Vancouver home prices poised for correction, could fall 21 per cent: report

By Sunny Freeman, The Canadian Press

TORONTO – Homes in Vancouver have become so expensive you might have to win the lottery to afford one, says a prominent economist — and with prices that sky-high, odds are the city is ripe for a big drop.

Overpriced homes in some Canadian cities, along with elevated household debt, suggest the real estate market is vulnerable to a correction — especially in Vancouver, senior economist Sal Guatieri said in a Bank of Montreal report released Tuesday.

“Riding a wave of wealthy immigrants, Vancouver’s house prices have nearly tripled in the past decade, spiralling beyond the reach of most first-time buyers or non-lottery winners,” Guatieri said.

Homes in that Pacific Coast city now cost 11.2 times median family incomes — a ratio that measures the median home price to median annual household disposable income. That’s more than double the current Canadian average of 5.1 times income.

Chinese demand for houses in Vancouver has been strong, on the back of looser travel restrictions, as well as stricter buying rules and lofty prices in China. A recent survey by Demographia rated Vancouver the third least affordable city in the world, behind Hong Kong and Sydney, two other cities influenced by Chinese demand, he said.

“While land-use restrictions and high quality-of-life rankings can justify elevated prices, current steep valuations could prove unsustainable if foreign investment ebbs or interest rates climb,” Guatieri said.

Past housing corrections have seen Vancouver home values fall an average of 21 per cent. But prices in the city are even higher today, averaging $815,000 in April, pushing the market further toward the brink of a housing bubble.

However, if interest rates stay low and foreign investment continues, the price correction could stabilize sooner than in the past, Guatieri said.

Even excluding Vancouver, average home prices have more than doubled in the past 10 years to a historically high level.

“Due to ultra-low interest rates, affordability isn’t a major issue yet, with first-time buyers allocating about one-third of their disposable income for mortgage payments, as is the norm,” Guatieri said.

“But high valuations suggest that even a moderate increase in interest rates will slow the market in coming years.”

Some triggers that could set off a broader collapse include a rapid rise in interest rates, a sharp increase in unemployment or a slowing of foreign investment.

High home prices in Toronto also mean the country’s biggest city is likely poised for softer prices in the near term, fuelled by a rising supply of condos that could soon outstrip demand, leaving a glut on the market.

Housing costs in the city eat up 6.7 times family income, comparable to costs in the late 1980s before prices slid 25 per cent. However, mortgage rates now are under four per cent, compared to 14 per cent in the earlier decade.

“That said, while high valuations might be sustainable in an ultra-low rate climate, they could come under pressure in a more normal rate environment,” Guatieri said.

Meanwhile, the report said energy-rich Calgary could see home prices rise in coming years. It is one of the few Canadian cities, along with Edmonton, where prices have not returned to pre-recession peaks, reflecting the fallout of overbuilding during the oil boom before the financial crisis hit. http://ca.finance.yahoo.com/news/Vancouver-home-prices-poised-capress-3105641674.html;_ylt=An.OF7eUa_4f1tw3uhpAmong2ppG;_ylu=X3oDMTFkaGliYW1yBHBvcwMxBHNlYwNuZXdzSHViQXJ0aWNsZUxpc3QEc2xrA3ZhbmNvdXZlcmhvbQ–?x=0

5 Factors That Impact the Value of Your Home

Money Crashers, On Wednesday June 1, 2011

Selling your house can be a huge headache–especially when you’re selling it in today’s buyer’s real estate market. One of the most challenging aspects to deal with is determining your home’s value. When it comes to fixing a fair price, homeowners always shoot high. After all, you love your house and you know how much work you’ve put into it. Won’t someone else appreciate it as much as you do?

The short answer is no. An experienced real estate agent will take the emotional factor out of the equation and help you come up with a realistic market value for your house. But if you want to sell your house yourself without a realtor–or you just want to be prepared for the number they advise–here are five factors that can heavily skew the asking price of your home.

1. Location

We’ve all heard how important “location, location, location” is, and with good reason. A great house in a bad location can knock as much as 50 percent off the value. If you have the nicest, most expensive house in your average neighbourhood, then the value is also going to be much lower than it would be if you had the least expensive house in a nice neighbourhood. Other factors, like freeways, proximity to a landfill or sewage treatment center, and train tracks, can knock 10 to 15 percent or more off the value of your home. This is why it’s so important to shop location first when you’re buying a house; you can always add home improvements, but moving it to another neighbourhood isn’t going to happen.

2. Outdated Rooms

If your fridge is more than 15 years old and your oven isn’t black or stainless steel, then count on listing your house lower than you’d be able to if you had a fully updated kitchen. With the influx of homes on the market right now, people can easily get a home that doesn’t need any updating, so why would they choose one that does? If you don’t want to update your home in order to sell it, know that outdated rooms can affect the value of your home by up to 10 percent.

3. Renters

Many people don’t want to own a home surrounded by rental properties. Although it’s a stereotype, tenants often don’t keep up the property like an owner would. In this case, the value of your house can go down as much as 15 percent, depending on how many rentals are in close proximity to your home.

4. Major Upgrades

In this market, don’t count on getting more for your home if you just upgraded the plumbing, bought a new furnace, or replaced your roof. However, if your home does need those upgrades and you haven’t done them, then it’s going to knock as much as 20 percent off the value of your home, depending on how severe the upgrade is. Buyers simply don’t want to shell out for major upgrades – especially when there is a large pool of other properties to choose from.

5. Fencing

Most people looking to buy a house have kids or pets. If your home doesn’t have a fenced backyard, you’re going to alienate a huge portion of the market since fenced backyards are essential for keeping kids and pets safe and contained. Not having a fence can knock up to 10 percent off your home’s value.

Final Thoughts

Although many of these factors, like location and proximity to renters, are out of your hands, there are plenty of things you can do to increase the value and appeal of your home. For instance, buyers almost always choose light and airy homes over dark ones. Therefore, it’s beneficial to do whatever you can to bring a sense of light and space into your home. Other factors, such as fresh paint and a tidy lawn, make a great first impression as well. The important thing is to be realistic when deciding on a price for your home so that you can move it off the market as quickly as possible. http://ca.finance.yahoo.com/news/5-Factors-That-Impact-the-usnews-2641331434.html?x=0&mod=pf-sp14e

News Release: June 2, 2011

Fraser Valley housing market shows local variation

(Surrey, BC) – The Fraser Valley Real Estate Board processed 1,608 property sales on its Multiple Listing Service (MLS®) in May, an increase of 9 per cent compared to 1,477 sold during May of last year, and an increase of 6 per cent compared to April’s 1,516 sales.

Sukh Sidhu, president of the Board, reports, “Overall, the Fraser Valley market is in a balanced position, however there are significant differences amongst individual communities and property types stressing the importance of getting local expertise if you’re thinking of buying or selling.

“For example, sales of single family detached homes in South Surrey/White Rock, Cloverdale and North Delta remain brisk with those markets favouring sellers, however in Abbotsford and Mission high inventory and downward pressure on prices is good news for buyers. In Langley, Surrey Central and North Surrey, conditions are balanced for sales of detached homes.”

Variation is also evident in home prices. In May, the benchmark price for Fraser Valley detached homes was $529,810, an increase of 2.8 per cent year-over-year. The benchmark price is the predicted sale price of a typical property in the Fraser Valley. Contrast that to May’s average price of $630,870 for detached homes, an 11.6 per cent increase compared to May 2010 – influenced by the sale of higher-end
homes or homes with larger lots.

Sukh Sidhu explains, “The average price and its percentage change often do not provide an accurate picture of the real market, which is why we talk about prices of “typical” homes that most people are buying or selling.”

In May, the benchmark price of Fraser Valley townhomes was $324,730, a decrease of 1.1 per cent compared to $328,295 in May 2010. The benchmark price of apartments was $250,988 in May, a decrease of 0.5 per cent compared to the $252,221 price in May of last year.

May finished with 2.9 per cent more active listings on the MLS® than it had in April – 9,978 compared to 9,697 – however, 12.6 per cent fewer than the 11,411 listings that were active during May of 2010. The Board received 3,070 new listings in May, an increase of 5.2 per cent compared to April and a decrease of 11.2 per cent compared to the 3,457 new listings received in May 2010.

Information and photos of all Fraser Valley Real Estate Board listings can be found on the national, public web site www.REALTOR.ca. Further market statistics can be found on the Board’s web page at www.fvreb.bc.ca. The Fraser Valley Real Estate Board is an association of 2,917 real estate professionals who live and work in the communities of North Delta, Surrey, White Rock, Langley, Abbotsford, and Mission.

Is buying a student condo for my child a good investment?

Sometimes a parent decides to buy a place for their children while they hit the books in university or college. It can be a good alternative to paying thousands of dollars toward residence fees or rent. Just look at the math:

Student rent of $500 a month = $6,000 a year = $24,000 over 4 years of school.

That money could go to your mortgage instead as an investment for you.

In Ottawa, for example, you can buy an older one-bedroom condo for about $195,000. Or, buy a 2-bedroom for $240,000 and let your child’s roommate help cover the mortgage by paying rent. Let’s assume you pay 20 per cent down. Here’s an example of what your monthly costs could total when mortgage rates are low:

Think about it: if your child rents a place, your money is helping the landlord pay his or her mortgage and other costs. If you buy a place instead and rent it to them, you have a real estate investment with a guaranteed tenant: your child. If the investment goes up in value, you will make money. Just remember that those gains will be taxed.

Also remember, mortgage rates and other costs change, and these changes will impact the numbers and your decision.

Things to consider before you decide:

You can buy the property in your name, in your child’s name, or both. If you buy the property in your name, you should consider:

• The rental income you charge can pay a lot of your costs. Just remember you have to declare that income on your tax return.
• As a landlord, you can also claim many of your expenses, including mortgage interest. Assess your costs carefully before you buy. They will vary with the local real estate market, mortgage rates and other factors.
• Plan for some vacancies. Your child (or their roommate) may not stay in the condo over the summer break. Are you really going to ask them to pay rent if they are living somewhere else for a few months?
• Remember that you will own a greater share of the equity as you pay off the mortgage. And, the value of the condo may rise over time. This can offset your costs. But whether you do more than break even depends on what happens to housing prices in the area.

There are other benefits, too. Your child won’t need to look for a different place to live each year. They also won’t have to worry about subletting every summer. And their furniture won’t be coming back with them if they live at home over the summer break. Not a bad deal.

Remember: you may not make money if you buy a student condo.
But there are other reasons you may decide to go ahead. At the very least, you can provide your child with a nice place to live in a good neighbourhood while they go to school.

http://ca.finance.yahoo.com/news/Is-buying-student-condo-child-getsmarteraboutmoney-2800756642.html;_ylt=Ak.Gk2aT_bWOvnX0IMVfDRTg2ppG;_ylu=X3oDMTFkYzZwc2o2BHBvcwM0BHNlYwNuZXdzSHViQXJ0aWNsZUxpc3QEc2xrA2lzYnV5aW5nYXN0dQ–?x=0

“WORLD CLASS” COMMERCIAL REAL ESTATE IN FRASER VALLEY RECOGNIZED

 LANGLEY, B.C. – May 27, 2011 – The best of commercial real estate in the Fraser Valley was showcased at an inaugural awards gala presented by the Fraser Valley Real Estate Board (FVREB) and the Business Fraser Valley (BFV) newspaper on May 26 at the Langley Coast Hotel & Convention Centre.   

 From a local pub to a seniors’ home to an innovative dairy farm, 11 categories of commercial and mixed use commercial/residential buildings were recognized at the sold-out event attended by local REALTORS®, builders, contractors, architects and developers.

 “As REALTORS® who work with these projects every day, we know how impressive they are,” said Charles Wiebe, Chair of FVREB’s Commercial Executive Council.

 “We wanted everyone to see that Fraser Valley commercial real estate has it all: variety, creativity and quality. Every winner and nominee is world class and that’s what these awards are all about.”

 Of the 11 category winners, the Judges’ Choice Award for best overall went to Abbotsford’s Bakerview Ecodairy, the first demonstration farm of its kind in Canada. Of the 29 nominees from across the Fraser Valley, six projects in Abbotsford and five in Surrey and South Surrey received top honours.  

 The 2011 category winners are:

 Morgan Crossing urban village, 15735-15795 Croydon Dr., South Surrey (Mixed use – commercial/residential)

 Quattro condominiums, 13706 108^th Ave., Surrey (Multi-family)                                                                            

 Primrose Gardens senior independent living, 2021 Primrose St., Abbotsford (Community Institutional)

 Jim Pattison Outpatient Care and Surgery Centre, 9750 140^th St., Surrey (Government Facilities)

 Grandview Corners shopping district, 24^th Ave. & 160^th St., South Surrey (Retail/ Shopping Centres)

 EMCO office building, 32988 South Fraser Way, Abbotsford (Office)

 Loblaw BC Perishables Distribution Centre, 12979 80^th Ave., South Surrey (Industrial)

 Finnegan’s Pub/Phoenix Lounge, 33780 King Rd., Abbotsford (Hospitality)

 Chuck Bailey Recreation Centre, 13458 107A Ave., Surrey (Recreational)

 Mill Tower corporate building, 34077 Gladys Ave., Abbotsford (Commercial renovation/restoration)

 Bakerview Ecodairy demonstration farm, 1356 Sumas Way, Abbotsford (Agri/Industrial)

 Sukh Sidhu, president of the FVREB and a 28-year Abbotsford REALTOR® observed, “Having witnessed firsthand the growth in my community and in the Fraser Valley, I am so proud to see our commercial building excellence being recognized. On behalf of Fraser Valley REALTORS®, we want to congratulate all nominees and award recipients. “

 The event’s main sponsor was RBC Commercial. Also sponsoring the event were RE/MAX Western Canada, the City of Abbotsford, Fortis BC and BFV. The event was coordinated by FVREB’s Commercial Division and BFV.

You — through the eyes of a mortgage lender Golden Girl Finance, On Tuesday May 24, 2011, 11:36 am EDT

If you’re a newcomer to Canada, self-employed, work on commission or have a poor credit history, you may think your chances of qualifying for a mortgage or refinancing are slim to none. Think again. It is often possible to find a way – the trick is seeing yourself through the eyes of a mortgage lender.

The 5 C’s of borrowing

Mortgage lenders look for certain characteristics in potential borrowers. Generally, they’re attracted by five key criteria:

• Capacity — whether your income is sufficient to repay the mortgage once all your other debts are factored in.
• Capital — whether the size of your down payment indicates a serious commitment to the property on your part, and sufficient minimization of risk on the part of the lender.
• Collateral — whether the property is of sufficient value and marketability to cover the amount borrowed.
• Character — your reputation and reliability, usually based on factors such as your education, employment history and residence.
• Credit — your history of meeting credit obligations, which is based on credit-bureau records for the past six years.

If your qualifications are less than stellar in any of these areas, a traditional lender may not accept you. But that doesn’t necessarily mean you can’t get a mortgage. Like we said before, it is possible! You just need to find the right match.

Bringing your best qualities to light

Many lenders may be perfectly willing to accept you as long as they view you as a reasonable credit risk overall. For example, if you are new to Canada, lenders may consider you based on the steady nature of your employment or the size of your down payment.

Likewise, if you are newly self-employed and can’t prove a regular income, the lender may instead look at your debt load, credit history and business plan. If these are all very positive, the fact that you don’t have an earnings history may not be so important.

And if your financial reputation is marred by a poor credit history, but you’ve have taken discernable steps to improve your rating and your debts are under control, your current income and down payment may be enough compensation.

Finding your perfect mortgage match

Each mortgage lender has its own particular requirements. Professional advice can go a long way in helping you find the right one. The right lender will be a good match for your situation, so that the mortgage you get meets your needs.

A financial professional can also help you put the steps in place so that you can make the most out of your best qualities and help you overcome mortgage hurdles — whether they’re real or perceived. Remember that you are most often your own worst critic. Let others see the good. http://ca.finance.yahoo.com/news/You-eyes-mortgage-lender-goldengirlwp-2677632851.html?&mod=pf-sp14e

BoC rate hike on hold until September: RBC

Eric Lam Financial Post May 24, 2011

The Bank of Canada’s plan to raise interest rates and exit its stimulus program has been delayed to September due to renewed uncertainty about the fiscal crunch in Europe and its potential spillover effects into Canada, the team at RBC Economics said Tuesday.

Dawn Desjardins, assistant chief economist with RBC, expects the BoC to maintain its 1.00% rate until September, and has cut the forecast rate to 1.75% by the end of 2011 from 2.00%. RBC maintains expectations for the overnight rate to hit 2.5% in mid-2012, and forecast GDP growth of 3.2% in 2011 and 3.1% in 2012.

RBC had originally forecasted rate hikes in July, September, October and December this year. The bank now only expects hikes in September, October and December, Ms. Desjardins said in an e-mail.

“Combined with already-present downside risks to domestic growth in the second quarter, the Bank of Canada is likely to remain on the sidelines longer than we previously thought,” she said in a note to clients. “Complicating the outlook are global developments with the European sovereign debt crisis bringing fiscal and debt rating concerns to the forefront for investors. In the United States, economic surprises have been to the downside.”

So far, the Canadian economy looks to be holding steady with data suggesting 0.3% growth in March after a dip in February. Monthly growth figures put the economy on pace for 3.7% growth with risks on the upside.

Persistent strength in housing and growth in household credit, however, means the BoC cannot wait too long before taking action to avoid inflationary pressure.

“On balance we remain comfortable with our forecast of real GDP growth of 2.8% annualized in the second quarter although unlike in the first quarter where the risks are to the upside, the risks to our Q2 forecast are to the downside,” she said. http://business.financialpost.com/2011/05/24/boc-rate-hike-on-hold-until-september-rbc/

Have a great day!

Five steps to scoring a mortgage

Amy Fontinelle Investopedia.com

A variety of factors can keep you from qualifying for a mortgage. The big ones include a low credit score, insufficient income for the size of the loan you want, insufficient down payment and excessive debt. All of these factors are within your control, however. Let’s take a look at your options for overcoming any liabilities you may have as a borrower

1. Repair Your Credit and Increase Your Score

To lenders, your credit score represents the likelihood that you will make your mortgage payments in full and on time every month. Therefore, with most loans, the lower your credit score, the higher your interest rate will be to compensate for the increased risk of lending you money. If your credit score is below 620, you will be considered subprime and will have difficulty getting a loan at all, let alone one with favourable terms. On the other hand, if you have a credit score above 800, you’ll easily be able to get the best interest rate available (also known as the par rate). (Find out how your borrowing activities affect your credit rating in The Importance Of Your Credit Rating.)

Measures you can take to improve your credit score relatively quickly include paying down revolving consumer debts, such as credit cards or auto loans, using your debit card instead of your credit cards for future purchases, paying your bills on time every month and correcting any errors on your credit report. However, some flaws, like seriously late payments, collections, charge-offs, bankruptcy and foreclosure, will only be healed with time. (Read How To Dispute Errors On Your Credit Report to find out how to address reporting mistakes.)

In addition to managing your existing credit responsibly, don’t open any new credit accounts. Applying for new credit temporarily lowers your credit score, and having too much available credit is also considered a warning sign. Lenders may be afraid that if you have a lot of available credit, you’ll take advantage of it one day and adversely affect your ability to make your mortgage payments. (For more tips and techniques to help you rebuild your ruined credit rating, read Five Keys To Unlocking A Better Credit Score.)

2. Get a Higher-Paying Job

If lenders say your income isn’t high enough, ask them (or your mortgage broker) how much more you need to earn to qualify for the loan amount you want. Then try to find a new job in your existing line of work where you’ll be able to earn that much money.

Because lenders like to see a steady employment history, you’ll have to stay in the same line of work for this strategy to be successful. This can be disappointing news for borrowers, as switching professions entirely might offer the best chances for a salary increase. However, switching companies can also be a good way to get a significant boost in income. Significant raises from existing employers aren’t that common, but a new employer knows he’ll have to offer something special to get you to make the switch. (Read Negotiating For Employment Perks for tips on reaching an agreement with your boss.)

If switching companies right now won’t be enough to get the raise you need, think about things you can do relatively quickly to make yourself more valuable to employers. Is there a continuing education program that you could complete? If you’re a legal secretary, could you become a paralegal? If you’re a receptionist, could you become a secretary? A career counselor or headhunter might be able to give you some guidance specific to your situation about how to improve your marketability and how to reach your income goals. (Read Six Steps To Successfully Switching Financial Careers to learn how to make adjustments without starting over.)

Unfortunately, getting a part-time job on top of your full-time job may not provide what lenders consider qualifying income. The part-time job may be viewed as temporary, and since it will probably take you at least 15 years to pay off your mortgage, lenders are looking for you to have long-term income stability. (Increase Your Disposable Income gives you ideas on how to make more money now, which can make a big difference down the line.)

3. Save Like Crazy

The larger your down payment, the smaller the loan you’ll need. In addition, the lower your loan-to-value ratio (LTV ratio), the less risky lenders will consider you. Both of these factors will make you more likely to qualify for a loan. Be aware that you may have to reach a certain down payment threshold, like 10 per cent or 20 per cent (with 20 per cent being the most conventional), before a larger down payment will help you qualify for a loan. (Learn more in Mortgages: How Much Can You Afford?)

4. Don’t Pay More Than the Bank’s Appraised Value

The bank will not want to lend more than the house is worth because they could be on the losing end of the deal, should you foreclose and owe more than the bank could get for it. A 20 per cent down payment also becomes much less valuable if the house is worth 20 per cent less than the purchase price. Collateral value is important to lenders, so it should be kept in mind when making an offer to purchase a property. (Read 10 Tips For Getting A Fair Price On A Home and learn how to make sure your house is worth the price you pay.)

5. Reduce Your Debt

To a lender, what constitutes excessive debt is not a set number – it’s a total monthly debt payment that is too high for you to be able to afford the monthly mortgage payment you’re asking for. When deciding how much loan you qualify for, lenders will look at what’s called the front-end ratio, or the percentage of your gross monthly income that will be taken up by your house payment (principal, interest, property tax and homeowners insurance), and the back-end ratio, or the percentage of your gross monthly income that will be taken up by the house payment plus your other monthly obligations, such as student loans, credit cards and car payments.

The more debt you’re required to pay off each month, whether it’s “good debt” like a student loan or “bad debt” like a high-interest credit card, the lower the monthly housing payment lenders will decide you can afford, and the lower the purchase price you’ll be able to afford. Decreasing your debt is one of the fastest and most effective ways to increase the size of loan you’re eligible for. (Learn what to watch for before you find yourself drowning in debt in Five Signs That You’re Living Beyond Your Means.)

Playing to Win

Qualifying for a mortgage isn’t always easy. Lenders require all applicants to meet certain financial tests and guidelines and allow a limited amount of flexibility within those rules. If you want to score a mortgage, you’ll have to learn how to play the game, and you’re likely to win if you take the steps outlined here http://www.theglobeandmail.com/globe-investor/personal-finance/mortgages/five-steps-to-scoring-a-mortgage/article1925218/page2/

check out www.youtube.com/merixfinancial to view a recorded product webinar

Good Morning Heads Up!!

 Bond yields are almost up by 8bps, this means it is quite possible that we will have an increase in our 5yr fixed rate.

 Guaranteed until midnight…Conventional 5yr Fixed – 3.87%…High Ratio 5yr Fixed 3.77%

 You may want to get that deal in the system, but don’t hit the button until the end of the day for the final rate notice.

 Susan Zanchetta, AMP

Account Manager, Lendwise

Why I paid $10,000 to break my mortgage

Tara Walton/Toronto Star  By Bryan Borzykowski |

Last September, my wife and I started scouring the city for a new house. We were living in a cozy bungalow, but with a growing kid and another on the way, we decided it was time to move.

Buying a new house is, of course, expensive, so I wanted to do whatever it took to reduce my costs. Most of the fees couldn’t be avoided, but there was one costly payment I desperately wanted to steer clear from: The mortgage penalty charge.

I had just over 12 months left on my five-year mortgage term, which meant that I either had to break my mortgage or stay with my current lender by transferring my mortgage to my new house. The latter option would have allowed me to avoid the fee. However, my lender couldn’t give me the best interest rate.

The new lender, a bank, was offering a variable rate of 2.25 per cent, a much lower rate than my old lender was willing to offer. I calculated that over the term I’d be better off paying the fee and taking the lower rate.

It was going to cost me $10,000 to break my contract. It felt like an unnecessary cost — I paid my lender so much in interest over the four years, why would I have to cough up so much cash?

I asked my broker to see if the lender would waive the fee, even though I was using a new lender for my next house, but they didn’t. Peter Veselinovich, vice-president of banking and mortgage operations at Investors Group, isn’t surprised. “The charge isn’t negotiable,” he says.

While the penalty may seem like an arbitrary sum, it’s not a cash-grab, he says.

The lender takes mortgage funds from money invested in GICs and other products and then it pays investors interest on those investments.

The idea is to match a five-year mortgage with a five-year GIC, so investors can get paid back at the same time as the mortgage comes due.

If a mortgage is broken, the lender needs to come up with money to fill the gap between the investment coming due and the mortgage ending. Hence the fee. The lender then takes that lump sum and invests it, so it can pay investors back when its GIC comes due.

The penalty is calculated two ways: you either pay 90 days of interest or what’s called an interest-rate differential, which is a penalty based on your old rate and a new rate based on a shorter term.

For example, let’s say you wanted to exit your 5 per cent five-year term with three years left to go. The lender would look at the current three-year term rate, which, say, is 3 per cent, and then charge you interest on the difference, 2 per cent, for 36 months. The sum also depends on how much money you still owe the bank.

However it’s calculated, the payment can be huge.

Darick Battaglia, a mortgage broker and owner of Dominion Lending Centres’ Barrie location, says that while it may seem as though people have to empty their bank account to pay the penalty, ultimately, by paying the lower rate, they’re getting that money back in mortgage savings.

Whether you’re moving houses, or just want to break a mortgage to take advantage of a lower interest rate, people often pay the penalty so they can free up more disposable income.

“It can help people get into a better financial position, because they have more disposable income,” says Battaglia. “They may find that it’s better to invest that money in an RRSP.”

If you’re moving, there are strategies to help reduce the penalty or even not pay it at all.

Almost all mortgages allow people to put a certain percentage of money down on a house every year; I was allowed to pay 20 per cent of my balance every 12 months.

In some cases, lenders will allow you to designate the first 20 per cent — it could be less or more depending on your lender — of the proceeds of a sale of a house towards the prepayment in order to pay down the outstanding balance and so reduce the mortgage penalty.

Investors Group is one institution that allows this, but not all do.

Battaglia has dealt with many lenders who refuse to honor this type of arrangement. They want two checks: one for the prepayment and one to pay off the mortgage.

My own lender refused to let me make one payment; I had to borrow money from my broker, who paid my prepayment three days before closing. I had to pay him back with some of the proceeds of the sale. It was a major hassle. But I did save about $1,500.

Some lenders will eat the fees themselves to retain the business. Again, most want the money. Battaglia says that some banks — he’s seen this happen with Scotiabank and TD — will waive the fee as long as you extend your term. He often uses the penalty as a negotiating tool.

“I’ll tell a lender I’m shopping around and while we’d like to keep a client’s business with your company, what can you do on the penalty?” he says. “A lot of times the penalty gets reduced or it’s paid off by the lender.”

Porting a mortgage to a new house is another way to avoid the fee.

Let’s say you have $100,000 left on a mortgage with a 4 per cent rate, but you need $200,000 more for the new house. The bank will give you the additional money at the new rate, which could be 3 per cent. You’d keep the same term or extend it and now you’d pay a blended rate, in this case 3.5 per cent on $300,000.

“There are no penalty costs, because you’re still honouring the original contract,” says Veselinovich.

Most people will have to open their wallet when they break a mortgage.

Fortunately, you can avoid paying administration fees that the lender will charge you. It’s not necessarily a big cost — Veselinovich says people get charged between $75 and a few hundred dollars — but why pay more money than you have to?

“These fees should be readily negotiable based on your past performance and your relationship with the lender,” he says.

While I did get my penalty reduced by making a prepayment before closing, I still had to write a cheque for about $8,000. It was painful at the time, but now that I’m in my new house, paying a new mortgage at a much lower rate, I don’t think about the penalty anymore.

Now I have to figure out a way to convince Best Buy to give me a deal on TVs http://www.moneyville.ca/article/981221–why-i-paid-10-000-to-break-my-mortgage