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  • Volume Eight, Number Eight: December 2003

    Switches and Refinances explained

    Linda Wickstrom – Mortgage Broker

    This is probably one of the most important columns you will ever read.  This information can save you thousands literally.  
    What happens legally when you switch?
    Most people are unaware of the legal effect of switching lenders. When you renew you are essentially starting the process again — discharging the existing mortgage, taking out a new one, and beginning the whole payment process, albeit at a lower principal amount. As such, you should treat this as just as important a process as the first time you arranged the mortgage. Remember your situation will most likely have changed since then, and you require a different product with different terms attached to suit your situation.

    In most Provinces a switch of the current or lower balance requires only a simple assignment of interest in the mortgage to be executed by all parties and registered on title. This assignment also attaches the specific terms that will have legal effect, and replaces those of the transferring institution. So even though the old mortgage is still registered on title, all those old terms and conditions registered by your previous lender will be completely replaced by those of your new lender under the assignment of interest.

    Moreover, the form that you are holding in your hand from the lender who did your previous mortgage financing has a rate that probably is not as competitive as it could be. Don't let the hassle from the first time you negotiated dictate you just signing the form and sending it back to the lender—it will most probably cost you in the form of higher rates.

    The lenders count on 70 per cent of people renewing just signing the form and mailing it in—they are not forcing you—but they are preying on human nature to embrace convenience. However, let the broker do the work for you—the same convenience, at a much lower cost to you and a product and terms that will suit your current situation. The fact is that it is likely another lender will give you what you want at a rate you want—there are no legal implications to you switching.

    There are many reasons why you might want to refinance, or increase, your existing mortgage—to consolidate non-mortgage debt, to finance improvements to your home, etc. Let a Broker help you negotiate with your existing lender or switch to a new lender who will give you a more favourable rate. There are many factors to consider when refinancing your mortgage. Here's what you need to know:

    Taking out equity in your home
    • Consolidate other debt
    • Most unsecured debt is priced by your bank at a higher rate than your mortgage in order to compensate them for the higher risk of loss if you default. For many people it only makes sense to use available home equity to pay out this debt, as it typically reduces interest costs significantly. If the total of the existing mortgage and the debt to be refinanced is less than 75 per cent of the value of your home, and you qualify in terms of income and credit standing, refinancing your first mortgage should be a breeze.

    In fact, using a Mortgage Broker is the perfect way to achieve this consolidation.

    Renovations & home improvements

    If you want to spend a significant amount of money on improving your home, you may be able to take out a lot more equity than you realized! A Broker can advise you through this process. Both insurers — GE Capital and CMHC, will insure new mortgages which are "topped up" for this purpose, and the total of your current mortgage and the new funds exceeds 75 per cent of the current home value. Not all improvements are eligible, however. Pools and spas are typical "over-improvements" which may not qualify for a high-ratio equity take-out. Of course, if the total requirement is less than 75 per cent of your home's current value, you should have little trouble getting the "top up" you need — regardless of the degree of luxury you plan to add.

    Consolidating existing financing
    Combining mortgages
    Where the combined mortgages result in one "high ratio" mortgage:
    If neither (or none) of the mortgages you're combining was ever insured, but combining them results in a high-ratio situation, you'll be required to pay an insurance premium. You need to look closely at the total savings the combination will give you, in order to determine whether this is financially worthwhile.
    Where the combined mortgages result in a new "conventional" mortgage:
    High ratio insurance is not required. As long as you qualify with your income and credit standing, and I will help you achieve this quickly and conveniently.
    • In both cases there is one critical consideration, which causes the failure of many such refinances. The new mortgage often requires a fraction of the cash flow previously needed to service the now consolidated debt. Many who go through this process not only absorb the cash flow savings into an improved lifestyle — they either re-incur debt that they paid out, or incur debt for which they now qualify — or both. It is important to approach such a consolidation/re-combination of obligations with the clear and focused goal of applying all savings toward paying down the mortgage. Otherwise, the new mortgage will be a burden, rather than a solution.
    • Breaking a closed mortgage to transfer to a new lender
    • Many closed mortgages have the feature that allows the balance to be paid out with a penalty after a certain time has elapsed on the mortgage. Check the "prepayment" clause in your mortgage to determine your own situation, or better still, call your institution and ask them the cost of paying out in full.  For example if you have a fixed mortgage rate of 7.50 per cent and over a year left on your mortgage, it may well be worth it to break your term and move your mortgage.

    Remember there is very seldom a fee associated with using a Mortgage Broker, so if any of the above scenarios apply to you, make the call and find out just how much you can save.  There is more mortgage information on my web site, please drop by and take a look at www.mortgagemaster.ca.  See you next issue.

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