Mortgage Basics 101: What is your mortgage term?


Hi Ryan Zupan here with City Wide Financial. Today I’m going to talk about your mortgage term. There are 2 time frames you need to think about when you get your mortgage. The first is your amortization – the life of your mortgage – the second is your mortgage term – the length of your mortgage contract. This is the period of time where you & your lender agree to a specific interest rate, payment & options (in the case of a variable rate, your payment & rate would fluctuate throughout the year).

Your mortgage options are things like your prepayment privileges. How much money can you put towards your mortgage each year? How much can you increase your payment? What happens if you miss a payment? Your ability to move the mortgage to another home if you sell your property? There’s a lot of things to consider.

It’s important that you choose the right term, because if you break your term, if you break your mortgage early, you have to pay a penalty. In a lot of cases that penalty is quite expensive. It’s very important that you think about your goals with that property.

If, for example, your investment portfolio does well, or you get transferred, or house prices increase such that you want to sell. It’s important that you have chosen the right term so that you cost is minimized.

A big mistake I see with buyers, is when they are shopping for their mortgage, they are just looking at interest rate. Rate is just one piece of the pie. If you’re going to sign a 5 year term, for example, you should be looking at what are your total interest costs over that 5 year period? What will your outstanding balance be at the end of term?

Sometimes it’s better going with a slightly higher interest rate IF you have better mortgage options because that mortgage is going to cost you less over the 5 year period.

There are two types of terms: short term (6 months – 3 years) & long terms (3 years & above). Unless you’re planning on selling your home in under 5 years, most people go with a 5 year term. That’s the sweet spot, right now anyways, between getting a low rate & locking it in for a relatively long period of time.

Some people, who are OK with more risk, will just go after short terms. With a shorter terms, your rate is less, so they prefer renegotiating their mortgage every 2-3 years & chasing that lower rate. It really depends on your risk tolerance, your plans with the property, etc.

If you’d like to help choosing the right term or you would like to know your interest costs over the term of your current mortgage, contact me, I’m Ryan at City Wide Financial.

Tax Tips: How Prepayments Save Your After Tax Dollars

Alright, so it is everyone’s favorite time of year, Tax Season!  Now, if you’re like me, you enjoy paying taxes as much as you enjoy finding an empty toilet paper roll in a public washroom.  They’re both revolting.  But in my effort to symbolically “spare a square,” I’m going to share some insight into how making prepayments on your mortgage are related to income tax.

Keep in mind, I’m a Mortgage professional & not a tax expert, but there are some very basic truisms I’d like to share:
Unlike the States, mortgage interest in Canada is not tax-deductible.  The monthly payments you make are with your after-tax income — what I mean is, the payments are with money you’ve earned & already paid tax on.  This makes it even more important to make prepayments on your mortgage early, as you will not only save dramatically on you long-term interest costs, but you’ll save from having to apply future after-tax dollars to your mortgage payments.

If you have a mortgage interest rate of 5%, for every $1000 of principle you reduce your debt by, you will save $50 in after tax cash each year.  Looking at it this way, in an income tax bracket of, say, 40%, you need to earn $83.33 to pay the interest for every $1000 of outstanding principle so there is a huge benefit to reducing this balance.

Any prepayments — whether it’s lump-sum, doubling up payments, increasing payments, anything above your required monthly commitment — are going directly to reducing your outstanding balance.  You wont’t have to pay interest down the road on that amount so you are saving your future, after tax dollars.

You could also think of this as your return on investment for making prepayments is 8.33% before tax & 5% after tax, which is better than most fixed return investments — bonds, GICs, etc.

So make lump-sum payments, double up payments when you can, use your RRSP-driven tax rebate to pay down your mortgage, you’ll not only save tremendous amounts of interest, but you’ll save from having to apply future after-tax dollars to your mortgage.

For more information on mortgage tax strategies, or learn how you should be using your prepayment privileges, contact me, I’m Ryan @ City Wide Financial.

Ryan Zupan
Mortgage Planner

The Biggest Threat to Today’s Homeowners & How to Protect Your Mortgage: Inflation Hedge Mortgage Strategy

Ryan Zupan here with City Wide Financial, I want to talk about a strategy that we’ve been using with just about all of our clients over the past few months. It’s called the Inflation Hedge strategy.

The biggest problem I see right now is that, b/c interest rates have been at historical lows for the past 3 years, there has been an influx of buyers entering the market who, when rates return to a more normal level, a higher level, they’re going to be in a lot of trouble. All of a sudden, from one month to the next, their mortgage payment is going to rocket up by $5-6-700 when their mortgage is up for renewal.

Now, some ppl say, well, in 5 years I’ll be making a lot more money so that won’t be a problem but as we all know, the more money we make, the more we spend & the more expenses we’ll have. You really don’t want to be a situation where you have that payment shock.

So this strategy is designed to prepare your mortgage for the higher rates of the future & eliminate that payment shock. How do you protect a mortgage from this type of inflation? What do we do that eliminates this shock?

There are a few key values that factor into this strategy. First, we calculate what your outstanding balance will be at the end of your term, then based on where we expect interest rates to be at that time & what we expect your payment to be, we determine what steps we need to take to get your mortgage payment to that level.

In a nutshell, the inflation hedge strategy adjusts your mortgage marginally each year to account for updates to interest rate forecasts. Because these marginal payment adjustments result in you paying down more principle, you’re going to save thousands in unpaid interest costs.

The results of the inflation hedge can be tremendous. The savings range from as low as a few thousand up to $15-$20K and all this is by doing very little.
The beauty of this strategy is that you can start it at any point in your mortgage so if you already own but want to find better ways to manage your debt or if you know of friends or family that may benefit from this very simple, yet effective strategy, contact Ryan @ City Wide Financial.

Ryan Zupan
Mortgage Planner

How to best take advantage of today’s low variable rate?

Ryan here with City Wide Financial, talking about what is an adjustable rate mortgage strategy.  This is one of the more common questions we’re asked – fixed or variable, which is better?

If you are asking yourself this question, a strategy I encourage you to think about is taking an adjustable rate, but fixing your payments at what they would be at the higher, fixed rate level.  If you’re considering taking a fixed rate, you can obviously handle that payment, so why not fix your payment at that level & pay down boatloads of principle while the variable rate is so low.

A good variable rate is around 2.25%, about 2% below today’s best fixed rates.  On a $300,000 mortgage over 30 years, your variable rate payment is over $300 lower than the fixed payment.  So if you take the variable rate & fix your payments at the fixed rate level, in year 1 you’ll pay down $4000 in more principle than you would normally.

Now, of course, the variable rate fluctuates & as it increases, the savings won’t be as significant but my goal here is to illustrate the kind of savings you’ll see.  Also, eventually that fixed payment likely won’t be enough to cover your variable payment, so at that time you’ll need to fine tune your strategy, but that is why you need someone committed to managing this mortgage for you.  Taking a variable rate opens your mortgage up to a lot more risk & anyone thinking of taking a variable rate with their bank is crazy because they do nothing to manage your mortgage over the term.

A lot can happen in 5 years time, particularly in the mortgage world, is money, so it’s important to have someone advising you throughout the life of your mortgage, making sure you’re saving as much money as possible.

If you’d like to hear about more of my mortgage strategies, or to see how much you can save by taking the adjustable rate strategy, contact Ryan at City Wide Financial.

Ryan Zupan
Mortgage Planner

How To Take 5 Years Off Your Mortgage.

Ryan here with City Wide Financial, talking about accelerated payments & why every mortgage holder should be using them.

Mortgages are a lot like having a bratty teenager: the more attention you give them, the less money they’ll cost you. Mortgages respond very well when there is someone actively engaged in managing them. Whether that’s me, whether that’s you, part of giving your mortgage more attention is making payments more frequent than regular monthly. Accelerated payments are either semi-monthly, bi-weekly or weekly. They have the effect of paying off your mortgage up to 5 years ahead of schedule. If you’re taking a 30 year mortgage, choosing accelerated payments are almost the same as choosing a 25 year mortgage – big savings for doing very little.

So what are they? Well with bi-weekly, for example, we take your monthly payment, cut it in half & arrange for you to make that payment every 2 weeks. Now, because there are 52 weeks in a year, that’s 26 bi-weekly payments, which is the same as 13 monthly payments. So, accelerated bi-weekly payments effectively squeeze in an extra month of payments into the calendar year.

If you have a $300,000 mortgage over 30 years at 5%, accelerated bi-weekly payments will pay off the mortgage in 25 years & 3 months, nearly 5 years earlier. Not only that, but you’ll pay off nearly $10,000 more principle & save over $50,000 in unpaid interest. Big savings.

Everyone’s mortgage should be on accelerated payments. We can match the mortgage to coincide with your paydays If you’re paid semi-monthly & don’t want the confusion of paying every 2 weeks, contact me & I’ll explain how we work around that. Otherwise, that will be a topic of a later blog.

If you, any friends or family would like to know how much accelerated payments could save you, contact me, I’m Ryan at City Wide Financial.

Ryan Zupan
Mortgage Planner