what are options to break 5 year closed mortgage term


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meitsme   
Member since: Feb 06
Posts: 476
Location:

Post ID: #PID Posted on: 18-07-11 13:56:37

Hi All,

My friend has plan to move back to India in Sept 2012. He has few questions and looking for your advice in advance. I am posting this because I am very interesting and may plan for moving back to India in future.

He owns townhome in Canada with 5 year closed mortgage term. Term end in Sept 2015. Few questions. He want to sell the house before going to India but it might cost high panelty. We have thought about few options below. You can add more options and provide your suggestion.

1) Pay panelty and sell house before moving to India.

In this case, How much will be the panelty? Consider the remaining mortgage amount will be $175000 from Sept 2012. His interest rate is 3.5%. Any formula to calculate the panelty?

2) Pay panelty and convert to variable open mortgage or 1 year closed mortgage today and sell it before moving.

This may help if panety will be less than the option (1). Any idea about how much will be the panelty in this case?

3) Rent home through property manager for 3 years. At the end of the mortgage term come back to Canada to sell it. Don't know how easy to sell home after 3 years?

In this case, any suggestion for good property manager? Any idea about who will be responsible if there will be any illigal activity in home through tenant? (Property Manager OR Owner?).

Once assign the property manager, What are other problems which owner has to deal with property manager or tenant?

4) Look for tenant who is ready for rent to own option.

In this case, do you still suggest to hire property manager for 3 years?

Can we make special contract with tenant/buyer? (like, he owns the home from Sept 2012 and he is 100% responsible for any kind of maintainance/upgrade (including furnace and major appliances ...) . So, we do not need to hire property manager?

5) Any other options?

For your information.

1) It is the townhome and today's price is about $310K. We think it will be easy to rent or sell as of today. Don't know about condition after 3 years?

2) Brand new home. Constructed in 2010 and includes Tarion Warranty.


Thanks,


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Success is Never Ending and Failure is Never Final.


Pramod Chopra   
Member since: Sep 03
Posts: 1284
Location: Pickering, ON

Post ID: #PID Posted on: 18-07-11 15:12:52

Quote:
Originally posted by meitsme

Hi All,

My friend has plan to move back to India in Sept 2012. He has few questions and looking for your advice in advance. I am posting this because I am very interesting and may plan for moving back to India in future.

He owns townhome in Canada with 5 year closed mortgage term. Term end in Sept 2015. Few questions. He want to sell the house before going to India but it might cost high panelty. We have thought about few options below. You can add more options and provide your suggestion.

1) Pay panelty and sell house before moving to India.

In this case, How much will be the panelty? Consider the remaining mortgage amount will be $175000 from Sept 2012. His interest rate is 3.5%. Any formula to calculate the panelty?



Since your Friend has a fixed mortgage, if he sells before the completion of term, he would have to pay either 3 months interest on the remaining balance at the time of breaking the mortgage or IRD (Interest rate Differential) whichever is higher.

It seems his 5 year fixed term started in Sept 2010 any if he breaks the mortgage in September, 2012 he would still have 3 years remaining in contract. The bank would see at that point of time, what is the remaining balance and at what interest rate the bank can lend money in the mortgage market for a new 3 year term. If after taking in to consideration the discounts he was given from the bank's posted rates at the start of the term, if the bank can lend at higher than 3.5% then he would only have to pay 3 months simple interest. So, if the balance remaining is $175,000 at that point of time, the total penalties would be a little over $1531 before the discharge/admin fee. The dreaded IRD would only be applicable if the rates at that point of time are much lower (I doubt) for a new 3 year term so the bank would take the difference of interest for the remaining 36 months. Every bank has its own style of calculating IRD, though they have to follow the same formula but depending on their posted and discounted rates, it may differ. Let's say the bank can lend money only at 3% for a new 3 year term in Sept, 2012 then the bank would loose 0.5% for every year, meaning a total of 1.5% for 3 years. So, the IRD penalty roughly would be 1.5% of the balance remaining and that would come to around $2625. So, he should not worry that much.




Quote:
2) Pay panelty and convert to variable open mortgage or 1 year closed mortgage today and sell it before moving.

This may help if panety will be less than the option (1). Any idea about how much will be the panelty in this case?



There is NO BENEFIT of paying penalties right now as most likely he would pay 3 months interest at any time he chooses to break as his rate is definitely a very good rate. So, he should let it remain as it is and decide when the time comes. He can also take advantage of the pre payment facilities thus reducing his penalties.


Quote:
3) Rent home through property manager for 3 years. At the end of the mortgage term come back to Canada to sell it. Don't know how easy to sell home after 3 years?

In this case, any suggestion for good property manager? Any idea about who will be responsible if there will be any illigal activity in home through tenant? (Property Manager OR Owner?).

Once assign the property manager, What are other problems which owner has to deal with property manager or tenant?



This might not be a very good idea if he is going back to INDIA for good. Because, if he rents the house here, he would be having ties in Canada and may have to pay taxes on his worldwide income in Canada. Otherwise, he would have to have his status changed to NON Resident and then he would (may) still have to pay taxes on his rental income at a higher rate.


Quote:
4) Look for tenant who is ready for rent to own option.

In this case, do you still suggest to hire property manager for 3 years?

Can we make special contract with tenant/buyer? (like, he owns the home from Sept 2012 and he is 100% responsible for any kind of maintainance/upgrade (including furnace and major appliances ...) . So, we do not need to hire property manager?



This option can be explored. Or he can sell the house now and let the purchaser assume the mortgage as the mortgage rate is very lucrative and then rent for him self either at the same house (if the new owner permits) or at another place and be worry free.

Quote:
5) Any other options?

For your information.

1) It is the townhome and today's price is about $310K. We think it will be easy to rent or sell as of today. Don't know about condition after 3 years?

2) Brand new home. Constructed in 2010 and includes Tarion Warranty.


Thanks,




See above for the alternative. However, where is the townhouse? How much he paid for it when bought 2 years ago? Whats the living area etc. and may be we may have some one from CD interested in buying the same.


-----------------------------------------------------------------


Pramod Chopra
Senior Mortgage Consultant
Mortgage Alliance Company of Canada



meitsme   
Member since: Feb 06
Posts: 476
Location:

Post ID: #PID Posted on: 20-07-11 12:24:35

Thank you very much for detail answer.

I was thinking about panelty will be very high but now I realize that it should not be because I have lower rate of mortgage.

Thanks Again.


-----------------------------------------------------------------
Success is Never Ending and Failure is Never Final.


thomas23   
Member since: Oct 05
Posts: 13
Location:

Post ID: #PID Posted on: 31-07-11 15:31:47

Check with your lender if you can transfer your mortgage to the new buyer. In that case if the then Mortgage rates are higher than your rate, the buyer will be more than happy to assume your mortgage which is at a lower rate.





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