Mortgage penalty explained

Image result for mortgage penalty pictures

It has been over a month since my last entry. My life has been crazy-busy this year and I really needed a break. I took time-off work and I also had family visiting, which was exactly what I needed. I realized I also needed a break from my daily routine.

I am definitely more settled in my condo and new city. I enjoy living there and I know I made the right move by selling my previous condo.

Going through the madness that is real-estate in Vancouver, I have to write another post on the subject of mortgage penalty.

In Canada, when you pay-off your mortgage early, lenders have the right to charge you a penalty for doing so. Mortgages are a huge business here, and even with low-interest rates, lenders are turning massive profits.

The penalty you will be assessed depends on whether you have a fixed rate or a variable rate mortgage. As indicated in their names, the interest rate on a fixed rate mortgage will remain the same during the term of the mortgage. A variable rate, on the other hand will fluctuate.

This is because the interest rate on a fixed mortgage is determined by the bond market whereas the variable rate is determined by the prime rate set by the Bank of Canada.

This also explains why there are 2 different penalties: 3-month interest or Interest Rate differential -IRD-.

For a variable rate mortgage, the penalty will always be 3-month interest, as mandated by the National Housing Act.

For simplicity, let’s say you have $ 100 000 left on your mortgage with an interest rate of 4.00%. The penalty would be:

4.00  X  100 000  X  (3/12)  = $ 1 000.00.  Pretty straightforward.

There are 2 different ways of calculating the IRD. One could impact you in a significant way.

Once again, for simplicity, we will assume  a $ 100 000 mortgage at 4.00 % with 24 months remaining on the term.

With a standard IRD calculation, the lender will take the current interest rate for a 2-year term fixed rate mortgage, matching the 24 months left on your mortgage.

Let’s say the rate on this is 2.75%. The lender will the calculate the difference between this rate and your mortgage rate. i.e 4.00 – 2.75 = 1 .25.

The penalty is then calculated as follow:

100 000  X (1.25 /12)  X  24  = $ 2 500.00.  More than double the 3-month penalty!

A few lenders use a loophole in the Interest Act for the second way to calculate the IRD. The Act does not specify which rate should be used to calculate the penalty.

Let’s keep the same numbers as above. Some lenders use the posted rates instead of the contract/discounted rates, i.e. the rates you actually pay or would pay.

You obtained a rate of 4.00% but the posted rate on the day you got your mortgage was 5.25 %. The lender gave you a discount of 1.25 %.

The posted rate for a 2-year mortgage is now 3. 00%.

The lender will use an IRD factor of 2.25, i.e. 4.00 – (3.00 -1.25).

In terms of penalty, it amounts to:

100 000 X (2.25 /12) X 24 = $ 4 500.00, more than quadruple the 3-month penalty!

I know all these calculations look boring but it is crucial to understand how your lender calculates your mortgage penalty if you have a fixed rate mortgage.

I was lucky that my previous lender did not use the posted rate. They charged me a 3-month penalty as it was higher than the IRD. Had they used the posted rate, I would have paid over $ 4 000 in penalty. When I signed the documents, I did not pay attention to this.

Most people don’t, unfortunately.

For my second mortgage, I went with a variable rate.

Save

Save

Save

Closing costs in real-estate

I am finally all moved-in in my new home sweet home. I am glad this whole “real-estate thing” is finally over. I decided to sell my previous condo in mid-April. By the time it was ready for sale, it was the end of May.

It was listed early June and sold on the 14th at over-asking. I was lucky to be able to buy my current home shortly after. That being said, the completion and possession dates were mid-August for both condos.

I had been living in boxes and more or less camping since the end of June. I was happy to take all my belongings out of those boxes.

Closing costs are payment for all the necessary items to conclude or “close” a real-estate deal. These fees are paid by both sellers and buyers but are different.

For the 2 transactions, I had budgeted $ 29K in closing costs….they came in at just above $ 25K. Staggering, isn’t it?

These fees creep-up very easily and add-up to big dollar amounts. They are always a surprise for most people, including myself. Here is a non-exhaustive breakdown of them:

When selling

  • Realtor commission:  in BC, it is usually 7% on the first $ 100K and 2.5% on the remaining balance
  • Legal fees: to clear the title. The fees are lower when selling as there isn’t much involved.
  • Mortgage penalty, if applicable: if you break your mortgage before term, lenders will charge you a penalty, either 3-month interest or Interest Rate Differential -IRD-
  • Mortgage discharge fee, if applicable: most lenders will also charge you an administrative fee to discharge the mortgage

Upon selling, the buyer will usually reimburse you for your share of the property tax and strata fees -if you buy a condo-.

When buying

  • Legal fees: these will be higher for purchasing, as more work is involved
  • Property transfer tax: cash grab from most governments. In BC, the rates are: 1% on the first $200K, 2% on the remaining balance up to $ 2 millions, 3% up to $ 3 millions. If you are a first-time home-buyer and your property is under $475K, you are exempt from this tax in BC.
  • Down-payment
  • Mortgage default insurance: if you buy with less than 20% down
  • Mortgage application fee: most lenders will waive this, but some will charge you an administrative fee to process your application
  • Title insurance: most lenders will require this. It is to insure you are the rightful owner of the property
  • Appraisal fees: if you buy a detached house, the lender will ask for an assessment of its value to insure you are not overpaying. It is less common for a condo
  • Land survey: for detached houses only. A lender may require a detailed plan of the land showing property limits, easements and rights of way.
  • Interest adjustment: You need to pay the interests on the mortgage for the month you close
  • Other adjustments: you will most likely have to reimburse the seller  for their share of the property taxes and strata fees
  • Fire insurance: lenders require to be first payee in case of a fire. Insurance companies will charge a fee to prepare the applicable document

Other fees that are not included in the statement prepared by lawyers/notaries:

  • Home inspection: if you can do one, that is great but it costs around $ 500.00
  • Moving company: unless you have willing friends, you will need people to move your belongings to your new place
  • Home insurance 
  • Utility hook-up & transfer: BC hydro charges $ 12.50 to transfer your account. Your cable company may also charge you fees
  • Locksmith: it is probably a good idea to have the locks of your new place re-keyed

As you can see the list is pretty long! When it comes to closing costs, you are better off thinking “high” than “low”. They will always be higher than what you think.

Save

Save

Save

Save

Save

New Canada Child Benefit explained

 

The Liberal Government has made huge changes to the Canada Child Benefit program (CCB) last month. It was actually part of their electoral campaign.

Under the old system, the CCB -actually called CCTB-was $ 100 per month, taxable. Needless to say this didn’t get any parent far in terms of child rearing.

The new CBB also includes the child disability benefit (if applicable) as well as any provincial programs parents may be eligible for. It is also tax-free.

The amount is based on income, number of children and status in Canada. Basically, you and/or your spouse must be considered as residents of Canada and be the primary caregivers. In case of divorce/separation the CBB is split 50-50 between the parents.

If you haven’t received any child benefit before, you need to apply. After, your situation is reviewed every year by CRA in July and you don’t need to fill-in further paperwork.

In terms of amount, the maximum is $ 6 400.00 per year and child – $ 533.33/month- for children under the age of 6, and $ 5 400.00 per year and child -$ 450.00/month- for children up to 17.

If you are making over $ 30 000 per year, the amount will be reduced. The system is designed to help lower income families who need it the most.

That being said, all families will receive higher payments. If I had a child now, I would receive $ 370.00 net/month vs $ 155.00 partly taxable under the old system. It is still not much but definitely a step in the right direction.

Child-rearing in Canada is incredibly expensive. In cities like Vancouver and Toronto, daycare costs for infants can be over $ 1 000/month, basically a second mortgage or rent! After school care and activities are not cheap either.

You also have to factor in the costs of taking maternity leave, coming with a huge pay-cut, as well as the ongoing costs of food, clothes etc….Did I mention anything about saving for university?

It is no wonder more and more people decide not to have children or to have them later on.

What about you? What do you think about this new program? Does it help you and your family?

 

Auto insurance basics in BC

In Canada, auto insurance is mandatory. Each province and territory has its own requirements. Since I live in British-Columbia, I will provide information about how it works in this province.

In British-Columbia, there are no private auto insurance providers. Auto insurance is administered by ICBC, a crown corporation run by the Provincial Government. It usually is quite a shock when newcomers to BC find out there is no such thing as “shopping for auto insurance” and “compare quotes”.

Insurance is bought and renewed through an ICBC Autoplan broker. All dealerships have a broker so you don’t leave with your new car uninsured. This is not necessarily the case in other provinces.

ICBC mandates basic coverage. It includes:

  • Third-party liability up to $ 200 000: if you are found at fault in a crash, both driver and passengers of the other vehicle can sue you for their medical treatment costs, as well as lost wages and an array of other items.
  • Autoplan accident benefits: If you are injured in an accident, ICBC will pay for some of your medical expenses and lost wages, even if you are at fault.
  • Underinsured motorist protection, up to $1 million: if a driver involved in a crash is not insured or underinsured.
  • Hit & run up to $ 200 000: this coverage is available to all residents of BC, even if you don’t have a vehicle
  • Inverse liability protection: certain parts of Canada do not allow you to sue another driver in case of a crash. ICBC will cover your costs if you are involved in an accident outside of the province.

And that’s it!

Did you notice some items are missing such as collision? You are right, this is not included in the basic ICBC coverage. Got a crack on your windshield? Not included either!

Most British-Colombians elect to purchase the following extra coverage:

  • Collision: repairs to your car in case of accident, even when at-fault. This also comes with a deductible. In BC, you only pay for the deductible if you are at-fault.
  • Comprehensive: this covers you in case of a crack in your windshield or if you hit an animal or hail damages. There is also a deductible for this.
  • Extended third-party liability: in case of a lawsuit, 200K may not be enough, depending on the nature of the injuries, the type of income and the number of people suing you. Lawsuits are pretty much the norm. You can purchase coverage for up to $ 5 millions.

You can find all the optional coverage products here.

In terms of costs, it also expensive. It is very common to pay $ 120.00/month with a very good driving record and reasonable coverage. A lot of items impact your premiums such as the usage of the vehicle and the type of vehicle. The fact that ICBC has monopoly doesn’t help either.

That being said, the driving factor – no pun intended!- behind the high cost of auto insurance is injury claims and lawsuits. These are extremely expensive.

A different money style for a different lifestyle

For decades, the traditional way of life has been pretty much as follow:

  • Get good grades and get a degree
  • Find a job and climb the corporate ladder in your company
  • Get married
  • Buy a house and a car
  • Have kids
  • Retire at 65 and explore the world

Does the above sound familiar? It certainly does for our grandparents and parents. But for the Generation X – who I am- and Millennials, things definitely don’t line-up that way. I don’t want to sound pessimistic but:

  • Post-secondary education has become incredibly expensive and does not guarantee a good job
  • Unemployment is also on the rise; The glory days of company pension plans and job stability are long gone, Same goes for the single career.
  • Almost 50% of marriages end up in divorce
  • Buying a house is no longer the ultimate proof of success and adulthood. In some cities, like Vancouver, it is just plain unaffordable
  • More and more people chose not to have children or have them later in life
  • Nowadays people want to retire at 55, if not sooner, and explore the world throughout their lives

OK, maybe I am a little pessimistic, but the above is the reality of most people nowadays. Yet, most people still have the same old financial style, i.e. pretty much financing everything and relying on a regular salary to pay it off.

There is just one problem with this line of thinking: the regular salary is becoming more and more elusive, and everything is becoming more and more expensive.

Our parents and grand-parents were able to achieve the original lifestyle because they actually made more money than the younger generations thanks to unprecedented economic growth. Living costs were also lower and, more importantly boomers were saving more.

Isn’t it time for the finances to match the new lifestyle?

  • You probably will need to get creative to finance post-secondary education or you may have to postpone it
  • You need an emergency fund, not to mention you will need to save for retirement too
  • You need adequate insurance
  • You may elect to rent over buying
  • You will need to save if you decide to have children. Maternity benefits in North America won’t get you far
  • Living today vs. living tomorrow will always be a balancing act

For some reasons, the word “savings” seem to have skipped younger generations. OK, I get it that it is more difficult to save nowadays, with way more demands on our hard-earned cash.

That being said, the best way to be able to save is not to get into too much debt in the first place, even more so to finance the “old lifestyle”.

We, as in generation X and Millennials, actually need to let go of that particular lifestyle. This is probably the hardest thing to do, as it has been ingrained in our minds by our parents….

Save

Save

The costs of working

 

Working is a necessity for the majority of us. Nowadays, dual income is the norm, even for families with children. Being a stay-at-home parent is somewhat considered as a luxury.

Many people, however, do not consider the costs of working, as yes, working actually costs money:

  • Commuting. Cars are not cheap, even if you own them outright. The extra gas, wear & tear, insurance, mileage, parking and tolls really add-up. Public transportation is your best bet to save money, but it may not be a possibility.
  • Daycare. If you have young children, this one can really be a dozy. In Vancouver, monthly costs for a licensed daycare can reach $ 1 000.00. If your children are of school age, you may not be able to pick them-up at 3.30 pm. You will also need to account for school breaks and other school closures, not recognized by your employer.
  • Lunches out: even if you are disciplined and a proponent of bringing your lunch to work, there will be occasions when it won’t be the case. And what about a latte here and there?
  • Work wardrobe: you may not be able to wear your jeans or casual clothing to work. You will need to account for the extra spending.
  • Work socializing: there will always be the occasional birthday, baby or wedding shower, Christmas party and other after-work activities. Pitching in for gifts and drinks also adds up.
  • Pet care: if you have a dog, you probably won’t be able to take it to work with you. Dog walkers or doggie daycare are not cheap.

These are actual dollar-costs. That being said, the biggest cost of having a job, in my opinion, is time.

Whether you are a parent or not, you need to look beyond the salary and benefits before accepting a job offer or deciding to return to work.

 

Save

In favor of the “starter home” concept

I am glad June is over. Last month was definitely a whirlwind, hence the lack of activity on my blog.

Thanks to the Vancouver red hot real-estate market, my condo sold for over-asking and in less than a week!

It is definitely a sellers’ market at the moment. As a buyer, I felt the pinch. On several occasions, I wasn’t fast enough and the property was already sold. At other times, there was a bidding war I was not willing to enter.

I ended-up finding the right condo when I increased my budget by $ 10 000. Luckily, I did not find myself into a bidding war and was able to put subjects in my offer.

To ensure I could actually afford my new place, I used a couple of tools: Ratehub and the real life ratio by Rob Carrick.

I also contemplated going back to renting. I would also have been able to afford a nice place, but finally decided against it. After further number-crunching, it simply does not make sense for me financially.

During the whole process, I ensured I did not make any of these previous mistakes or these ones. I also had the right Realtor.

Which, somehow, brings me to the next point. I have gained a whole new appreciation and perspective on the concept of “starter home”.

I now see this as “trial and error”. Let me elaborate a bit.

As a first-time home buyer, I knew nothing about real-estate, mortgages and the whole process. It was a steep learning curve and I felt overwhelmed.

Money was also tighter. I pretty much put all my savings in the purchase and then some.

I also wasn’t sure of what I actually needed in a home, and living in Vancouver, I had to adjust my expectations big time.

My current condo’s layout is not that functional. It has 2 bathrooms and it is one too many for me. The walk-in closet in the master bedroom is also too small. First-world problems, I know!

Unfortunately, the Realtor I randomly chose back then was not really helpful and did not give me sound advice. I ended-up buying in my current building, in a neighborhood I wasn’t thrilled about.

For my second purchase, I did not go with bigger, but with smarter and better. I ditched the second bathroom in favor of a den, the layout is way more functional and both building and neighborhood are much better. I am not going to see any special levy anytime soon in my new home.

I am really exited about moving-in -and by extension moving-out of my current building-. I hope that it will be more of a “permanent” home for years to come.

Save

Save