Over the past month, the Bank of Canada has lowered its overnight rate by a whopping 1.5 percentage points to a mere 0.25%. Many people expected mortgage rates to fall equivalently. The banks have reduced prime rates by the full 150 basis points (bps). But, since the second Bank of Canada rate cut on March 13, banks and other lenders have hiked mortgage rates for fixed- and variable-rate loans. That’s not what happens typically when the Bank cuts its overnight rate. But these are extraordinary times.
The Covid-19 pandemic has disrupted everything, shutting down the entire global economy and damaging business and consumer confidence. No one knows when it will end. This degree of uncertainty and the risk to our health is profoundly unnerving.
Most businesses have ground to a halt, so unemployment has surged. Hourly workers and many of the self-employed have found themselves with no income for an indeterminate period. All but essential workers are staying at home, including vast numbers of students and pre-school children. Nothing like this has happened in the past century. The societal and emotional toll is enormous, and governments at all levels are introducing income support programs for individuals and businesses, but so far, no cheques are in the mail.
In consequence, the economy hasn’t just slowed; it has frozen in place and is rapidly contracting. Travel has stopped. Trade and transport have stopped. Manufacturing and commerce have stopped. And this is happening all over the world.
What’s more, the Saudis and Russians took advantage of the disruption to escalate oil production and drive down prices in a thinly veiled attempt to drive marginal producers in the US and Canada out of business. This has compounded the negative impact on our economy and dramatically intensified the plunge in our stock market.
Many Canadians are now forced to live off their savings or go into debt until employment insurance and other government assistance kicks in, and even when it does, it will not cover 100% of the income loss. The majority of the population has very little savings, so people are resort to drawing on their home equity lines of credit (HELOCs), other credit lines or adding to credit card debt. Businesses are doing the same.
The good news is that people and businesses that already have loans tied to the prime rate are enjoying a significant reduction in their monthly payments. All of the major banks have reduced their prime rates from 3.95% to 2.45%. So people or businesses with floating-rate loans, be they mortgages or HELOCs or commercial lines of credit, have seen their monthly borrowing costs fall by 1.5 percentage points. That helps to reduce the burden of dipping into this source of funds to replace income.
So Why Are Mortgage Rates For New Loans Rising?
These disruptive forces of Covid-19 have markedly reduced the earnings of banks and other lenders and dramatically increased their risk. That is why the stock prices of banks and other publically-traded lenders have fallen very sharply, causing their dividend yields to rise to levels well above government bond yields. As an example, Royal Bank’s stock price has fallen 22% year-to-date (ytd), increasing its annual dividend yield to 5.31%. For CIBC, it has been even worse. Its stock price has fallen 30%, driving its dividend yield to 7.66%. To put this into perspective, the 10-year Government of Canada bond yield is only 0.64%. The gap is a reflection of the investor perception of the risk confronting Canadian banks.
Thus, the cost of funds for banks and other lenders has risen sharply despite the cut in the Bank of Canada’s overnight rate. The cheapest source of funding is short-term deposits–especially savings and chequing accounts. Still, unemployed consumers and shut-down businesses are withdrawing these deposits to pay the rent and put food on the table.
Longer-term deposits called GICs, which stands for Guaranteed Investment Certificates, are a more expensive source of funds. Still, owing to their hefty penalties for early withdrawal, they become a more reliable funding source at a time like this. As noted by Rob Carrick, consumer finance reporter for the Globe and Mail, “GIC rates should be in the toilet right now because that’s what rates broadly do in times of economic stress. But GIC rates follow a similar path to mortgage rates, which have risen lately as lenders price rising default risk into borrowing costs.”
To attract funds, some of the smaller banks have increased their savings and GIC rates. For example, EQ Bank is paying 2.45% on its High-Interest Savings Account and 2.55% on its 5-year GIC. Other small banks are also hiking GIC rates, raising their cost of funds. Rob McLister noted that “The likes of Home Capital, Equitable Bank and Canadian Western Bank have lifted their 1-year GIC rates over 65 bps in the last few weeks, according to data from noted housing analyst Ben Rabidoux.”
The banks are having to set aside funds to cover rising loan loss reserves, which exacerbates their earnings decline. An unusually large component of Canadian bank loan losses is coming from the oil sector. Still, default risk is rising sharply for almost every business, small and large–think airlines, shipping companies, manufacturers, auto dealers, department stores, etc.
Lenders have also been swamped by thousands of applications to defer mortgage payments.
Hence, confronted with rising costs and falling revenues, the banks are tightening their belts. They slashed their prime rates but eliminated the discounts to prime for new variable-rate mortgage loans. Some lenders will no doubt start charging prime plus a premium for such mortgage loans. Banks have also raised fixed-rate mortgage rates as these myriad pressures reducing bank earnings are causing investors to insist banks pay more for the funds they need to remain liquid.
An additional concern is that financial markets have become less and less liquid–sellers cannot find buyers at reasonable prices. The ‘bid-ask’ spreads are widening. That’s why the central bank and CMHC are buying mortgage-backed securities in enormous volumes. That is also why the Bank of Canada has started large-scale weekly buying of government securities and commercial paper. These government entities have become the buyer of last resort, providing liquidity to the mortgage and bond markets.
These markets are crucial to the financial stability of Canada. Large-scale purchases of securities are called “quantitative easing” and have never been used before by the Bank of Canada. It was used extensively by the Fed and other central banks during the 2008-10 financial crisis. When business and consumer confidence is so low that nothing the central bank can do will spur investment and spending, they resort to quantitative easing to keep financial markets functioning. In today’s world, businesses and consumers are locked down, and no one knows when it will end. With so much uncertainty, confidence about the future diminishes. The natural tendency is for people to cancel major expenditures and hunker down.
We are living through an unprecedented period. When the health emergency has passed, we will celebrate a return to a new normal. In the meantime, seemingly odd things will continue to happen in financial markets.
Your Interest is my Only Interest
This is great news and sounds exactly like what I have been hearing from other sources. It is also consistent with Evan Siddall leaving CMHC and it reduces the power of the banks that set the posted rate and keep it excessively above contract rates.
MPC Pres & CEO Paul Taylor was at C.D. Howe today, listening to a speech by OSFI’s Ben Gully. It became more of a big deal for our mortgage brokering community than would have been expected. The Globe and Mail just reported on it this hours. Not sure if the story is paywalled, so here it is for BTBB:
Banking regulator reviewing key component of mortgage stress test
JAMES BRADSHAW – Globe and Mail
Canada’s banking regulator says it is reviewing a key component of its stress test for mortgages for the first time, but continues to defend its core tenets as good policy for the housing market.
The hotly debated stress test, introduced in 2018 by the Office of the Superintendent of Financial Institutions (OSFI), has been applied to uninsured mortgages – those with a down payment of at least 20 per cent of the purchase price – since 2018. It forces lenders to make sure borrowers could handle an increase of at least two percentage points in their mortgage interest rate.
To set the test’s threshold for each borrower, mortgage providers must either add two percentage points to the loan’s actual rate, or use the Bank of Canada’s five-year benchmark mortgage rate – whichever is higher. But OSFI is now considering whether the central bank’s benchmark should still be part of the calculation.
OSFI has staunchly defended the stress test, insisting it was necessary to clamp down on loose mortgage underwriting standards that posed a risk to lenders, and to the broader financial system. But the rule change has drawn criticism from mortgage professionals and would-be homeowners, who see the stress test as too onerous and inflexible. Some have suggested it was primarily a response to hot housing markets in Toronto and Vancouver, applied bluntly to all Canadian mortgages, though OSFI says it wants consistent underwriting across the country.
Federal Finance Minister Bill Morneau was tasked with considering ways to make the mortgage stress test “more dynamic” in his mandate letter from Prime Minister Justin Trudeau, and will review recommendations from financial agencies.
Introducing the stress test “was not a popular decision,” said Ben Gully, assistant superintendent for OSFI’s regulation division, in a speech to the C.D. Howe Institute in Toronto. “This certainly tested our mettle.”
He defended the stress test again, saying “the qualifying rate is working.” But he also said that the Bank of Canada rate used to set it may need to be changed. At current levels, that benchmark rate is making it even tougher to qualify for an uninsured mortgage.
When the regulator chose to use the Bank of Canada’s benchmark, it was “the best available rate at the time,” Mr. Gully said, but it “is not playing the role that we intended.” That’s because the gap between that rate, now at 5.19 per cent, and the average mortgage rate has widened to roughly 2.3 percentage points, making it “less responsive to market changes than when it was first proposed,” Mr. Gully said.
OSFI is now reviewing whether it should still use the benchmark as part of the stress test, and the findings “will help to inform the advice OSFI might provide to the Minister, as requested in the mandate letter to him,” Mr. Gully said.
But OSFI maintains that a threshold of two percentage points – or 200 basis points – is a reasonable buffer to ensure borrowers can manage unforeseen shocks such as a job loss or a rise in interest rates. “This will therefore remain a key part of OSFI’s guideline B-20,” the regulation that outlines the stress test, he said.
Mr. Gully took over OSFI’s regulation division last April after his predecessor Carolyn Rogers, a key architect of the stress test, was appointed as the first Canadian secretary- general of the Basel Committee on Banking Supervision, a standard-setter for global banking regulation.
Despite deteriorating housing affordability across the country, buying a home is still the more affordable option when compared to renting.
A new report from Mortgage Professionals Canada has determined that, despite the rapid rise in home price, those who are able to invest in a home would end up “significantly better off” in the long term compared to renting.
The report, authored by the mortgage broker association’s chief economist Will Dunning, found that while upfront monthly costs are in fact cheaper in most locations, the “net” cost of ownership is less than the equivalent cost of renting in a majority of cases, and becomes even more cost effective over time.
“The costs of owning and renting continue to rise across Canada,” Dunning noted. “However, rents continue to rise over time whereas the largest cost of homeownership–the mortgage payment–typically maintains a fixed amount over a set period of time – usually for the first five years. The result is that the cost of renting will increase more rapidly than the cost of homeownership.”
Additionally, the costs of ownership include considerable amounts of repayment of the mortgage principal. “When this saving is considered, the ‘net’ or ‘effective’ cost of homeownership is correspondingly reduced,” Dunning added.
On average, the monthly cost of owning exceeds the cost of renting by $541 per month. But when principal repayment is considered, the net cost of owning falls to $449 less than renting.
Interest Rate Scenarios
The analysis compared the cost of renting vs. owning both five and 10 years into the future, with higher interest rates factored into the equation. In all cases, owning comes out ahead:
Scenario #1: If interest rates remain the same (using an average of 3.25%), after 10 years the average net cost of owning is $1,014 less than the monthly cost of renting.
Scenario #2: If interest rates rise to 4.25% after five years, the average net cost of owning falls to $1,295 less than the monthly cost of renting.
Scenario #3: If interest rates rise to 5.25% after five years, the average net cost of owning is still $726 less than the monthly cost of renting.
“By the time the mortgage is fully repaid in 25 years (or less) the cost of owning will be vastly lower than the cost of renting,” the report adds, noting that the cost of owning, on average, would be $1,549 per month vs. $4,655 for an equivalent dwelling.
Canada Still a Country of Homeowners
Despite rising home prices and deteriorating affordability, Canada remains a nation of aspiring homeowners.
The study pointed to the continued strong resale activity as one indicator of this.
Resale activity in 2017 was still the third-highest year on record, at 516,500 sales, just off the peak of 541,2220 sales in 2016.
But other polls have also found a strong desire among younger generations that still dream of owning.
RBC’s Homeownership Poll found a seven-percentage-point increase in the percentage of overall Canadians who planned to buy a home within the next two years (32%), and a full 50% of millennials.
Similarly, a RE/MAX poll found more than half of “Generation Z” (those aged 18-24) also hope to own a home within the next few years.
Perhaps the biggest question is whether those aspiring homeowners will have the means to surpass the barriers to homeownership, namely larger down payments and the government’s new stress test.
“While recent changes to mortgage qualifying have made the barrier to entry higher, those who can qualify will be much better off in the long term,” Paul Taylor, President and CEO of Mortgage Professionals Canada said in a statement. “Given the economic advantages of homeownership, Mortgage Professionals Canada would recommend the government consider ways to enable more middle-class Canadians to achieve homeownership.”
Despite its affordability benefit over renting, Dunning addresses some of the impediments of homeownership, namely the longer timeframe needed to save for the down payment. Despite higher home prices and larger down payments required, first-time buyers still made an average 20% down payment.
Additional Tidbits from the Report
Some additional data included in Dunning’s report include:
- Average house price rose 6.2% per year from $154,563 in 1997 to $510,090 in 2017
- Average weekly wage growth was up just 2.6% per year from 1997 to 2017
- The average minimum interest rate for the stress test during the study period: 5.26%
- The average annual rates of increase for the following housing costs:
- Property taxes: 2.8%
- Repairs: 1.9%
- Home insurance: 5.4%
- Utilities: 1.6%
- Rents: 2.4%
Your Interest is my Only Interest
The Canadian housing market is facing significant headwinds heading into the fall, and it’s still unclear how it will navigate them.
From a rising interest rate environment, to worryingly high levels of household debt, there are several factors the industry experts are telling homeowners and would-be buyers to consider.
For a closer look at what could affect the market this month, Livabl has rounded up the latest industry commentary, to keep you in the know.
An interest rate hike is on its way
The Bank of Canada chose not to hike the overnight rate this week — but that doesn’t mean it won’t in the near future.
In its release, the Bank noted that the housing market is “beginning to stabilize as households adjust to higher interest rates and changes in housing policies.” That, combined with an acknowledgement that the debt burden among households is starting to lower, has TD senior economist Brian DePratto predicting that the Bank will choose to hike the overnight rate in October.
“The Bank of Canada made it clear that it is still on track to raise interest rates again this year,” he wrote, in a note. “The Canadian economy is indeed evolving in line with its projections, with the desired rotation of demand towards investment and exports, and a stabilization of the housing market after a difficult start to the year…We believe the BoC will raise interest rates at its October meeting, consistent with its gradual approach to policy normalization.”
As the overnight rate climbs, mortgage rates will also be pushed upwards, possibly causing some would-be buyers to reconsider entering the housing market. Beyond causing a slowdown in activity, a rate increase would weigh on existing homeowners, who might struggle to make higher mortgage payments.
Affordability is deteriorating
As interest rates moved upwards, housing affordability deteriorated in most major Canadian markets last quarter.
The Bank of Canada hiked the overnight rate to 1.50 per cent in July, and mortgage rates followed suit.
The ratio of homeowners mortgage payments in comparison to their income, known as MPPI, rose 0.2 per cent in Q2, after a 1.2 per cent rise in Q1, marking 12 months of consecutive deterioration. In total, seven of 10 major markets saw their MMPI rise last quarter.
“Mortgage interest rates were on the rise for a fourth consecutive quarter in Q2,” wrote National Bank economists Matthieu Arseneau and Kyle Dahms. “Unsurprisingly, the rise in interest rates hit harder for the priciest markets in the country.”
Household debt is still a concern
That deteriorating affordability is bad news for Canadians household debt levels, which are still worryingly high.
“Risks around housing appear to have dissipated with the national market stabilizing in recent months,” wrote BMO senior economist Benjamin Reitzes, in a recent note. “[But] household debt is an issue that isn’t going to be resolved anytime soon.”
While Canada’s debt-to-disposable income ratio eased from 169.7 to 168 per cent in the first quarter of 2018, Canadians still have some of the highest debt levels in the world.
“The [Bank of Canada] is continuously collecting data on how households are coping with rising rates, while the macro data suggest the moves have been manageable thus far,” wrote Reitzes. “The slowing housing market and new mortgage rules have caused debt growth to decelerate, but it’s going to take time to work off debt burdens and bring debt ratios down.”
Your Interest is my Only Interest
Self-employed Canadians will be happy to hear that CMHC is willing to make some changes that will make it easier to qualify for a mortgage.
In an announcement on July 19, 2018, the CMHC has said “Self-employed Canadians represent a significant part of the Canadian workforce. These policy changes respond to that reality by making it easier for self-employed borrowers to obtain CMHC mortgage loan insurance and benefit from competitive interest rates.” — Romy Bowers, Chief Commercial Officer, Canada Mortgage and Housing Corporation. These policy changes are to take effect Oct. 1, 2018.
Traditionally self-employed borrowers will write as many expenses as they can to minimize the income tax they pay each year. While this is a good tax-saving technique, it means that often a realistic annual income cannot be established high enough to meet mortgage qualification guidelines.
Plain speak, self-employed people don’t look good on paper.
Normally CMHC wants to see two years established business history to be able to determine an average income. But the agency said it will now make allowances for people who acquire existing businesses, can demonstrate sufficient cash reserves, who will be expecting predictable earnings and have previous training and education.
Take for example a borrower that has been an interior designer with a firm for the past eight years and in the same industry for the past 30 years, but just struck out on his own last year. His main work contract is with the firm he used to work for, but now he has the ability to pick up additional contracts from the industry in which he has vast connections.
Where previously he would have had to entertain a mortgage with an interest rate at least 1% higher than the best on the market and have to pay a fee, now he would be able to meet insurance requirements and get preferred rates.
The other change that CMHC has made is to allow for more flexible documentation of income and the ability to look at Statements of Business Professional Activity from a sole-proprietor’s income tax submission to support Add Backs of certain write-offs to support a grossing-up of income. Basically, recognizing that many write-offs are simply for tax-saving purposes and are not a reduction of actual income. This could mean a significant increase in income and buying power.
It is refreshing after years of government claw-backs and conservative policy changes to finally see the swing back in the other direction. Self-employed Canadians have taken on the burden of an often fluctuating income and responsible income tax management all for the ability to work for themselves. These measures will help them with the reward of being able to own their own home as well.
Your Interest is my Only Interest
On a national basis, the Aggregate Composite MLS Home Price Index (HPI) rose only 1.0% y/y (year-over-year) in May 2018, marking the 13th consecutive month of decelerating y/y gains. It was also the smallest annual increase since September 2009.
Decelerating year-over-year home price gains largely reflect trends among GGH housing markets tracked by the index. While home prices in the region have stabilized and begun trending higher on a monthly basis, rapid price gains recorded one year ago have contributed to deteriorating y/y price comparisons. If recent trends remain intact, year-over-year comparisons will likely improve in the months ahead.
Condo apartment units again posted the most substantial y/y price gains in May(+12.7%), followed by townhouse/row units (+4.9%). By contrast, one-storey and two-storey single-family home prices were down (-1.5% and -4.7% y/y respectively), very much in line with what we saw last month.
Benchmark home prices in May were up from year-ago levels in 8 of the 15 markets tracked by the index (see Table below).
Composite benchmark home prices in the Lower Mainland of British Columbia continue to trend upward after having dipped briefly in the second half of 2016 (Greater Vancouver (GVA): +11.5% y/y; Fraser Valley: +20.6% y/y). Apartment and townhouse/row units have been mainly driving this regional trend while single-family home prices in the GVA have stabilized. In the Fraser Valley, single-family home prices have also started rising.
Benchmark home prices were up by 11.5% on a y/y basis in Victoria and by 18.1% elsewhere on Vancouver Island.
Within the GGH region, price gains have slowed considerably on a y/y basis but remain above year-ago levels in Guelph (+3.8%). By contrast, home prices in the GTA, Oakville-Milton and Barrie were down from where they stood one year earlier (GTA: -5.4% y/y; Oakville-Milton: -5.9% y/y; Barrie and District: -6.3% y/y). This reflects rapid price growth recorded one year ago and masks recent month-over-month price gains in these markets.
Calgary and Edmonton benchmark home prices were down slightly on a y/y basis in May (Calgary: -0.5% y/y; Edmonton: -0.9% y/y), while prices in Regina and Saskatoon were down more noticeably from year-ago levels (-6.2% y/y and -2.7% y/y, respectively).
Benchmark home prices rose by 8.2% y/y in Ottawa (led by a 9.5% increase in two-storey single-family home prices), by 6.7% in Greater Montreal (driven by a 7.3% increase in two-storey single-family home prices) and by 4.3% in Greater Moncton (led by a 4.8% increase in townhouse/row unit prices).
Housing markets continue to adjust to regulatory and government tightening as well as to higher mortgage rates. The speculative frenzy has cooled, and multiple bidding situations are no longer commonplace in Toronto and surrounding areas. Home prices in the detached single-family space will remain soft for some time, and residential markets are now balanced or favour buyers across the country. The hottest sector remains condos where buyers face limited supply.
Owing to the housing slowdown, a general slowing in the Canadian economy and significant trade uncertainty, the Bank of Canada has taken a very cautious stance. However, at their last meeting, monetary policymakers have signalled that a rate hike is coming, likely when they next meet on July 11.
Five-year fixed mortgage rates have already risen roughly 110 basis points, while rates for new variable mortgages rose by close to 40 basis points. Since the implementation of new mortgage standards, nonprice lending conditions for mortgages and home equity lines of credit have also tightened.
In the Bank of Canada’s recently released Financial System Review, the central bank analysts observed that the updated Guideline B-20, which took effect at the beginning of this year, “is dampening credit growth and improving the quality of new mortgage lending, especially in regions with the highest house prices. For example, because of the new mortgage interest rate stress test, the size of a 5-year, fixed-rate mortgage with a 25-year amortization that a median-income borrower in Canada can qualify for dropped by about $82,000 to $373,000. The stress test will have more significant effects in markets such as the Greater Toronto Area (GTA) and Greater Vancouver Area (GVA), where house prices are higher relative to incomes and low-ratio mortgages are more common.
Your Interest is my Only Interest
Apparently, as per the weather experts, March has a lot of snowfall and surprisingly so does April!
Hearing this on the radio gives you a wave of emotions: holy cow, oh great, I wonder how many vacation days I have left and when can I take down my Christmas lights.
Good news, those same weather experts are predicting a hot summer and you know what that means! Buy your fan(s) now before they run out and check out a pool, size and budget appropriate, for the backyard. So glad we have a compressor to blow that thing up every year; three rings take a lot of breath!
Normally by April you are thinking about moving because you need a bigger home, you need to down size, or its time to leave the basement of your family home.
Those weekends where you have little to do so you opt to go out, get a coffee and go to show homes and see how they decorate because the DIY on TV is all reruns. While you are there, you start to picture yourself living there and then begin to wonder, “can I do this?” Do I want to want to do all the landscaping, do I need a developed basement now or later, where are the schools? Maybe should I think about an already established community with lots of schools, trees, or place that my cat and I can live.
Working with your Dominion Lending Centres Mortgage Professional, we will review your options, your affordability, possible extra costs that you may have missed and finally, get you pre-approved!
Prequalified or rate hold, what is the difference?
Your broker has asked you for supporting documentation that will confirm your income, you do indeed have a down payment, and your debt is not more than you can handle along with possible new housing costs. This is so they can start the application to ensure the numbers are good and we can begin.
- Rate Hold – it is just that, a rate that lender is offering and, based on the application submitted to them, it shows the numbers are in alignment for them to hold a rate for you. This rate can be held anywhere from 90 – 120 days. Remember, they have reviewed the application submitted only and no other supporting documentation.
- Prequalified – it is just that, the lender has reviewed the supporting paperwork along with the application and is in happy to provide you with a prequalified letter stating they not only are they holding the rate for 90 – 120 days, depending on which lender, but you have met their criteria for lending.
o Although once you present you offer they may still have a few more items they want to check:
▪ You still working? – you will need a current paystub
▪ You still working at the same place?
▪ You didn’t buy a new car, right? Ugh!
▪ You didn’t get new furniture and finance it with the store, right? Ugh!
Ask your advisor about the DO’s and DON’Ts; this one single sheet of paper will make or break a deal!
Prequalified or rate hold, now you know the difference.
Your Interest is my Only Interest
By: Karren Panner
Since 2009 the prime lending rate has shifted from a high of 6% down to 2% range remaining fairly level for the past few years before rising to a present day level of 3.45%. During that time, lenders have offered consumers high discount variable mortgage as low as 1.2% when rates were at their lowest, to current rates of 2.45 (depending on the lender and if the mortgage is insured or not).
Historically the choice of a variable rate mortgage over a fixed term has allowed borrowers to save in interest costs.
I always recommend if my clients can qualify and it makes sense for their specific situation to choose variable only if they will take full advantage of the lower rate. By setting their payment to the equivalent of the 5 year fixed rate at the time, the difference in payment goes directly to principal pay down.
Every 10% increase in payment shaves three years off the amortization of a five-year term so every bit extra matters and can make a difference.
If your mortgage is maturing in the next 90-180 days, it is time to talk to your Dominion Lending Centres mortgage professional for tips for your variable rate mortgage that could save you thousands.
You may feel the pressure to lock in to a fixed rate after the recent increases in the prime lending rate. For some this may be an option. However, I have the same advice every time someone asks me this question: It depends on your situation and we need to do a review. Take the extra time to review the current rate, remaining term of the mortgage, the new offer, how that will impact payments and your plans for staying in your home, moving and/or if this is an investment property.
For example Amy and Jake have a current balance of $300,000 on their mortgage with a variable rate at Prime minus .80% (2.65%). Current payments set at $703 bi-weekly. The mortgage matures in 24 months but they are considering to lock in for a new five-year term offered at 3.34%. New payments would be $739. They love their condo but not sure if they will stay or move in two years or not.
After a review of their mortgage we offer a second option. Keep the remaining variable rate mortgage in place for the remaining two years. Set payments at 3.34% or $739 bi-weekly.
They decide on this second option because:
- In 24 months the savings on interest is $4,000 and their outstanding balance is $4,000 less than by staying in the fixed rate
- They won’t be locked into a mortgage for another five years
- If they choose to sell before the maturity date, the penalty on a variable mortgage is only three months interest
- In two years they can either choose to stay with the same lender or move to another lender without penalty
With this strategy they don’t have to feel pressured into locking in today and they can continue to take advantage of the lower variable rate.
So if you are in a variable rate mortgage and not sure what to do. Remember my tips for your variable rate mortgage that could save you thousands.
You can fine More Info about Variable rate mortgages at: http://ikomaurovski.com/general/variable-rate-mortgage/
Your Interest is my Only Interest
By: Pauline Tonkin
Banks and Credit unions are often grouped together into one category under “financial institutions”. While they may have several similarities in terms of financial service offerings, in the world of mortgages the banks and credit unions have little in common. As mortgage professionals, we work with both of them and are well versed in the differences between the two. To start with, we will first need to look at the definition of each institution.
A bank is a financial institution that accepts deposits, lends money and transfers funds. They are listed as public, licensed corporations and have declared earnings that are paid to stockholders. A key point: they are regulated by the federal government-Office of the Superintendent of Financial Institutions.
A CREDIT UNION
Credit unions also deposit, lend and transfer funds. However, after that, we run into some differences between the two. Credit Unions have an elected Board of Directors that consist of elected members from their community. They are local and community-based organizations and unlike the banks, they are not federally but Provincially regulated.
Now that we have to clear definitions, we are going to focus on just one of the differences between the two: Who they are regulated by. Credit Unions are not regulated by OSFI therefore, they are not always subject to the mortgage lending rules imposed by the federal government (at least not right away). Take for example the recent changes to the B-20 guidelines. Since Credit Unions are not classified as a Federally Regulated Institution, they currently do not need to comply with the implications listed in the new rule changes. What does this mean for the consumer? Let’s walk through an example.
Say you have a dual income family with a combined annual income of $85,000. The current value of their home is listed at $700,000 and they have a mortgage balance of $415,000. Lenders have agreed to refinance to a maximum amount of 80% LTV (loan to value). That gives us a total of $560,000 minus the existing mortgage and you have $145,000 available provided you qualify to borrow it.
Now let’s put the Bank and the Credit Union toe-to-toe:
Difference between Bank and Credit Union when Refinancing
That means you are able to qualify for $105,000 LESS with the bank when refinancing!
Take the same scenario listed above and let’s apply it to purchasing:
Difference between Bank and Credit Union when Purchasing a Home
Again, you have a reduced amount of $105,000 towards the purchase of your new home.
A few disadvantages to Credit Unions that you should be aware of:
- You cannot port your mortgage out of province
- With the introduction of the new B-20 guidelines, there has been an increased demand for Credit Unions. This increasing demand has led to higher rates and sometimes these are not the most competitive for the client. Working with a broker can ensure that you receive the best rate and product for your situation.
- Credit Unions also have a typically lower debt qualification ratio for how much house you can afford and how much debt you can carry
With those considerations, there are limitations to what Credit Unions are able to offer you. As always, working with a Dominion Lending Centres mortgage professional is one of the best ways to ensure you are not only getting the sharpest rate, but also the best product for you and your unique situation. Give me a call today-I would love to talk to you about your options and how I can help you.
Your Interest is my Only Interest
For more info please visit http://ikomaurovski.com/