April 11, 2024 • 6 mins
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EPISODE DESCRIPTION
In this episode, Tom shares 5 common mortgage mistakes that cost individual Canadians thousands of dollar a year, and how you can avoid these pitfalls.
What was discussed: → Paying off your mortgage and locking into too long with fixed rates. → Understanding pre-payment privileges and mortgage porting → The co-signer trap that makes you house poor.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:08):
you save money in mortgages andreal estate.
So these five tips that I'll besharing here today are from years
of helping clients as a mortgagebroker.
And as you can imagine, I've seensome shit.
So starting off with point numberone, I see a lot of people trying
to pay off their mortgageaggressively, which is great.
But if you're leaving highinterest debt on the side, that's
not such a great thing.
So what I see a lot of people
(00:30):
struggle with from a mentalperspective is if they have debt
sitting outside of their mortgage,and they're just trying to pay
down their mortgage as fast aspossible, and that's their main
goal, then they typically leavethat high interest debt sitting on
the sidelines, which obviouslyisn't a good thing because you'd
much rather have that tied up intoa lower interest rate.
And whenever I talk to someclients that are in this scenario,
they're very hesitant to increasetheir mortgage amount because of
course, their main objective is topay down the mortgage.
(00:52):
But not only are you going to besaving on interest, whatever the
savings is, that's going toincrease your monthly cashflow.
So what I coach clients on doingis whatever that savings amount
is, just allocate that towards themortgage, it's going to help you
pay down that mortgage faster.
So to give you a good example, we
had a client that came to us for arenewal.
And what we did was we looked atthe whole picture, and we saw that
(01:13):
she had $40,000 sitting on herunsecured line of credit.
So that line of credit had a 12and a half percent interest rate.
So what we did was we bundled thatin with her mortgage, which had a
5.2% interest rate.
So right off the bat, she's saving
$500 a month.
So now with that $500 a month,
what we did is we coached her andsaid, hey, put your payments on
autopilot.
You can increase your mortgage
payment and put that extra $500straight towards principal and pay
(01:34):
down your mortgage aggressively.
So point number locking in to a
five-year I know two, you're Andput that extra fixed.
$500 Now, straight towards saying,principal and pay down your
mortgage aggressively.
So point number locking in to a
two, five-year fixed.
I know you're Now, what's wrong
saying, with well, the five-yearfixed?
It's one of the most common termsthat we see out there in the
mortgage world.
that's Yes, true.
But right we are at the peak ofinterest now, rates.
We're probably going to be seeinginterest rates decrease within the
next year or two.
So it doesn't make sense to lock
(01:58):
into a five-year at the peak ofrates.
Now, yes, the five year fixed isthe lowest rate typically.
So sometimes it does make sensefor clients if they just want to
optimize on cash flow.
But typically speaking, if you
want to save the most amount ofmoney long term, you're better off
going with a short term fixedrate.
Now, of course, it really dependson where rates are at at the time.
If you're close to the bottom ofrates, and we feel that you're
going to have a good runway with afive year term, then of course, it
makes sense to lock into that fiveyear fixed.
(02:20):
The one thing I will say, though,to add to that is a lot of people
don't understand how mortgagepenalties work.
So mortgage penalty is incurred ifyou break your mortgage.
So anytime you either moverefinance, you might incur a
penalty.
Yes, there's ways to get around
that.
But generally speaking, if you are
about to break your mortgage,you're going to be paying that
penalty.
And with the fixed rate, you're
going to have the highest penalty.
Now, I have another video going
over that.
(02:40):
I'm not gonna explain all of the
details on how penalties arecalculated.
Just know a five-year fixed ratewith a big bank is going to be
your biggest penalty, and you canassume a three to 5% penalty based
off of the remaining mortgageamount.
Now, assuming you have a mortgageamount remaining of $500,000 at
the time of breaking, then you canassume you have a minimum penalty
of $15,000 in that scenario.
Now, point number three, not using
your prepayment privileges beforemoving.
(03:01):
So first of all, let's back up andexplain what prepayment privileges
are.
So every mortgage you get, you do
have the ability to pay down yourmortgage through what's called a
prepayment privilege.
So every lender is different.
You can have between 10 to 20% ofprepayment privileges, which allow
you to put a certain amount ofmoney towards the principal on an
annual basis.
(03:21):
So if we use an example of a
$500,000 mortgage and you have a20% prepayment privilege, then
you'd be able to put $100,000towards that mortgage on an annual
basis.
So how does this tie into the
scenario of you moving?Well, if you're moving and you are
going to a new lender and notporting, so taking your current
mortgage over to the new property,for whatever reason, maybe you
(03:42):
didn't qualify with your currentlender, or maybe you just wanted
to optimize on the interest rate.
If you're going to a new lender,
and you're about to break yourmortgage, then you are going to
incur that penalty that we justdiscussed.
So if that's the case, and you'reabout to incur a penalty, the best
thing you can do is use yourprepayment privileges.
So going back to that example of a$500,000 mortgage, if you
(04:04):
allocated $100,000 and knockedthat mortgage down to 400k, your
penalty is going to be much, muchless.
Now speaking of mortgage porting,this is point number four, not
going to a lender that allows youto port your mortgage in the
future.
Every lender is different when it
comes to porting.
So it's very, very important when
you sign on to your new mortgage,you ask either your mortgage
broker or the bank rep, what arethe mortgage porting features and
(04:26):
how do they work?The last thing you want is to pay
a penalty in the future if youcan't port your mortgage.
So a classic example and somethingthat we see all the time is if
someone is with a credit union andthey want to move out of province,
then they're not going to be ableto port their mortgage.
So while although credit unionshave some pretty aggressive rates
at times, it's going to cost youmuch, much more in the form of
(04:49):
paying a penalty versus whateverrate you saved on during the term.
And with housing being moreunaffordable in Ontario, for
example, we're seeing a lot ofpeople move out west to say
Alberta, it's becoming more andmore common.
And we're seeing more of thatscenario of someone locking into a
credit union mortgage and notbeing able to port it and bring it
over to their new property.
And number five, beware the
cosigner.
Yes, that sounds counterintuitive.
You probably hear people say,well, the best thing for a first
(05:11):
time homebuyer is to get acosigner to help with the
mortgage.
But with that being said, what we
try to do is we try to look at bigpicture for clients.
So you want to make sure that youcan afford the payment because
while although yes, it is nice tohave a cosigner and it helps you
afford the home, gets you approvedfor a mortgage, that payment is
likely going to be higher thanwhat you would have qualified on
(05:35):
your own.
So what we do is when we talk to
clients, we make sure they'recomfortable with the payment
because the last thing we want forthem is to be house poor, move
into the home and realize, shit,my payment is way too high.
I can't afford this.
I'm going to need to either sell
this or really just get someone tobail me out like my parents and
help me with the payment.
So I'm curious, have you ever made
(05:55):
any of these mistakes in the pastand wish someone told you this?
Let me know, comment down belowand make sure you hit that shiny
subscribe button, help us out.
And we're going to help you out by
releasing new videos in thefuture, helping you save money
with mortgages and real estate.
you save money in mortgages andreal estate.
So these five tips that I'll besharing here today are from years
of helping clients as a mortgagebroker.
And as you can imagine, I've seensome shit.
So starting off with point numberone, I see a lot of people trying
to pay off their mortgageaggressively, which is great.
But if you're leaving highinterest debt on the side, that's
not such a great thing.
So what I see a lot of people
(00:30):
struggle with from a mentalperspective is if they have debt
sitting outside of their mortgage,and they're just trying to pay
down their mortgage as fast aspossible, and that's their main
goal, then they typically leavethat high interest debt sitting on
the sidelines, which obviouslyisn't a good thing because you'd
much rather have that tied up intoa lower interest rate.
And whenever I talk to someclients that are in this scenario,
they're very hesitant to increasetheir mortgage amount because of
course, their main objective is topay down the mortgage.
(00:52):
But not only are you going to besaving on interest, whatever the
savings is, that's going toincrease your monthly cashflow.
So what I coach clients on doingis whatever that savings amount
is, just allocate that towards themortgage, it's going to help you
pay down that mortgage faster.
So to give you a good example, we
had a client that came to us for arenewal.
And what we did was we looked atthe whole picture, and we saw that
(01:13):
she had $40,000 sitting on herunsecured line of credit.
So that line of credit had a 12and a half percent interest rate.
So what we did was we bundled thatin with her mortgage, which had a
5.2% interest rate.
So right off the bat, she's saving
$500 a month.
So now with that $500 a month,
what we did is we coached her andsaid, hey, put your payments on
autopilot.
You can increase your mortgage
payment and put that extra $500straight towards principal and pay
(01:34):
down your mortgage aggressively.
So point number locking in to a
five-year I know two, you're Andput that extra fixed.
$500 Now, straight towards saying,principal and pay down your
mortgage aggressively.
So point number locking in to a
two, five-year fixed.
I know you're Now, what's wrong
saying, with well, the five-yearfixed?
It's one of the most common termsthat we see out there in the
mortgage world.
that's Yes, true.
But right we are at the peak ofinterest now, rates.
We're probably going to be seeinginterest rates decrease within the
next year or two.
So it doesn't make sense to lock
(01:58):
into a five-year at the peak ofrates.
Now, yes, the five year fixed isthe lowest rate typically.
So sometimes it does make sensefor clients if they just want to
optimize on cash flow.
But typically speaking, if you
want to save the most amount ofmoney long term, you're better off
going with a short term fixedrate.
Now, of course, it really dependson where rates are at at the time.
If you're close to the bottom ofrates, and we feel that you're
going to have a good runway with afive year term, then of course, it
makes sense to lock into that fiveyear fixed.
(02:20):
The one thing I will say, though,to add to that is a lot of people
don't understand how mortgagepenalties work.
So mortgage penalty is incurred ifyou break your mortgage.
So anytime you either moverefinance, you might incur a
penalty.
Yes, there's ways to get around
that.
But generally speaking, if you are
about to break your mortgage,you're going to be paying that
penalty.
And with the fixed rate, you're
going to have the highest penalty.
Now, I have another video going
over that.
(02:40):
I'm not gonna explain all of the
details on how penalties arecalculated.
Just know a five-year fixed ratewith a big bank is going to be
your biggest penalty, and you canassume a three to 5% penalty based
off of the remaining mortgageamount.
Now, assuming you have a mortgageamount remaining of $500,000 at
the time of breaking, then you canassume you have a minimum penalty
of $15,000 in that scenario.
Now, point number three, not using
your prepayment privileges beforemoving.
(03:01):
So first of all, let's back up andexplain what prepayment privileges
are.
So every mortgage you get, you do
have the ability to pay down yourmortgage through what's called a
prepayment privilege.
So every lender is different.
You can have between 10 to 20% ofprepayment privileges, which allow
you to put a certain amount ofmoney towards the principal on an
annual basis.
(03:21):
So if we use an example of a
$500,000 mortgage and you have a20% prepayment privilege, then
you'd be able to put $100,000towards that mortgage on an annual
basis.
So how does this tie into the
scenario of you moving?Well, if you're moving and you are
going to a new lender and notporting, so taking your current
mortgage over to the new property,for whatever reason, maybe you
(03:42):
didn't qualify with your currentlender, or maybe you just wanted
to optimize on the interest rate.
If you're going to a new lender,
and you're about to break yourmortgage, then you are going to
incur that penalty that we justdiscussed.
So if that's the case, and you'reabout to incur a penalty, the best
thing you can do is use yourprepayment privileges.
So going back to that example of a$500,000 mortgage, if you
(04:04):
allocated $100,000 and knockedthat mortgage down to 400k, your
penalty is going to be much, muchless.
Now speaking of mortgage porting,this is point number four, not
going to a lender that allows youto port your mortgage in the
future.
Every lender is different when it
comes to porting.
So it's very, very important when
you sign on to your new mortgage,you ask either your mortgage
broker or the bank rep, what arethe mortgage porting features and
(04:26):
how do they work?The last thing you want is to pay
a penalty in the future if youcan't port your mortgage.
So a classic example and somethingthat we see all the time is if
someone is with a credit union andthey want to move out of province,
then they're not going to be ableto port their mortgage.
So while although credit unionshave some pretty aggressive rates
at times, it's going to cost youmuch, much more in the form of
(04:49):
paying a penalty versus whateverrate you saved on during the term.
And with housing being moreunaffordable in Ontario, for
example, we're seeing a lot ofpeople move out west to say
Alberta, it's becoming more andmore common.
And we're seeing more of thatscenario of someone locking into a
credit union mortgage and notbeing able to port it and bring it
over to their new property.
And number five, beware the
cosigner.
Yes, that sounds counterintuitive.
You probably hear people say,well, the best thing for a first
(05:11):
time homebuyer is to get acosigner to help with the
mortgage.
But with that being said, what we
try to do is we try to look at bigpicture for clients.
So you want to make sure that youcan afford the payment because
while although yes, it is nice tohave a cosigner and it helps you
afford the home, gets you approvedfor a mortgage, that payment is
likely going to be higher thanwhat you would have qualified on
(05:35):
your own.
So what we do is when we talk to
clients, we make sure they'recomfortable with the payment
because the last thing we want forthem is to be house poor, move
into the home and realize, shit,my payment is way too high.
I can't afford this.
I'm going to need to either sell
this or really just get someone tobail me out like my parents and
help me with the payment.
So I'm curious, have you ever made
(05:55):
any of these mistakes in the pastand wish someone told you this?
Let me know, comment down belowand make sure you hit that shiny
subscribe button, help us out.
And we're going to help you out by
releasing new videos in thefuture, helping you save money
with mortgages and real estate.
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