Before getting into this week’s topic I would like to acknowledge the two comments I have received from readers. First of all, thank you. It is nice to know that at least two other people other than my family are reading my opinions. Either that or my daughters have enlisted two new anonymous email addresses. For now I will choose the former and bask in the fame.

 

To “qwaszxter”, you have confirmed a very important point. “Portability” of a previously negotiated low rate is valuable. Keep the rate you get today at say, 5.49% for five years or 6.25% for ten years and take that mortgage with you to your next home in say two or three years when the new rates may be as high as 7.5% to 8.5% (and trust me they will go up as the economy recovers). On a $200,000 mortgage if you can maintain the original amortization and term you not only save the pre-payment penalty (minimum $2,500), you can also save approximately $19,000 in interest over the next five years. Unless you would rather give it to the bank for simply re-writing your mortgage.

 

“Assumability” works in the same way. If you are looking to sell and don’t need your mortgage you now have $21,500 to negotiate with the buyer who is interested in your home. In a market like we are in Prince George today you may have some competition… a number of homes for sale that are very similar to yours. All else being equal, what if you were to offer the buyer a savings of $11,500 just in interest if they buy your home and assume your mortgage? They pay you $10,000 for the right to assume it (perfectly legal) and you still sell your home for market value. Now, you are $10,000 richer, the buyer is $11,500 richer and the bank maintains the business. “Win, win, win.” To top it off, the mortgage broker (me) looks like a star and gets more referrals for future business. You gotta like that. I know I do.

So, before you sign for a mortgage that is saving you .15% to .25% over the next five years ($2,375), determine if these options might be of benefit to you. “Don’t know” you say? Well then, check this out: 71% of borrowers re-finance their mortgages before the term is up. That means the chances are that a lender that not only offers “portability” and “assumability”…but also “topping up” might be a good choice for you. Whoops, now we didn’t talk about “topping up” before. What does that mean? “Topping up” is adding more funds to your mortgage without changing the term or amortization. Since the lenders rely on investors for their funds they have to assure them of a return as originally set out when you got your mortgage. The lender doesn’t have to break or re-finance the entire mortgage. They simply fund you more money at the original term (rate) and amortization. Again using a $200,000 mortgage, you may need $50,000 for renovations, debt consolidation, children’s’ educations, etc. If you are in the position of having to borrow or even choosing to borrow to take advantage of an opportunity… saving the $21,500 we calculated earlier can help your decision and go a long way. It can also make the difference of being able to take advantage of an opportunity. It is my experience that most borrowers don’t know what these options mean and don’t know if they have it in their mortgage.

 

Now for “eagleone”, yes you are correct. The US sub-prime mortgage collapse is a clear example of what can happen when a borrower doesn’t plan for the long term. They just get in right now at any cost without looking ahead to the future. The people who took the “almost looks too good to be true” mortgages did so because they were afraid that if they didn’t they would never be able to buy a house. At the end of this year the total dollar value in mortgages written off will probably be close to one trillion dollars (that’s right Austin, “one trillion”). My main philosophy in any investment, especially one that involves borrowing is to plan for the long term. If you see a short term opportunity then you may be in a position to take advantage. If your planning is only for the present you may get caught in a crunch. Like many of the people in the US did last year. Like many of the people in Prince George did from 1999 – 2001. Like many of the people will who don’t prepare for the long term.

 

As I look back on my years in Prince George I remember a number of times when people bought home at the peak of the cycles (1981, 1999 & 2007). Those who maintained their homes and lived up to the obligations of their mortgages lived through the downturns and emerged on the other end with higher valued homes, increased equity and opportunities to grow their personal wealth. 

 

As a realtor I remember sitting through many sessions in court that involved foreclosures. Homes were purchased for “market value”. Some buyers thought they got real great deals but then don’t we all at the time? Those who lost their homes were devastated at the time but were cleared of the debt and able to purchase homes again after re-establishing their credit. I know because I have been able to place many of them into mortgages that are much better for them. Mostly because they have learned from the past experience. The banks and CMHC took heavy losses, learned from the experience but continue to lend money to people because that is what they do. So I don’t understand “eaglone”’s comment “bankers in action…lol”, unless it’s based on the assumption that just because one buys a home they are entitled to a guaranteed profit. Remember we are in a free enterprise society. With every speculation, there is a risk. With risk there may be a reward… sometimes that reward may be only the experience.

 

Oh well, it looks like our time is up for today. I guess I will have to get into “the tightening guidelines” next time. In the meantime, I look forward to your comments.

 

 

 

Bob Quinlan is a Mortgage Broker with Meridian Mortgages of Prince George

www.pgmortgages.ca  or send him an email  bob@pgmortgages.ca