# Eeesh ... getting another mortgage ... need some advice



## mind_business (Sep 24, 2011)

After paying off the mortgage on our current home (paid off in 2011), I definitely didn't want to get another one. Well, with an impending move from Ontario to Alberta, we're looking at purchasing a small acreage (3 to 5 acres), which means we'll need to take out a relatively large mortgage. 

We just got back from the bank where we were pre-approved for $350,000. The properties we're looking at vary between $550,000 to $600,000. If we take all of the proceeds from the sale of our current home (likely will be $280,000) and apply it to a down payment ... and top it off with an extra $20,000 ... we'll have a $300,00 down payment. That leaves us with a $300,000 mortgage maximum ... YUK!!!

Oh well, such is life.

Anyhow, to get to my question. *What is a reasonable mortgage interest rate these days on a 25 year mortgage, locked in for 5 years?* Our bank (RBC) offered 3.09%. Is this good? ... or are people still getting 2.89% at some places?

Also, our banker is recommending we use their RBC Homeline Plan. This would allow for a portion of the amount to be held in a mortgage (min 15%), and the rest in a Line of Credit at prime + 0.5% (today it would = 3% prime + 0.5% = 3.5%). The main advantage to having the line of credit portion, is that we can pay it off in large chunks without any penalties. Our goal is to have the entire $300,000 paid off in 4 1/2 years. A traditional mortgage would limit our ability to pay it off quicker. *Second question: Does anyone here have experience with this type of product. Does it sound right for our situation???*


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## birdman (Feb 12, 2013)

Firstly, 3.09% on a 5 yr term is okay in my opinion. Perhaps not the best rate but it is fair. Some of your other comments don't seem to ring true. For example, you comment that you wish to pay it off in under 5 years and the line of credit will enable you to do this. Yes, it certainly will but if you took out a 5 year term mortgage and amortized it over 5 years it would be paid in full. I don't recommend that. You could also take a 5 yr term mtge and amortize it over a longer period, say 10 or 15 years but make lump sum annual payments of probably 20%, perhaps pay bi monthly instead of monthly, etc. The line of credit suggestion is also a fair one and quite common and could also help you in attaining what you wish to do. Your rate is a bit higher and could go up if interest rates go up. Prime plus 1/2 is fair but you may wish to push for prime. If you go this route I suggest you give your future cash flow projections some careful thought. You don't want to stretch yourself too thin on the term part of your mortgage. The big advantage of the line of credit is that you can pay it down with all your surplus cash and if you run short you can just have it re-advanced. The downside is that it is at a higher rate and rates could go up. And yes, this type of product sounds right for your type of situation but just be sure you understand what you are doing. PM me if you wish.


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## Just a Guy (Mar 27, 2012)

TD has something similar, I hear you can get up to 80% LTV on the property if you lock in a portion (their way of getting around the new rules). The nice thing about TD's product is you can lock in portions of the HELOC at mortgage rates. 

So, lets say you owe $100,000 (I think their rate is prime +1, so 4%) and you know you're going to get a small windfall next year of 10k, you can lock in 10k at current mortgage rates (say 2.09 for 1 year) and 90k at the 5 year rate (say 2.99%). As you pay the locked in portion, the credit becomes available in the 4% floating, interest only part for future use (if required).


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## mind_business (Sep 24, 2011)

Thanks for your reply Frase. The reason the LOC is so attractive to us VS taking out a mortgage on the full amount, is that we can pay of much larger amounts per year. My salary increase will allow us to contribute a minimum of $60,000 per year into the mortgage, plus I'll be throwing all bonuses into the mortgage as well. 

You've brought up a good point about the risk of rates going up, vs locking in. That is a concern of mine, however we'll be focused on reducing the principle as quickly as we can, which should limit our risk exposure ... I hope.

I've never been great at negotiating lower rates. Is it realistic to try to get Prime rather than Prime +0.5%? I don't see the incentive for the bank to reduce it down to Prime.


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## Spudd (Oct 11, 2011)

If you feel confident about making higher payments to the mortgage, then why not take a lower amortization so you can get more of the balance on the low rate?


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## mind_business (Sep 24, 2011)

Spudd said:


> If you feel confident about making higher payments to the mortgage, then why not take a lower amortization so you can get more of the balance on the low rate?


Good question. I'm not comfortable doing this mainly because we're a single income family. Too risky. If I lost my job, we would be unable to make the higher mortgage payments.


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## Berubeland (Sep 6, 2009)

RBC had a mortgage where you were allowed to make double monthly payments and 10% annual prepayments. 

As it works out you can pay it off in 5 years and if you have to lower your payment you have that freedom as well. If you don't have the money to make the annual prepayment you make what you can. 

At the end the final prepayment will be larger that 10%


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## Ponderling (Mar 1, 2013)

You don't mention what other assets you have. 

I mention this because I did a self directed morgage once the big chunk of my home was paid for.
I used the 120K mortgage as a proxy for bonds in my RRSP , becuase at the time, back in 06 there was no up side on the horizon for the bond holdings I owned then. 

No one wants to sell you a self directed mortgage, or bring it to your attention becuase there is no money in it for anyone other than yourself.


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## Sampson (Apr 3, 2009)

$60,000 per year available for top up means you can go with a mortgage with 'conventional' 20% prepayment with lowest rate available, sub-3% still out there. This means you could payoff full mortgage in 4 years (make prepayment at beginning of the calendar year).

No point getting a higher rate HELOC portion to maximize prepayment options since you don't have more than 20% available per year anyway.


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## birdman (Feb 12, 2013)

Firstly, you are on the right track and as mentioned by some of the previous posts you have lots of options and you just have to decide which one to go with. Its your call.
In regards to negotiating a better rate, the Prime + 1/2% seems fine and the difference between prime and prime + 1/2 is not that much. However, there is nothing wrong with politely asking "I was talking to someone who mentioned that in view of the mortgage security that perhaps a prime + 0% is warranted?" It is in fact really a variable rate mortgage. All the lender can say is "NO". Don't take the negotiations personal, its business, and don't get upset if it doesn't go your way. Its a good skill to have and negotiations are often a part of business these days. As a matter of interest I have a $50,000. unsecured line of credit at prime + 0%. There are reasons for this which I won't get into. It seems you are doing everything right and not to worry, just get er done. Would be interested in how you make out.


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## mind_business (Sep 24, 2011)

Berubeland said:


> RBC had a mortgage where you were allowed to make double monthly payments and 10% annual prepayments.
> 
> As it works out you can pay it off in 5 years and if you have to lower your payment you have that freedom as well. If you don't have the money to make the annual prepayment you make what you can.
> 
> At the end the final prepayment will be larger that 10%


OK, now I feel foolish. You're absolutely right ... and I should have known this since that's how we accelerated our previous mortgage payments. I should have done the math first.

Thanks for the reminder!!! This is very doable if we use weekly payments (increased by 10%, then doubled, then maximize the 10% of principal anniversary payments for 5 years). 

Now I'm starting to do the math to see if we should do minimum payments ($358.41 per week, or $18637 per year) and invest the remaining $51,000 per year is a safe investment (or $274,800 at the end of 5 years if I can get a 2.5% return). This will ensure we're not living life on the edge by building up a reserve fund. At the end of the 5 years, we can opt to pay off the mortgage in its entirety ... not sure what the penalty would be, however I'll have to find out before making up our minds.

Again Berubeland ... thanks for the wake-up call. I needed it!!!


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## Spudd (Oct 11, 2011)

Tehre should be no penalty for paying it off at the end of the term. Penalties only apply if you pay it off while the term is still in force.


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## mind_business (Sep 24, 2011)

Spudd, here's my ignorance of mortgages coming through ... are you saying that a mortgage amortized over 25 years can get paid out in full without penalty at the end of any interest term? (ie: if I locked in the interest rate for 5 years on a 25 year mortgage, I could pay the entire mortgage out without penalty ... no matter the amount?).


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## Spudd (Oct 11, 2011)

Yes, that's right.


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## Feruk (Aug 15, 2012)

You're indicating you can pay the loan off in ~5 years, but the bank will only give you $350K over 25 years. Where is the disconnect?


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## mind_business (Sep 24, 2011)

Feruk said:


> You're indicating you can pay the loan off in ~5 years, but the bank will only give you $350K over 25 years. Where is the disconnect?


Well, I never said that. The bank will give us much more than $350K if we want them to, but we only requested that amount. We're limiting our home purchase to $650 max (300K down payment) and are certain we won't go over that amount. Yes I realize we could have just asked to be pre-approved for the maximum amount they'd loan us, but it just didn't seem necessary. That's just us I guess ... no better explanation.


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## mind_business (Sep 24, 2011)

Running a couple of options (all based on a $300,000 - 25 year amortized, fixed rate mortgage at 3.09%, locked in for 5 years), here's the mortgage costs:

*Scenario #1* - If we maxed out our accelerated weekly payments with RBC (10%, double up payments, and a 10% anniversary payment per year):

​$321,373.20 (Mortgage completely paid off in 5 years)


*Scenario #2* - If we only made the min accelerated weekly payments ($358.41 per week), with the intention of paying off the entire mortgage amount at the end of the 5 year interest term. The final payment would be $248,872.40. This final payment would come from our savings over that 5 year period. We would put all of the money into savings that would have otherwise gone into Scenario #1 payments. The total cost of the mortgage for this scenario is $342,059.00 minus the interest made on our savings ~$7000 (assuming 3% compounding interest).

​$335,059.00 (Mortgage completely paid off in 5 years)


*Conclusion:*
If we opt to make the minimum weekly payments, with a large lump sum payment at end of year 5, the cost differencial is approx. $14,000 ... which would be the cost for peace of mind that we have a large emergency reserve fund. Now to decide if it's worth it. I'm initially thinking we'll do a hybrid of option #2 for a year or two, and then finishing of the last few years with Option #1 to minimize our borrowing costs.


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