25 Sep

Which Mortgage Payment Frequency Is Best For You?

Mortgage Tips

Posted by: Chanele Langevin

Many people do not realize that there are options when it comes to paying off a mortgage faster than the actual Amortization period of the loan while also saving thousands of dollars in interest.

Most mortgages have an Amortization period of 25 years.  This means that the time it will take you to pay off the Mortgage in full would be 25 years.

As a Mortgage Agent, I am strictly looking out for the client’s best interests.  It is important to me to make sure that the homebuyer is aware of all options to save money within their mortgage.  There are a few ways that you, the homebuyer, can shorten the 25-year period and potentially save thousands of dollars that would have been interest payments on your mortgage loan.

The following payment frequencies are typically offered by most financial institutions:

  • MONTHLY – One payment per month for 12 months per year
  • SEMI-MONTHLY  – Two payments per month for a total of 24 payments per year
  • BI-WEEKLY – One payment being paid every 2 weeks.  The monthly payment is multiplied by 12 and then divided by 26
  • WEEKLY – One payment per week, total of 52 payments per year. The monthly payment is multiplied by 12 and divided by 52

These are the payment frequencies that save you the most interest over the life of your mortgage and as a result, shorten the Amortization Period:

  • ACCELERATED BI-WEEKLY – One payment of ½ the monthly payment every 2 weeks.  This is the equivalent of making one extra monthly payment per year
  • ACCELERATED WEEKLY – One payment of ¼ of the monthly payment every week.  This is the equivalent of making one extra monthly payment per year

Scenario

*The following is a scenario to show the differences in dollars:

A homebuyer has a $260,000 mortgage that has an amortization period of 25 years with an interest rate of 4%

Payment Frequency

# of payments per year

Payment Amount

Total Payments Per Year

Interest Saved on Mortgage

Monthly

12

$1,400

$16,800

$0

Semi-monthly

24

$700 ($1,400/2)

$16,800

$197

Bi-Weekly

26

$646 ($1,400×12/26)

$16,800

$212

Accelerated Bi-Weekly

26

$700 ($1,400/2)

$18,200

$21,273

Weekly

52

$323 ($1,400×12/52)

$16,800

$305

Accelerated Weekly

52

$350 ($1,400/4)

$18,200

$21,509

Choosing an accelerated payment frequency is the equivalent of making one extra payment each year and can result in paying off a mortgage 4 years sooner, while also saving $21,000 in interest over the entire amortization period.

For many people a mortgage is the largest financial investment they will make, as well as the longest period of time that they will be making payments.  I’ve had great success as a mortgage broker in Grande Prairie mainly because my priority is assisting my clients to make the best decisions with their mortgage. Find the mortgage payoff calculator under the “Refinance” tab of my website to gain an idea of what numbers and payment frequencies might work for you.  It is always best to consult a mortgage agent with questions as they will give an unbiased opinion and provide you with the best scenario for your needs.

*Reference

10 Sep

What is the First Time Home Buyer Incentive Program?

General

Posted by: Chanele Langevin

The First Time Home Buyer Incentive Program, referred to as FTBHI, is a Government of Canada program granted by Canada Mortgage and Housing Corporation (CMHC). CMHC acts as the Program Administrator of the program.

The amounts of the incentive that are provided are as follows:

  • Re-sale home, 5% of home value
  • New construction home, 5% or 10% of home value
  • Mobile/Manufactured Home (new construction or resale), 5% of home value

This first time homebuyer incentive is not interest bearing and does not require ongoing repayments. The amount of the incentive is owed back to the Program Administrator after 25 years from the date of the purchase or when the home is sold. There is also the option to prepay the money in full with no penalty to the homebuyer.

Requirements to be eligible for the First Time Home Buyer Incentive are as follows:

  •  Homebuyer’s total annual income cannot be more than $120,000. If there is more than one Homebuyer, the annual incomes must be combined and be no more than $120,000. This means salary before taxes and investment income.
  • The total amount to borrow can not be more than 4 times the total qualifying income.
  • The Homebuyer must be a Canadian citizen, permanent resident or a non-permanent resident who is legally authorized to work in Canada.
  • A least one person involved in the purchase must be a First Time Home Buyer. The definition of First Time Home Buyer is:
    • Having never purchased a home before; or
    • In the last 4 years, they did not occupy a home that they or their current spouse or common-law partner owned; or
    • They are experiencing a breakdown of a marriage or common-law partnership

First time home buyers are permitted to obtain this incentive only once and as soon as the money is advanced to the home buyer they are not eligible for any additional first time home buyer incentives.

When applying for the First Time Home Buyer Incentive buyers also need to be aware that they are still required to have a minimum down payment of 5% when purchasing a home. This money may come from savings, withdrawing RRSP’s, non-repayable financial gift from relatives. Down payments sources that are not allowed are unsecured personal loans or a line of credit.

*Here is a scenario involving the Incentive being 10%:

Anita wants to buy a home for $400,000. Through the Incentive, Anita can apply to receive $40,000 in a shared equity mortgage (10% of the cost of a new home) through the program, on top of the minimum required down payment of $20,000 (5% of the purchase price) from savings. This lowers Anita’s mortgage amount and reduces the monthly expenses. As a result, Anita’s mortgage is $228 less per month or $2,736 a year. What if Anita has an annual qualifying income of $83,125? To be eligible for the First Time Home Buyer Incentive, Anita will have to purchase a home that is no more than $350,000. She still has the required minimum down payment of 5% of the purchase price ($17,500) from savings and can apply to receive $35,000 in a shared equity mortgage (10% of the cost of a newly constructed home). This would reduce Anita’s mortgage payments by $200 per month or $2,401 per year. What if Anita sells the home for $420,000? At this time, the Incentive will need to be repaid. Anita will repay the Incentive as a percentage of the home’s current value. This would result in Anita repaying 10%, or $42,000 at the time of selling the house.

At the time of repayment the amount owing will be based on the market value at the current time. It definitely benefits the homebuyer to repay the incentive early as well as prior to doing any home renovations that may increase the home value. The equity from the sale of the home also becomes a part of the 5% or 10% owed back to the Program Administrator.

**Here are a few scenarios involving paying back the First Time Home Buyer Incentive:

Scenario 1 – Increase in Market Value-Resale home purchase (5% share) – Shared Equity Amount owed when home sold after 5 years:

Information Amount
Original Home Value $400,000
Incentive ($400,000 x 5%) $20,000
Assumed Market Value at sale of home $480,000
Shared Equity Amount ($480,000-$400,000) x 5% $4,000
Amount to repay to the Program Administrator

(Incentive Principal Amount PLUS Shared Equity Amount)

$24,000
Equivalent APR (assuming the home is sold after 5 years) 3.71%

Scenario 2 – Increase in Market value-New Construction Purchase (10% share) – Shared Equity Amount owed when home sold after 5 years:

Information Amount
Original Home Value $400,000
Incentive ($400,000 x 10%) $40,000
Assumed Market Value at sale of home $480,000
Shared Equity Amount ($480,000-$400,000) x 10% $8,000
Amount to repay to the Program Administrator

(Incentive Principal Amount PLUS Shared Equity Amount)

$48,000
Equivalent APR (assuming the home is sold after 5 years) 3.71%

Scenario 3 – Decrease in Market value-Resale home purchase (5% share) – Shared Equity Amount owed when home sold after 5 years:

Information Amount
Original Home Value $400,000
Incentive ($400,000 x 5%) $20,000
Assumed Market Value at sale of home $331,040
Shared Equity Amount ($331,040-$400,000) x 5% -$3,448
Amount to repay to the Program Administrator

(Incentive Principal Amount PLUS Shared Equity Amount)

$16,552
Equivalent APR (assuming the home is sold after 5 years) -3.71%

Scenario 4 – Decrease in Market value-New Construction Purchase (10% share) – Shared Equity Amount owed when home sold after 5 years:

Information Amount
Original Home Value $400,000
Incentive ($400,000 x 10%) $40,000
Assumed Market Value at sale of home $331,040
Shared Equity Amount ($331,040-$400,000) x 10% -$6,869
Amount to repay to the Program Administrator

(Incentive Principal Amount PLUS Shared Equity Amount)

$33,104
Equivalent APR (assuming the home is sold after 5 years) -3.71%

 

 

*Reference

**Reference