Real Estate NewsCanadians Save Billions On Mortgage Payments
It"s spring, and Canada"s financial institutions are going all-out, grabbing mortgage business from the still-booming real estate market.
"By renegotiating their mortgages last year, Canadian homeowners saved a total of $3 billion in interest payments -- and this figure swells to a cumulative $10 billion in mortgage interest savings over the past three years," says Benjamin Tal, senior economist at CIBC. "Given recent trends in interest rates, an estimated 20 per cent of current mortgage holders can still renegotiate their mortgages profitably."
The lower interest payments, due to renegotiations, saved the average household almost $1,900 in mortgage interest payments in 2004, which CIBC says is the equivalent of a three per cent increase in average household income, and roughly 10 per cent of the annual carrying cost of a home. It says lower-income Canadians who renegotiated their mortgages in 2004, "saw an even larger benefit relative to their income, generating annual savings equivalent to no less than an eight per cent pay increase."
A recent RBC Royal Bank survey, says that 56 per cent of existing Canadian homeowners have a mortgage. The average Canadian has $109,504 left to pay and expects it will take 12 years to pay it off. The survey says only eight per cent of homeowners plan to refinance their mortgage in the next 12 months. But while many Canadians have already renegotiated their mortgage terms to save money, others are losing out because of misconceptions about home financing.
For example, most Canadians believe the minimum down payment necessary to buy a house is 11 per cent. "New options such as no-down and low down payment mortgages, make it possible for qualified buyers to purchase a home without having to spend years saving up while house prices continue to advance," says RBC.
Clayton Van Esch, a senior manager with RBC, says, "Forty per cent of Canadians did not know that home-equity based loans are the most affordable type of credit available. Misconceptions like this are the reason why people should look to competent credit advice, the same way they do for investment advice."
When BMO Bank of Montreal got into the act, and surveyed those looking for a house, it found that 77 per cent did not seek any financial advice from a banker, financial adviser or mortgage broker.
"That could be a big mistake," says Maria Racanelli, a vice-president at BMO. "While securing a great mortgage rate is important, developing a realistic plan on how to manage both your regular payments and unexpected expenses often makes a huge difference in maintaining a comfort level about your overall finances."
For example, while variable-rate mortgages have saved money for mortgage-holders during the last few years, the RBC survey says more Canadians are likely to opt for the peace of mind that comes with a fixed-rate mortgage.
There are several new mortgage products that may be worth checking out, depending on your personal situation.
Mortgage Intelligence recently introduced a mortgage based on interest accrual only, with no pay down on principal, for up to 80 per cent loan to value. It can also be combined with a second mortgage for loan-to-values that range from over 80 and up to, 95 per cent that can be paid off at any time without penalty. Although interest-only mortgages have long been available in the United States, the company says this is the first time the concept has been introduced in Canada.
Expected to appeal to first-time buyers, the "idecide" mortgage enables consumers "to buy a home with five per cent down, no fees or insurance premiums attached, and on an interest only basis," says Bob Conway, interim president, Mortgage Intelligence. "Typically, mortgages with a loan-to-value ratio of over 75 per cent are insured... and require the customer to pay a fee that is subsequently blended in the mortgage. That fee can range from a one per cent premium to as high as 3.25 per cent. The flexible prepayment options with idecide mean clients are paying down their mortgage, not fees and premiums."
Laurentian Bank is offering the 6-Month Free Mortgage option. The bank pays the first six monthly mortgage payments with no interest carried forward. "It is the only mortgage option on the market to cover both capital and interest," says the bank. "The new mortgage solution will help homeowners to settle in their new home, to complete certain projects or to simply take time to enjoy life by reducing their financial obligations for six months. This mortgage offer is ideal for first-time home buyers since there are many expenses related to any first property purchase."
Scotiabank"s Flex Value mortgage offers customers a rate of 0.75 below Scotiabank"s Prime Rate on a five-year variable term, with low payments and the ability to lock-in, at any time, to a product of equal or greater term, at no cost.
All the lenders agree on one thing -- whether you"re buying a new mortgage, or renegotiating an existing one, get some expert advice and shop around to make sure your mortgage terms are tailored to your needs.