30 Sep



Posted by: Angela Vidakovic


Renovation FinancingSo you have found a great house.  The neighborhood is wonderful.  Mature trees, lower property taxes, schools within walking distance and easy access to a variety of amenities.  But the house is, how do I put it, retro at best.  You wonder how you will tolerate the bright pink carpets and the vast array of energy inefficient items has you wondering if you will be able to pay the astronomical heating bills.

What now?  Should you look for something newer? No way my friend, there is a mortgage product made just for this situation and today we are going to take a look.

Purchase Plus Improvements is the name of this product and this is how it works. You head out with your Realtor to choose the best house for your needs.  You write up an offer and bargain your way to the best price.   In the meantime, you contact a qualified contractor or other service providers, to get quotes for the work you would like to do.  These quotes are provided to the lender as a part of the financing process.  The lender reviews and provides the thumbs up.

But you before to rush out to do just this, you really need to know a few things.

  1. The day of possession, the funds are transferred for the purchase of the home so you are able to move in and start the renovations. The balance of the funds are held in trust with the lawyer and will not be released until the work is 100% complete. An appraiser will be sent to your home to verify the work is done. You may want to arrange access to a line of credit so you will be able pay for any deposits or other costs in the interim as you will only get the funds upon completion.
  2. There is a maximum amount you are allowed. Most lenders will allow you $40,000 or 10% of the home’s value as your renovation budget.
  3. You will have to have at least 5% of the improved value to put down. For example, if your new home costs $300,000 and you are going to do $30,000 of improvements, you will need to have $16,500 down ($300,000+ $30,000 = $330,000 x 5% = $16,500) instead of $15,000.
  4. Not all improvements you propose will be acceptable to the lender. The Travertine tile imported from Italy may be gorgeous but it does not necessarily add a dollar-for-dollar value.   Lenders like new kitchens, flooring, bathrooms, siding, windows, furnaces, garages, roofing or other substantial upgrades. They will sometimes allow appliances or landscaping but this is a case by case decision.
  5. You must do the upgrades you said you would do to get the funds. It has happened that once a homeowner took possession of their home they opted to make different improvements, however the lender is not likely to release the funds for work they did not agree to in the first place.
  6. There is a time restriction. Most lenders allow only 90 days for the work to be completed.  If some of the work is seasonal you should make sure your lender will allow a relaxation on the restriction.

This product can also be great for people purchasing a brand new home.  This is an easy way to get the funds you need to finish the basement or the fencing.

There is also a similar program for homeowners looking to upgrade their existing home.  In this case, the value of the home is determined via an appraisal “as is” and a complete system.   The current mortgage is paid out and the balance of the funds are held in trust with the lawyer until the work is complete.  The same restrictions as the Purchase plus Improvements apply.

The really nice part of this program is that you are able to borrow the funds to complete your renovations at today’s very low rates and your mortgage payment will be only slightly higher.

So there you have it.  A simple way to get the funds you need to turn your house into your dream home. Your mortgage professional at Dominion Lending Centres can answer any questions you may have about this program.


29 Sep



Posted by: Angela Vidakovic


Your Mortgage Penalty Was How Much??

Someone recently asked if I could describe the various penalties associated with breaking a mortgage prior to the maturity date.

Generally speaking, lenders usually use a 3 month interest penalty, or an Interest Rate Differential penalty (IRD). The penalty for breaking a fixed rate mortgage is usually the greater of 3 months interest, or the IRD (in some cases when it is very close to maturity, the 3 month interest penalty will be higher, but otherwise the IRD penalty is much higher than 3 months interest).

Variable rate mortgages usually use the 3 month interest penalty. Some variable mortgages offering lower rates, however, will use an IRD or, in some instances, are closed (you cannot break them) without a bona fide sale of the property. This is also the case for some niche fixed rate mortgage products.

It is in the IRD penalty where there can be vast differences from one lender to another.

The IRD penalty is based on 3 things:

  1. The principal balance of the mortgage at the time you break it, and
  2. The difference in the interest rate of the original mortgage and the rate the lender would charge for the term closest to the remaining time on the mortgage (for instance, if there are 21 months left, the lender will most likely use their 2 year term interest rate as the comparison rate).
  3. The number of months remaining in the mortgage term.

If the lender uses the discount off the posted rate in the equation, it widens the difference with the comparison rate. This increases the IRD penalty. Let’s take these 2 examples on a 5 year fixed mortgage:

Mortgage Amount: $300,000
Current Interest Rate: 2.69%
Discount Originally Obtained From the Posted Rate: 1.95%
Months Remaining on the Term: 22
Lender’s Comparison Rate: 3.04%

Let’s say one lender uses posted rates to calculate their IRD (and many lenders do). The differential here is 1.6%. The penalty would be $8,800.

Now, as a comparison, another lender uses only contract, or effective rates, to calculate the IRD (and there are many lenders who do). Therefore, the discount is not applicable, and the comparison rate for a 2 year (using today’s contract rates) would be around 2.19%. The differential would be 0.5% and the penalty would be $2,750.

In each case, the 3 month interest penalty would be $2,018.

One strategy the big banks have used over the past few years is to register liens on homes as collateral charge loans, rather than as mortgages. The advantages of this is that it allows the buyer to refinance at minimal, or no cost any time during their term. The caveat is, because it is a collateral charge loan rather than a mortgage, the client cannot leave that financial institution,even at the maturity date, and needs the services of a lawyer or title insurance company to break the loan agreement with that financial institution. This costs several hundred dollars. The financial institutions using collateral charge loans are aware of this cost and can afford to offer an interest rate at renewal that is a higher one, closer to a posted rate, rather than the discounted rate offered by their competitors, since the client does not want to incur this extra cost.

So, when mortgage shopping, it is always good to look at not only the interest rate, but also:

  • Confirm if there are prepayment privileges, or if it is a totally closed mortgage (except for a bona fide sale),
  • How that lender calculates their IRD penalties when breaking a mortgage,
  • Their pre-payment privileges (could be 15%, 20%, or 25%),
  • Whether the interest is calculated monthly or semi-annually (this can mean up to a few hundred dollars per year you are paying extra if it is monthly)

If you have any questions, please contact me at Dominion Lending Centres at anytime.

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By: Daniel Lewczuk