The showing activity across the Province has continued to taper off as we enter into the Fall months. This is a typical trend coming into the fourth quarter, however the activity remains to be much higher than the same time last year. The showing activity across Alberta is still showing a 128% increase year over year. The showing activity on CIR’s listings also experienced a modest slow down in most price ranges, the largest drop being in the higher price points. Overall the showing activity remains relatively balanced, unlike the sales activity. Through September, CIR Realty has trended over 45% higher in transaction volume compared to September 2019. This is the fourth straight month that sales activity for CIR Realty has not only out performed the year previous, but also the industry itself. While we enter into what is anticipated to be slower months, it remains our responsibility to help educate clients to help them make the best decision based on their circumstances. There continues to be many moving parts in today’s markets which we will address more in the monthly Real Estate Summar.
When you’re shopping for a mortgage, what’s the most important thing? Most Canadians will say getting the lowest mortgage rate. While getting a low mortgage rate certainly matters, it’s important to recognize that there are other things to consider as well.
There’s a difference between getting the lowest mortgage rate and the lowest cost of borrowing. Getting the lowest mortgage rate is just that, the mortgage with the lowest rate. Whereas, getting the lowest cost of borrowing factors in other things like prepayments and penalties. In this week’s article, we’re going to talk about the latter, penalties.
When you sign up for a mortgage, probably the last thing on your mind is breaking it. But sometimes life happens and you’re forced to break it sooner than anticipated. It could be for many reasons: relocating for a job promotion, job loss, divorce, and the list goes on. If you didn’t take the time to ask about mortgage penalties when you first signed up for your mortgage, you could find yourself blindsided by a big penalty.
In this article, we’ll look at how mortgage penalties are calculated for variable-rate and fixed-rate mortgages. After reading this article, you’ll have a much better understanding of how mortgage penalties work and what to look for.
“Roughly 2 out of 3 people break their mortgage early, at an average of 33 months”
Dustan Woodhouse President at Mortgage Architects
Variable Rate Mortgage Penalties
If you’re signed up for a variable (or adjustable) rate mortgage, the penalty is pretty simple. You’ll pay three months’ interest for breaking your mortgage early. This is the most favourable mortgage penalty calculation (besides paying no penalty at all of course). Whether you’re with one of the big banks or a monoline lender, your penalty will be three months’ interest.
For example, let’s say your mortgage rate is 2.49% percent and you have a $500,000 mortgage balance. In this case your mortgage penalty would be:
2.49% × $500,000 × (3 months/12 months) = $3,113
Pretty simply wouldn’t you say? Whether you break one month into your mortgage over four years, three months in, your mortgage penalty is the same.
Fixed Rate Mortgage Penalties
If you sign for a fixed rate mortgage like most Canadians, the mortgage penalty calculation is a little more complicated. You’ll pay the greater of three months’ interest or something called the “Interest Rate Differential” or IRD for short. If you’ve read stories in the media about Canadians paying huge mortgage penalties, the IRD is most likely the reason why.
Using the same numbers as above, even though your mortgage rate is only 2.49%, if you’re with one of the big banks whose posted rate is let’s 4.79%, that’s when it can really inflate your penalty.
Let’s say you have three years left on your mortgage and your lender’s three-year fixed mortgage rate is 2.25%. If we use the IRD, your mortgage penalty would be:
$500,000 × 36 months × 2.54% (difference between 4.79% and 2.25%)/12 months = $38,100
Because the IRD penalty calculation is greater than the three months’ interest calculation, you’d have to pay a penalty of almost $40k to break your mortgage early. I don’t know about you, but that’s a lot of dough!
The example we showed here is using one version of IRD known as Standard IRD which is based on the current posted rate for a similar comparable term. There are many other versions of IRD and penalty calculations. Some Lenders calculate their penalties on the posted rate at the time you got your mortgage, some deduct the discount you originally received of the posted rate, some require you to pay back the cash-back you originally received, some calculate penalties entirely differently, like 12 months interest or 3% of balance. The only true way to find your exactly penalty is asking your lender.
The Bottom Line
It’s important to ask about mortgage penalties up front so you’re not forced to pay a penalty out of pocket like this later on.
If you want a fixed rate mortgage, but don’t want to get stuck paying a huge penalty out of pocket, you may consider taking out a fixed rate mortgage with a monoline lender instead of the big banks. Monoline lenders don’t have high posted rates like the big banks, so your mortgage penalty is likely to be a lot lower when breaking your mortgage with a monoline.
The showing activity across the Province climbed slightly week over week. The showing activity continues to be well above this time period last year, currently sitting at 130.6% more showings compared to last year. The showing activity for CIR’s listings also experienced a slight uptick week over week, with 1,995 showings. The majority of the activity remains to be in the mid points of the markets with a slight decline in the lower price points. The showing activity of weeks passed continues to translate into sales as CIR’s transactions are up 31.4% in the first two weeks of the month compared to the first two weeks of September 2019. The property ladder has been in full motion over the past three and a half months. With the uptick in the lower price points, it has freed up buyers that had homes they needed to sell to make their next purchase. We have seen the sales volume climb upwards on the price scale as a result. We do anticipate to see slower activity as we enter into the late Fall, and early Winter months as we do each year but as of right now, the lower inventory combined with heightened sales continues to help balance many markets.
Calgarians have had more than their share of weather challenges this summer, including several nasty bouts of hail. Thankfully, a little preparation can help your home’s roof emerge unscathed the next time golf-ball-sized ice chunks starts falling from the sky.
“Hail eats standard laminate architectural shingles like sugar eats kids’ teeth,” said Anthony Babin, owner of A.B’s Roofing & Contracting. “The best protection is found in metal, rubber and tile roofs, followed by those with Class 3 or Class 4 high-impact-resistant shingles.”
Of course, protection comes at a cost. While standard shingles will run a homeowner around $2.30 – $3.50 per square foot, depending on the contractor, impact-resistant shingles range from $3.50 – $5.00 per square foot. Rubber, metal and tile come in at $5.00 – $8.00 per square foot.
Fortunately, most roofs are built to last, so that upfront cost can be a solid investment.
“The average lifespan for standard architectural shingles is 15 – 25 years, and the majority come with a limited lifetime warranty,” said Babin. “While warranties for other material like rubber, metal and tile differ among manufacturers, they generally range from 25 – 50 years.”
“HAIL EATS STANDARD LAMINATE ARCHITECTURAL SHINGLES LIKE SUGAR EATS KIDS’ TEETH.” – ANTHONY BABIN, A.B’S ROOFING & CONTRACTING
The choice of material will also impact ease of installation. All asphalt shingles are fairly easy to install, as is rubber, while metal can be more technical.
“With asphalt, you put underlay on and install the shingles right over top, but metal requires a different underlay and strapping on the roof deck,” said Babin “This allows you to elevate the roof and still have the ability for air to transfer through the space, avoiding issues with mould or condensation. Tile roofs can equal metal in terms of complexity, depending on the design.”
Apart from choosing the right roofing material, the key to proper protection during the next hailstorm comes down to general maintenance.
“So many homes are way past due for maintenance, so the biggest thing I stress is being proactive with your property,” said Babin. “We see the most problems with older homes, and often with rental properties where the owner may be trying to squeeze every dollar they can from the property without doing maintenance.”
Homeowners are encouraged to regularly inspect their property and have a roofer or contractor with verified credentials examine their roof if they believe there might be an issue.
“Spring is a good time to look at your roof, as it has just gone through the freeze/thaw cycle that can cause a lot of damage to shingles.”
As with any house-related project, owners should do their homework before hiring a professional.
“Check references on a contractor and ask to see their portfolio, then check that they have general liability insurance and WCB coverage,” said Babin. “At the end of the day, this will ensure that the work is done properly and at a reasonable price.”
Total residential sales in August were relatively stable compared to last year with year-over-year gains in the detached and row sectors.
These gains offset declines in the apartment and semi-detached products.
With 1,573 sales in August, this is consistent with levels over the past five years. Year-to-date sales activity remains nearly 13 per cent below last year.
“Recent national reports have shown a bounce back to new record levels over the past several months. Calgary has seen improvements over the lows recorded during the lockdowns but is far from record levels,” said CREB® chief economist Ann-Marie Lurie.
“The situation in Calgary has been slightly different as the job losses were not isolated to sectors that are typically associated with rental demand. We have started to see improvements in the job market compared to previous months as some jobs start to return.”
However, the impact of COVID-19 on the economy is not over.
“There have been more than 100,000 jobs lost since last year and Calgary’s unemployment rate sits at 15 per cent. This is well above the national average of 11 per cent,” said Lurie.
New listings are easing and is helping to chip away at existing inventory compared to the higher levels recorded last year. However, the pace of year-over-year decline has eased as inventory levels have trended up relative to levels recorded a few months ago.
The months of supply has also risen compared to the past few months and now sits at four months. This gain has slowed some of the monthly gains on prices. The residential benchmark price in August was $420,800 and is nearly one per cent lower than last years’ levels.