Real Estate

I want to Buy. Need help getting started.

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  • Dec 11th, 2015 11:18 pm
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Newbie
Nov 28, 2015
28 posts
1 upvote
Toronto, ON
Dynatos wrote: Most lenders will allow you to increase your regular payments by a certain percentage as well as pay a certain percentage of your initial principal in one annual lump sum. Most often, the condition offered is 20/20, which means you can increase your regular payment by up to 20% and pay off up to 20% of your initial principal every year without penalty.

Your regularly scheduled payments are based on an amortization formula. Every payment pays a certain amount to interest and a certain amount to principal. The amount of interest per payment decreases, and the amount of principal paid off increases, as you pay off the principal. Every payment made in addition to your regularly scheduled payment goes directly towards the principal, thereby reducing the interest paid on subsequent payments.

So, the math, without actually showing the amortization calculations. I used my own Excel based calculator for ease.

Scenario 1
  • A $300,000 mortgage at 2.64% over 10 years results in a $2,845 monthly payment.
Scenario 2
  • A $300,000 mortgage at 2.64% over 25 years results in a $1,365 payment. A 20% increase in your regular payment will remove 5 years from your mortgage.
  • If your mortgage conditions allow a 20% increase to your regularly scheduled payment and you take advantage, your monthly payment becomes 1.2*$1365 = $1,638.
  • The difference between the 10 year amortization and this increased payment is $2845 - $1638 = $1,210 per month. Over the course of the year, this is 12*$1207 = $14,484. If you then pay an annual lump sum of $14,484 every year for 10 years, you'll knock your mortgage down to 10 years. Simply take the difference ($1,210/month) and put it aside in account. Then, once a year, put that against your mortgage.
  • Your monthly payment averages out to $1638 + $14484/12 = $2,845/month, the same as the 10 year amortization
So, by amortizing over 25 years, increasing your regular payments, and adding an annual lump sum, you'll still pay the mortgage off in 10 years. In fact, if you had a wealth of cash sitting around, you could conceivably pay the 25-year mortgage of in under 4 years with no penalties.

Then, if the unforeseen happens (job loss, marriage, kids, etc.), you can decrease your monthly payment back to the contractual minimum of $1,365. You also have $1,210/month that you've been saving towards your lump sum payments that you can use in case of emergency. Furthermore, if the interest rate increases, you have some float to be able to offset that interest rate increase by keeping your payments constant, which will slightly increase your amortization.

Let's use your specific situation as an example for more illustration.
  • $250,000 house
  • $100,000 down payment
  • $150,000 mortgage


You can get a variable rate mortgage as low as prime-0.65 (i.e. 2.05%).
  • At 10 years amortization, your monthly payment is $1383.56
  • At 25 years amortization, your monthly payment is $639.44
  • Increases your payments by 20% ($127.88) = $767.33. Your mortgage drops to 19.92 years.
  • Put aside $1383.56-$767.33 = $616.23/month in a savings account. At the end of the year (month 12), put the total 12*$616.23 = $7,394.76 against the mortgage. Your mortgage now drops to 122 months.
  • Say you end up having financial hardship in 5 years. At year 5, the outstanding balance is $79,202.10. You've already paid off almost half the mortgage. Decreasing to the bare minimum at this point will mean you only have 10 years left to pay off.


It all comes down to your financial situation, where you see your financial situation in the future, what risk you're willing to take and, more importantly, how disciplined you are with your finances. Taking advantage of prepayment conditions really requires discipline. For many people, it would just be easier to amortize at 10 years and forget about it but, with financial discipline, you can buffer a lot of risk.
Thanks for this breakdown. I found this calculator/ and was able to get a clearer idea of what you where saying. Your post makes it even more clear. By just doing prepayment and accelerated biweekly will knock it from 25 years down to 18.

I am pretty disciplined so I probably will go with method as I rather have a safety net as I like to prepare for the worst. This gives me the flexibility of having best of both worlds.


I think I might go to my main bank, maybe with CdnRealEstateGuy and one other to get some pre approvals and then once I am about to buy do a blitz and go to many and see if I can get a better rate?

Or do you think it is over kill going to like 3 for pre approvals?
Deal Addict
Jul 11, 2010
1294 posts
329 upvotes
Toronto
howser2 wrote: Thanks for this breakdown. I found this calculator/ and was able to get a clearer idea of what you where saying. Your post makes it even more clear. By just doing prepayment and accelerated biweekly will knock it from 25 years down to 18.

I am pretty disciplined so I probably will go with method as I rather have a safety net as I like to prepare for the worst. This gives me the flexibility of having best of both worlds.


I think I might go to my main bank, maybe with CdnRealEstateGuy and one other to get some pre approvals and then once I am about to buy do a blitz and go to many and see if I can get a better rate?

Or do you think it is over kill going to like 3 for pre approvals?
Each time a credit check will be done. The second and third person will see this and will ask you why you are shopping around. Once you have an accepted offer and need the mortgage the same thing will happen. It takes a lot of work to prepare an application for a purchase as a lot more documentation is required than on a refinance or switch. It is not fair to try to get 3 or more agents to get you approved and all but 1 do not get paid.

If you go to a bank you will only get the rate that they are willing to offer. If you go to a mortgage agent 1 credit check is done, that agent will look at the rates of all the lenders that he/she deals with and then get you the best rate that fits your requirements as there are different % prepayments and payment increases out there.
Doug Boswell
i
Deal Addict
Apr 4, 2013
1274 posts
410 upvotes
I agree with Doug. It is overkill to get 3 different pre-approvals. The pre-approval essentially highlights any credit problems you may have (which any lender will discover when it requests your credit report) and provides an estimate on the total mortgage that you may be approved for based on your reported income. The rate that you will be guaranteed will rarely be the best rate available.

I really think that you would benefit from a mortgage broker who is able to meet with you face to face. Most first timers have a lot of questions and it is important to build the rapport that you need to feel confident with your choices. For some, this goes beyond email and online applications. I would ask around for a referral from some people that you know and make sure that you ask why your friends are providing the recommendation. Look for more than, "this guy got me a cheap rate". It is relatively easy to get a cheap rate today - just go to sites like ratespy, find the lowest rate and ask any broker to match it. It won't take you long to find one that will. Just know that this is the absolute worst way to select a mortgage.
Jr. Member
Oct 30, 2012
143 posts
10 upvotes
Toronto
howser2 wrote: Well what happens if you take 20-25 year amortization and by using th 20% annually you get down to zero within 10 years? Will you still pay fees?




As soon as I find a place that I like and can see myself living there for 10 years. Not sure what a syndicated mortgage is.


With regards to investing. On one side I see everyones point about investing but on the other side. I think well if I pay my place off as fast as possible then I don't have to worry about paying X amount of dollars a month. Even if I would lose my job or something I would have to pay very little to live in a month and would give me more peace of mind to invest in higher risk stuff for better return.
The thing you should keep in mind about investing is: the longer the term, the better the return. Having a portfolio in place while you pay off the mortgage could mean your money doubles by the time your mortgage is paid off. This will almost always win out against investing in high risk investment much later. As to risk about losing the job and what not, it is typically recommended that you keep six months of living expense on hand in case this happens, and invest the rest of the money right away.

Syndicated mortgage is where you invest in development projects. They typically pay 10% over 2 to 3 years. Decent investment locally.
Newbie
Nov 28, 2015
28 posts
1 upvote
Toronto, ON
lucindaluca wrote: The thing you should keep in mind about investing is: the longer the term, the better the return. Having a portfolio in place while you pay off the mortgage could mean your money doubles by the time your mortgage is paid off. This will almost always win out against investing in high risk investment much later. As to risk about losing the job and what not, it is typically recommended that you keep six months of living expense on hand in case this happens, and invest the rest of the money right away.

Syndicated mortgage is where you invest in development projects. They typically pay 10% over 2 to 3 years. Decent investment locally.
I am still planning to put money towards my RRSP each month(via index funds). I understand it is lest risky but you alway have to say I am not going to touch it for a very long time. What happens if it is down and you lose your job or something. If you have your place paid off or lower monthly payments then you can shield from this risk more.
Deal Fanatic
Jul 3, 2011
6517 posts
3798 upvotes
Thornhill
I agree with this, three pre-approvals is unnecessary. Those mortgage brokers who aren't desperate will not even do one if they think you're shopping and playing them.

The key is to meet with at least 3 to get to know a) which lenders they deal with, b) the products they offer, c)what you may possible get and most importantly d) to connect with one you're comfortable with.

If anyone isn't willing to discuss A and B with you willingly, move on.
cbr663 wrote: I agree with Doug. It is overkill to get 3 different pre-approvals...
I really think that you would benefit from a mortgage broker who is able to meet with you face to face...
Newbie
Nov 28, 2015
28 posts
1 upvote
Toronto, ON
licenced wrote: I agree with this, three pre-approvals is unnecessary. Those mortgage brokers who aren't desperate will not even do one if they think you're shopping and playing them.

The key is to meet with at least 3 to get to know a) which lenders they deal with, b) the products they offer, c)what you may possible get and most importantly d) to connect with one you're comfortable with.

If anyone isn't willing to discuss A and B with you willingly, move on.
How should I go about finding a broker? Just google Vancouver Mortgage brokers and start calling them up?

So are people saying even when I find a place I should not check any of the major banks and see if they can match or beat the rate. I have a friend, she used a mortgage broker and she did not like her and in the end she regrets not talking to the big banks after. She ended up getting the same rate as a friend who just went to the bank but her friend also got the goodies ontop of it. I think this is probably why she did not end up liking the broker.

So she recommended to go talk to a broker and a bank or 2 as well.
Deal Addict
Jul 11, 2010
1294 posts
329 upvotes
Toronto
howser2 wrote: How should I go about finding a broker? Just google Vancouver Mortgage brokers and start calling them up?

So are people saying even when I find a place I should not check any of the major banks and see if they can match or beat the rate. I have a friend, she used a mortgage broker and she did not like her and in the end she regrets not talking to the big banks after. She ended up getting the same rate as a friend who just went to the bank but her friend also got the goodies ontop of it. I think this is probably why she did not end up liking the broker.

So she recommended to go talk to a broker and a bank or 2 as well.
The more informed a consumer is the better choice they will make. You can find a mortgage agent in Vancouver by googling. Some of the mortgage agents here work for companies that are also licensed to do mortgages in BC. Some of the Ont agents here are probably licensed themselves to write BC mortgages.

Just remember the big banks BMO, RBC etc are looking to maximize profits. Look at the earning reports that came out this week for a couple of them. If you need to break the mortgage mid-term you might find yourself paying a very high payout fee. Mortgage agents deal with many lenders so they usually can get you the lowest rate possible.

When you talk to a bank rep ask how the penalty is calculated if you have to break the mortgage midterm. Ask them if the mortgage will be a collateral one. If they don't know they don't know their product very well. Collaterals have both good and not so good features.
Doug Boswell
i
Newbie
Apr 27, 2014
33 posts
2 upvotes
Calgary, AB
Need some advice on looking for a Condo/Town-house.
I recently got a big inheritance (close to $300,000).
I have spoken with my bank, they told me in general that should I put down 35% or more I should't have a problem getting pre-approved.
I haven't done anything yet, just gathering some info, I don't want to touch my inheritance for at-least 3 months.
This will be my first time looking at buying a house, so I'm a newbie.

Should I go to see open condos/Town-houses to get a better understanding of what's on the market and to see what Condos/Town-houses look like before I start looking for a Realtor/Estate agent.
What is the difference between a Realtor and an Estate agent.
What types of question should I ask a Realtor/Estate agent before I sign with him/her
When I'm ready to seriously start looking, is it better to get pre-approved with my bank or a mortgage agent.

I figure a $225k-$250k should be more than enough for the price tag.
I live in Calgary

Any advice would be helpful, and if there's anything I missed please feel free to pm me

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