Whatever you want to call them nobody likes them. They can be unfairly inconsistent from lender to lender, and can be difficult at times to ballpark or “guesstimate” for clients.  The Canadian Bank Act dictates no consistency or single standard for how lending institutions recover the earnings they lose on an early mortgage payout, or prepayments.

Many Canadians today are refinancing to take advantage of lower interest rates, consolidating debt, or both. Clients could see some hefty interest penalties, and it can be confusing. When you pay-off your mortgage prior to its maturity, and break the existing mortgage term you are assessed either a three month interest penalty, or an IRD (interest rate differential).  Even though when you sign your original mortgage documents, and it outlines the details of the “cancellation fee” policy, the lender may at its own discretion change the terms and conditions of their policy.

Here are the two common lender calculations:

Most lenders apply both, stipulating “whichever is the greater of the two.”  If you have a VRM (Variable Rate Mortgage) you would use the 3 month interest penalty.

Three months’ interest penalty – Lenders guidelines may vary from institution to institution but most lenders will calculate your current interest charges for your next 3 mortgage payments.

To estimate the Three Months’ Interest Costs:

Interest rate differential – The IRD amount is calculated on the mortgage amount being paid out using an interest rate equal to the difference between your existing mortgage interest rate and the interest rate that your lender can charge when re-lending the funds for the remaining term of the mortgage.

To estimate the Interest Rate Differential Amount:

On reaching for yield: “We agree with investment writer Ray DeVoe’s observation, “More money has been lost reaching for yield than at the point of a gun.””

On availability of credit: “Borrowers then learn that credit is like oxygen. When either is abundant, its presence goes unnoticed. When either is missing, that’s all that is noticed. Even a short absence of credit can bring a company to its knees.”

On market volatility: “As one investor said in 2009: “This is worse than divorce. I’ve lost half my net worth – and I still have my wife.””

On homeownership: “But a house can be a nightmare if the buyer’s eyes are bigger than his wallet and if a lender – often protected by a government guarantee – facilitates his fantasy. Our country’s social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford.”

Taken from www.canadiancapitalist.com MoneySense

Paying debt with debt? I know it doesn’t sound that great. But, it actually does make sense (most of the time).  Like most Canadians we all have some form of debt, if it’s a mortgage, a new car loan, a line of credit you used for a recent basement reno, or that very trustworthy, and handy visa card.  Recently TransUnion released their quarterly analysis of Canadian credit trends. They found that the total debt per consumer (excluding mortgage) across Canada increased to $25,709 in the fourth quarter of 2010, up 2.2 percent from the third quarter of 2010 ($25,163). They did indicate that historically total debt does rise in the fourth quarter due to the wonderful holiday shopping season.  However, they did find that credit card debt actually declined nearly 3 percent during this period. But, lines of credit, revolving loans and installment loans all showed increases.

What this maybe saying is that Canadians are becoming smarter with their debt. They are researching lower rate bank products, cutting up high interest retail credit cards, and just taking a closer look (or having more interest in), at where their money is going.

Consolidating debt continues to be the second chance many are looking for. Refinancing your home still proves to be one of the most efficient ways of clearing your high interest debt, and “starting over” with a clean slate.  In many cases it makes sense to pay an interest penalty to break your existing mortgage, payout all, or most of your 18% or higher interest rate debt, and get into a new mortgage with rates as low as 2.25%. This option is not for everyone, and depends on the amount of your penalty payout, your mortgage renewal date, and a few other variables.

Take a look at this calculator from Moneyville.ca titled: How Long Will It Take To Pay Off My Credit Card? It can be a bit depressing to see that a $5,000 balance could take 12.5 years to payoff. But it does make you start to search for a better more efficient financial solution.

Today oil prices are at their highest levels since September 2008. The cause of course is from the civil unrest the world is seeing from the Middle-East.  It started in Tunisia, then Egypt, and most recently Libya.  If the unrest continues for some time, or starts to spill over to larger oil producing countries, then oil prices may continue to rise.

Now what does this have to do with mortgages? Well quite a bit. Although it’s not directly related there are many variables that may indirectly affect mortgage rates in Canada.

Oil is a factor of all production, from manufacturing to transportation. So if the price of oil is high, this creates inflationary pressure on our economy. The Bank of Canada protects against inflation by increasing interest rates, meaning higher variable mortgage rates.

However, the stock market is taking a bit of a hit because of the uncertainly, leading to a higher demand for bonds. Higher demand for bonds means decreased bond yields, which leads to downward pressure on fixed mortgage rates.

Depending on how severe and how long this worldly unrest lasts for, the Alberta economy may start to see a boost, with increased investment into the oil sands, potential increased drilling, and oil production.

Here are the changes to take effect March 18^th, 2011

• The maximum amortization period on CMHC insured mortgages will be reduced to 30 years from 35 years.
• The maximum refinancing amount that a homeowner can borrow against their home will fall to 85% from 90% of the value of the home.

Finally, effective April 18^th, 2011

• CMHC will no longer insure HELOC’s

Implications

Of today’s three changes the reduction of the maximum amortization period to 30 years will have the most direct impact on the housing market, and Canadian households.  This will cause higher mortgage payments, in turn reducing cash flow and cut into household budgets.  The changes to refinancing and HELOCs will more directly affect the financing tools available to consumers.  The shorter amortization period will raise the cost of homeownership, and the cost of refinancing.  At the current 5-year rate bench rate of 5.19%, reducing amortization from 35 to 30 years would boost a monthly mortgage payment by $95 on an average $300,000 mortgage.  Put another way, the change would require the income needed to qualify for a mortgage to rise almost 5%.

• It is estimated that 30% of new mortgages in the last year had amortizations of 35 years – the new rule will dampen new homebuyer demand
• With soft home values, many clients will not be able to refinance to even payoff  their existing mortgage

Here are a few interesting points that Mark Carney brought up in a press conference today after releasing the October Monetary Policy Report, which the Bank published this morning.

• The economic outlook for Canada has changed. The Bank expects the economic recovery to be more gradual than it had projected in July, with growth of 3.0 per cent in 2010, 2.3 per cent in 2011, and 2.6 per cent in 2012. This more modest growth profile reflects a more gradual global recovery and a more subdued profile for household spending.
• The inflation outlook has been revised down and both total CPI and core inflation are now expected to converge to 2 per cent by the end of 2012.
• The three main upside risks to the inflation outlook are higher commodity prices, a stronger-than-anticipated recovery in the U.S. economy, and the possibility of greater-than-projected momentum in the Canadian household sector.
• These upside risks are balanced by three downside risks relating to Canada’s international competitiveness, global growth prospects, and the possibility of a more pronounced correction in the Canadian housing market. These risks are balanced.
• The Bank maintained the target for the overnight rate at 1 per cent. This leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in an environment of significant excess supply in Canada.
• At this time of transition in the global recovery, with a weaker U.S. outlook…are expected to slow consumption and housing activity in Canada, any further reduction in monetary policy stimulus would need to be carefully considered.

So the seasonally adjusted annual rate of housing starts was once again down in September from August. However, the Canadian Real Estate Association announced today that existing home sales are up 3 percent this month over last. The average price has changed little from last month but this is good news for those who currently struggling to sell their home. Again with mortgage rate dropping earlier this week we should continue to see a stable housing market.

REMAX recently announced that they believe that there has been a lot of hesitation amongst homebuyers in Alberta over the summer, resulting in low and declining sales numbers.  However, with recent renewed confidence in Calgary and Edmonton, and lower prices with more selection, we should see steady positive sales numbers for the remainder of the year.

The question of the day is, are these increases too much too soon?  “This is actually a fairly large increase reflecting what’s happening in the bond market lately,” said Benjamin Tal, senior economist with CIBC.

With the current economic conditions strengthening and confidence increasing, more jobs are becoming available and consumer spending is on the rise. But really how stable is our fragile economy?  The big banks are anticipating a sooner than expected rate increase in the prime lending rate by the bank of Canada, that is thought to have already been priced into the market.

This has certainly caused a recent stir, and somewhat of a panic situation for many Canadians as they review their financing options causing many questions, and having many make some quick decisions.

Albertans that are looking to buy a home, 40% say they will buy within the next year. Across Canada Albertans are the most likely to say they are “very likely” to buy a home in the next two years and 92% believe that buying a home is a good investment. This information is according to the 17th Annual RBC Homeownership Survey.

It’s obvious that low mortgage rates are fueling the optimism and the mortgage activity all across Canada. Alberta has gone through a home price decline for some time and now finally we are starting to see a consistent increase in home prices, three straight months to be exact.

The survey also shows that Albertans have down payments higher than the national average, about 13.6% per cent of their estimated home value, and 77% believe they’re doing a “good job” of paying down their mortgage, again the highest across Canada.

What we are seeing on a daily basis is the increase in confidence across Alberta. It wasn’t long ago that Albertans were losing jobs, or not sure if they were going to be working the next day.  However, with the price of oil increasing to the levels we are seeing today the confidence is finally back. The rest of Canada was off to a quicker start, but Alberta is slowly catching up, and as anticipated by most industry professionals the later spring early summer housing market will be a busy one.