage lenders, outlined new restrictions that would limit lenders to a maximum of $350-million new guarantees, the amount of “market NHA MBS”, that can be guarenteed by CMHC for the month of August. The restrictions come at a time when housing prices are still near record highs. Read more