20 May

Refinance and Renew: Similar Terms, Different Meaning

General

Posted by: Lyle Green

Mortgage terms sound like a foreign language to most people. All the talk about LTV, GDS/TDS, rental offset, conventional, insurable, debt servicing and stress-tests, is enough to make your head spin; or maybe put you to sleep! Some may have a bit of knowledge of them, but not enough to feel confident explaining them to someone. Two terms that home owners should be aware of are refinance, and renew. All borrowers will undoubtedly renew at some point, and refinancing will be a part of a lot of home owners’ experience as well. The terms may seem quite similar and thought of as the same, but they’re not. Let me give you some insight as to how they are different.
A mortgage renewal occurs when the term of the mortgage is coming to an end. Whether it’s the most common term, which is 5 years, or another term length, it has come to the point where another term length needs to be set with the lender. In addition to setting a new term, the borrower has to get a new rate for their mortgage. If rates have gone up since the start of their last term they will have to bite the bullet and take the higher rate. If rates have gone down, they can celebrate their fortune and will benefit from the lower rate for the duration of their new term.
The process is pretty simple for a mortgage renewal. There are no documents to submit, no income to validate, no lawyers to visit, as long as you stay with the same lender. However, if you decide to shop around for a better rate, then the process becomes a little more involved. If you find a better rate with another lender you have the ability to switch, or transfer, your mortgage over to them. There is no pre-payment penalty owed to your lender since the term has expired. Any fees that may be involved in the transfer, like lawyer fees, are usually covered by the new lender. With a new lender however, you will have to “requalify” for the mortgage. That means that you will need to provide them with income documents and have your credit checked again. The reason for the requalification is that they have no idea of your financial situation, so need to make sure you are able to maintain mortgage payments.
Now let’s get to a mortgage refinance. When you refinance your mortgage, you are changing your mortgage in some way. Any increase in the amount, or adjustment to the amortization, will qualify as a refinance or your mortgage. Its usually done when someone wants to access equity in their property to do things like pay off some debts. For instance, it could be something like credit card debt, or student loans. Or it may be to use for investments like mutual funds, stocks and bonds. Or they may want to use it as a down payment to buy another property. Whatever the case, changes are being made and a requalification is required. Even if you were to refinance with the same lender, you would still need to requalify for the new mortgage.
As I mentioned earlier, you have to go through the process of qualifying just like you did when you acquired the mortgage. Income documents must be verified, liabilities must be checked and a current credit score must be obtained. If you have gotten a new job, or accumulated a large amount of debts, that can affect your ability to qualify. Lenders like to see 2 years history at a job. So getting a new job isn’t advantageous. Also, if you bought a new car or borrowed to pay for your child’s education, your liabilities may be out of wack for qualifying as well. However, if you received a promotion at work, and have reduced your debt amounts, then obviously qualifying will be a much simpler process. You will have to consider your current circumstances before deciding what you want, or are able, to do.
The term is not a factor with a refinance, except in regards to the penalty. You can refinance at any point during the term of your mortgage. However depending on when during your term you decide to refinance, it will impact the amount of your penalty. If you break the mortgage at or near the beginning of the term on a fixed rate mortgage, the penalty will be higher than it would at the end. It’s different with a variable rate mortgage where the penalty is 3 months interest, which I discuss more in-depth in another blog. So there is another factor to consider in making your financing decision.
You are now equipped with the basic knowledge of these terms; refinance and renew. Feel free to contact me to translate more mortgage terms and help you gain more understanding or the mortgage world.

27 Jun

All Mortgages are NOT Created Equal

General

Posted by: Lyle Green

We know that people are different. Some are tall, and some are short. Some are black and some are white. We have many different cultures and ethnicities. We also know that clothes are different. What you can get in terms of style and quality from stores like Nordstroms or Holt Renfrew is much different than say Walmart or a Thrift Store. Food as well is not the same across the board. Would you rather have a meal at a place like Hawksworth Restaurant or at…. McDonald’s? This all seems pretty obvious to most people and would be considered common knowledge. However, for some reason, when it comes to mortgages, people assume that they are all the same. They assume that all the banks offer the same terms and that there is no difference between them except for the rate. Well, they’re not. Aside from the clear differences of rates and choosing between fixed and variable, there are other differences that should be know.

1. PREPAYMENT PRIVILEDGE – Lenders have differences in how, and how much, they allow a borrower to pay down their mortgage without a penalty. Most lenders will allow you to pay a percentage of the principle mortgage amount per year in addition to your mortgage payments. The percentage ranges from 10% to 15% to 20% of the principle mortgage. Some will also allow you to increase your payments by the same percentages. There are a few that will allow you to do even more. They allow you to double your payments, which enables you to pay down the mortgage even faster. If you’re a salary plus commission or bonus employee, or you get a large tax return each year, this could be an important factor in the mortgage you choose.
2. PREPAYMENT PENALTY – If you need to sell, or move, or refinance your mortgage this is an important component. There is a huge difference between lenders when it comes to the prepayment penalty. It basically breaks down into two groups: Monoline lenders and the rest, which are Banks and Credit Unions. When it comes to the penalty for breaking a variable rate mortgage, there is no difference. They all charge a 3 months interest penalty. However for a fixed rate mortgage, it’s a much different story. They charge the greater of 3 months interest or the Interest Rate Differential (IRD). The IRD is the difference in interest that the lender looses when giving you a new mortgage. The way it’s calculated with Banks and Credit Unions produces a much higher penalty than with a Monoline. So if you are going with a fixed rate mortgage, you may want to think about using a Monoline lender.
3. COLATERAL CHARGE – This is a way that some lenders register the mortgage on your home. With a collateral charge mortgage, the mortgage can be registered for an amount higher than the actual mortgage. Doing that, theoretically allows the borrower to obtain a home equity line of credit in the future for no charge. However due to the collateral charge, it makes it more difficult, and costly, to leave the lender for a better rate down the road. That retention ability is the main reason some lenders use the collateral charge. Another point to consider, if you have other products from the lender (credit cards, line of credit, etc..) and you default on them, they can come after your home. With a collateral charge the lender can tie-in other debts you have with them into your mortgage. So defaulting on those debts is like defaulting on your mortgage. Not a good situation.
4. PORTABILITY – This is the ability to move, or transfer your mortgage to another property if you buy another home. Having the capability to do this can save you thousands of dollars. Otherwise, you would have to break your mortgage which would incur the prepayment penalty. As I’ve previously discussed, with certain lenders that could be a hefty amount. Porting your mortgage allows you to avoid that cost. The downside however, is that if rates have gone down, you are tied into paying a higher interest rate than what is currently available. Due to that, in some cases it is better to absorb the penalty and break the mortgage to take advantage of the better rate. The overall savings is worth paying the penalty to get the new mortgage and rate.
These are all factors that you should consider in addition to the rate you may get. Your personal plans and desires should be discussed with your mortgage broker when deciding what mortgage is most suitable for you. If you don’t, you may have to live with some remorse, and have the thoughts of “what if” floating around in your head.