—The Mortgage Report: Sept. 28—
- Ever wonder who’s got the most generous prepayment privileges in Canada on a closed mortgage? So did we, so we just looked in our database of 3,000+ rates to find out. It turns out that credit unions rule the roost when it comes to annual lump-sum prepayment allowances. The leaders:
- 30% per year: Casera Credit Union (Manitoba)
- 30% per year: Community Savings Credit Union (B.C.)
- 30% per year: Comtech Fire Credit Union (Ontario)
- 25% per year: Tangerine (National)
- A 30% prepayment privilege, for example, means you can generally pay $90,000 a year extra on a $300,000 mortgage without penalty. If you pay even $1 more than that over the course of the year (on top of your regularly scheduled payments), you’ll pay a prepayment charge on that $1.
- Spy Tip: Most (not all) lenders base prepayment allowances on your starting mortgage balance — i.e., the amount they lent you when your last term began.
- 900,000 Canadian households made a lump-sum mortgage prepayment last year, according to Mortgage Professionals Canada.
- The average mortgagor who did so in 2019 prepaid $19,100. That was just 7% of the average mortgage balance, as tracked by TransUnion.
- The average annual prepayment privilege—among all prime lenders in Canada—is 19% of the original mortgage balance per year, or $51,220 based on the average mortgage size.
- Hence, the difference between typical prepayment options and the best prepayment option (30% per year) won’t be a factor to most. In general, 15-20% a year is more than adequate unless there’s a good likelihood you’ll:
(A) come into money (and have nothing better to do with it), or
(B) break a closed mortgage early (in which case you may be able to make a prepayment before discharge to reduce your penalty).
Moody’s Sees a 6.5%+ Home Price Drop in 2021
- “The housing market will no longer be able to escape the poor condition of the labour market” in 2021, says Moody’s. “Not even lower interest rates will be enough to save the housing market.” Well, that’s comforting.
- Meanwhile, real-time housing indicator websites like HouseSigma suggest September could be yet another record month for home prices in parts of the country, including Canada’s biggest metropolitan area.
As if 2021 needed another housing drag
- Income interruption in 2020 could haunt homebuyers in 2021, writes Mortguage founder Alex Leduc. Many people who rely on a two-year average of their tax-reported income to qualify for a mortgage (which is common lender policy for the self-employed, those with big bonuses or commission earners) will face an income dip on paper by the first half of next year. That’s when lenders will start expecting such applicants to prove income with 2020 tax documents.
- For that reason, Leduc encourages such borrowers to buy beforehand if they’re otherwise qualified. “…Not acting within the next 5-7 months could affect home buyers for up to three years if they’ve experienced a loss of income in 2020.” The full story…
would you go with a 1.84% 5 yr fixed with 25% pre-pay option or 1.69% with 10% pre-pay option?
Other things equal, this is a math question that requires inputs.
What is the probability you will make a prepayment within 5 years? (e.g., a 50% chance?)
If you pre-pay, how much will those prepayment(s) be per year, and when will you make them (i.e., how far into the 5-year term)?
That would depend on your individual circumstance. Would you be in a position to pay down 25% of your principle amount? If yes, go with 1.84 or else go with the other rate.
Hi @The Spy, if we get a fixed mortgage now, what will be the IRD penalty for big banks in the future? Are we expecting very low penalty for fixed mortgage under low interest rate?
No. We are not expecting that.
Big bank IRD penalties can be extreme even if rates go sideways for years.
Moreover, historically wide spreads between 5yr posted rates and actual 5yr rates are punishing bank borrowers (i.e., by boosting their penalties in the future).
You can project future penalties by plugging your assumptions into your lender’s penalty calculator (if it has one).
Here’s a list of them: https://www.ratespy.com/mortgage-penalty-calculators-07242914