Canadian home prices continue to re-accelerate in September
October 25, 2021
Home sales recorded over Canadian MLS® Systems were up 0.9% between August and September 2021, marking the first monthover-month increase since March.
The actual (not seasonally adjusted) number of transactions in September 2021 was down 17.5% on a year-over-year basis, from the record for that month set last year. That said, it was still the second-highest ever September sales figure by a sizeable margin.
“September provided another month’s worth of evidence from all across Canada that housing market conditions are stabilizing near current levels,” said Cliff Stevenson, Chair of CREA. “In some ways that comes as a relief given the volatility of the last year-and-a-half, but the issue is that demand/supply conditions are stabilizing in a place that very few people are happy about. There is still a lot of demand chasing an increasingly scarce number of listings, so this market remains very challenging. That’s why your best bet is to consult with your local REALTOR® for information and guidance about navigating the current market,” continued Stevenson.
Bank of Canada maintains policy rate, continues forward guidance and current pace of quantitative easing
September 13, 2021
The Bank of Canada on September 8th held its target for the overnight rate at the effective lower bound of ¼ percent, with the Bank Rate at ½ percent and the deposit rate at ¼ percent. The Bank is maintaining its extraordinary forward guidance on the path for the overnight rate. This is reinforced and supplemented by the Bank’s quantitative easing (QE) program, which is being maintained at a target pace of $2 billion per week.
The global economic recovery continued through the second quarter, led by strong US growth, and had solid momentum heading into the third quarter. However, supply chain disruptions are restraining activity in some sectors and rising cases of COVID-19 in many regions pose a risk to the strength of the global recovery. Financial conditions remain highly accommodative.
In Canada, GDP contracted by about 1 percent in the second quarter, weaker than anticipated in the Bank’s July Monetary Policy Report (MPR). This largely reflects a contraction in exports, due in part to supply chain disruptions, especially in the auto sector. Housing market activity pulled back from recent high levels, largely as expected. Consumption, business investment and government spending all contributed positively to growth, with domestic demand growing at more than 3 percent. Employment rebounded through June and July, with hard-to-distance sectors hiring as public health restrictions eased. This is reducing unevenness in the labour market, although considerable slack remains and some groups – particularly low-wage workers – are still disproportionately affected. The Bank continues to expect the economy to strengthen in the second half of 2021, although the fourth wave of COVID-19 infections and ongoing supply bottlenecks could weigh on the recovery.
CPI inflation remains above 3 percent as expected, boosted by base-year effects, gasoline prices, and pandemic-related supply bottlenecks. These factors pushing up inflation are expected to be transitory, but their persistence and magnitude are uncertain and will be monitored closely. Wage increases have been moderate to date, and medium-term inflation expectations remain well-anchored. Core measures of inflation have risen, but by less than the CPI.
The Governing Council judges that the Canadian economy still has considerable excess capacity, and that the recovery continues to require extraordinary monetary policy support. [The Bank of Canada] remains committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In the Bank’s July projection, this happens in the second half of 2022. The Bank's QE program continues to reinforce this commitment and keep interest rates low across the yield curve. Decisions regarding future adjustments to the pace of net bond purchases will be guided by Governing Council's ongoing assessment of the strength and durability of the recovery. [The Bank of Canada] will continue to provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation objective.
The next scheduled date for announcing the overnight rate target is October 27, 2021. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR at the same time.
Bank of Canada lowers overnight rate target to 1 ¼ percent
March 4, 2020
The Bank of Canada today lowered its target for the overnight rate by 50 basis points to 1 ¼ percent. The Bank Rate is correspondingly 1 ½ percent and the deposit rate is 1 percent.
While Canada’s economy has been operating close to potential with inflation on target, the COVID-19 virus is a material negative shock to the Canadian and global outlooks, and monetary and fiscal authorities are responding.
Before the outbreak, the global economy was showing signs of stabilizing, as the Bank had projected in its January Monetary Policy Report (MPR). However, COVID-19 represents a significant health threat to people in a growing number of countries. In consequence, business activity in some regions has fallen sharply and supply chains have been disrupted. This has pulled down commodity prices and the Canadian dollar has depreciated. Global markets are reacting to the spread of the virus by repricing risk across a broad set of assets, making financial conditions less accommodative. It is likely that as the virus spreads, business and consumer confidence will deteriorate, further depressing activity.
Bank of Canada maintains overnight rate target at 1 ¾ percent
January 24, 2020
The Bank of Canada today maintained its target for the overnight rate at 1 ¾ percent. The Bank Rate is correspondingly 2 percent and the deposit rate is 1 ½ percent.
The global economy is showing signs of stabilization, and some recent trade developments have been positive. However, there remains a high degree of uncertainty and geopolitical tensions have re-emerged, with tragic consequences. The Canadian economy has been resilient but indicators since the October Monetary Policy Report(MPR) have been mixed.
Data for Canada indicate that growth in the near term will be weaker, and the output gap wider, than the Bank projected in October. The Bank now estimates growth of 0.3 percent in the fourth quarter of 2019 and 1.3 percent in the first quarter of 2020. Exports fell in late 2019, and business investment appears to have weakened after a strong third quarter. Job creation has slowed and indicators of consumer confidence and spending have been unexpectedly soft. In contrast, residential investment was robust through most of 2019, moderating to a still-solid pace in the fourth quarter.
First-Time Home Buyer Incentive now available
September 4, 2019
The First-Time Home Buyer Incentive helps qualified first-time homebuyers reduce their monthly mortgage payments without adding to their financial burdens.
The First-Time Home Buyer Incentive is a shared-equity mortgage with the Government of Canada. It offers:
- 5% or 10% for a first-time buyer’s purchase of a newly constructed home
- 5% for a first-time buyer’s purchase of a resale (existing) home
- 5% for a first-time buyer’s purchase of a new or resale mobile/manufactured home
The Incentive’s shared-equity mortgage is one where the government has a shared investment in the home. As a result, the government shares in both the upside and downside of the property value.
By obtaining the Incentive, the borrower may not have to save as much of a down payment to be able to afford the payments associated with the mortgage. The effect of the larger down payment is a smaller mortgage, and, ultimately, lower monthly costs.
The homebuyer will still have to repay the Incentive based on the property’s fair market value at the time of repayment. If a homebuyer received a 5% Incentive, they would repay 5% of the home’s value at repayment. If a homebuyer received a 10% Incentive, they would repay 10% of the home’s value at repayment.
The homebuyer must repay the Incentive after 25 years, or when the property is sold, whichever comes first. The homebuyer can also repay the Incentive in full any time before, without a pre-payment penalty.
March 22, 2019
To help make homeownership more affordable for first-time home buyers, Budget 2019 introduces the First-Time Home Buyer Incentive.
- The Incentive would allow eligible first-time home buyers who have the minimum down payment for an insured mortgage to apply to finance a portion of their home purchase through a shared equity mortgage with Canada Mortgage and Housing Corporation (CMHC).
- It is expected that approximately 100,000 first-time home buyers would be able to benefit from the Incentive over the next three years.
- Since no ongoing payments would be required with the Incentive, Canadian families would have lower monthly mortgage payments. For example, if a borrower purchases a new $400,000 home with a 5 per cent down payment and a 10 per cent CMHC shared equity mortgage ($40,000), the borrower’s total mortgage size would be reduced from $380,000 to $340,000, reducing the borrower’s monthly mortgage costs by as much as $228 per month. Terms and conditions for the First-Time Home Buyer Incentive would be released by CMHC.
- CMHC would offer qualified first-time home buyers a 10 per cent shared equity mortgage for a newly constructed home or a 5 per cent shared equity mortgage for an existing home. This larger shared equity mortgage for newly constructed homes could help encourage the home construction needed to address some of the housing supply shortages in Canada, particularly in our largest cities.
- The First-Time Home Buyer Incentive would include eligibility criteria to ensure that the program helps those with legitimate needs while ensuring that participants are able to afford the homes they purchase. The Incentive would be available to first-time home buyers with household incomes under $120,000 per year. At the same time, participants’ insured mortgage and the Incentive amount cannot be greater than four times the participants’ annual household incomes.
Budget 2019 also proposes to increase the Home Buyers’ Plan withdrawal limit from $25,000 to $35,000, providing first-time home buyers with greater access to their Registered Retirement Savings Plan savings to buy a home.
The Bank of Canada today maintained its target for the overnight rate at 1 ¾ per cent
January 9, 2019
The Bank Rate is correspondingly 2 per cent and the deposit rate is 1 ½ per cent. The global economic expansion continues to moderate, with growth forecast to slow to 3.4 per cent in 2019 from 3.7 per cent in 2018. In particular, growth in the United States remains solid but is expected to slow to a more sustainable pace through 2019. However, there are increasing signs that the US-China trade conflict is weighing on global demand and commodity prices.
Global benchmark prices for oil have been about 25 per cent lower than assumed in the October Monetary Policy Report (MPR). The lower prices primarily reflect sustained increases in US oil supply and, more recently, increased worries about global demand. These worries among market participants have also been reflected in bond and equity markets.
The drop in global oil prices has a material impact on the Canadian outlook, resulting in lower terms of trade and national income. As well, transportation constraints and rising production have combined to push up oil inventories in the west and exert even more downward pressure on Canadian benchmark prices. While price differentials have narrowed in recent weeks following announced mandatory production cuts in Alberta, investment in Canada’s oil sector is projected to weaken further.
The Bank of Canada increased its target for the overnight rate to 1 ¾ per cent
October 26, 2018
The global economic outlook remains solid. The US economy is especially robust and is expected to moderate over the projection horizon, as forecast in the Bank’s July Monetary Policy Report (MPR). The new US-Mexico-Canada Agreement (USMCA) will reduce trade policy uncertainty in North America, which has been an important curb on business confidence and investment. However, trade conflict, particularly between the United States and China, is weighing on global growth and commodity prices. Financial market volatility has resurfaced and some emerging markets are under stress but, overall, global financial conditions remain accommodative.
The Canadian economy continues to operate close to its potential and the composition of growth is more balanced. Despite some quarterly fluctuations, growth is expected to average about 2 per cent over the second half of 2018. Real GDP is projected to grow by 2.1 per cent this year and next before slowing to 1.9 per cent in 2020.
The projections for business investment and exports have been revised up, reflecting the USMCA and the recently-approved liquid natural gas project in British Columbia. Still, investment and exports will be dampened by the recent decline in commodity prices, as well as ongoing competitiveness challenges and limited transportation capacity. The Bank will be monitoring the extent to which the USMCA leads to more confidence and business investment in Canada.
Household spending is expected to continue growing at a healthy pace, underpinned by solid employment income growth. Households are adjusting their spending as expected in response to higher interest rates and housing market policies. In this context, household credit growth continues to moderate and housing activity across Canada is stabilizing. As a result, household vulnerabilities are edging lower in a number of respects, although they remain elevated.
CPI inflation dropped to 2.2 per cent in September, in large part because the summer spike in airfares was reversed. Other temporary factors pushing up inflation, such as past increases in gasoline prices and minimum wages, should fade in early 2019. Inflation is then expected to remain close to the 2 per cent target through the end of 2020. The Bank’s core measures of inflation all remain around 2 per cent, consistent with an economy that is operating at capacity. Wage growth remains moderate, although it is projected to pick up in the coming quarters, consistent with the Bank’s latest Business Outlook Survey.
Given all of these factors, Governing Council agrees that the policy interest rate will need to rise to a neutral stance to achieve the inflation target. In determining the appropriate pace of rate increases, Governing Council will continue to take into account how the economy is adjusting to higher interest rates, given the elevated level of household debt. In addition, we will pay close attention to global trade policy developments and their implications for the inflation outlook.
Zero down mortgages, pros and cons
October 10, 2018
The dreaded down payment often keeps young Canadians from being able to afford their first home for years and with the price of houses rising in many of the major cities, even 5% of the purchases price is typically a larger number than most people are comfortable with.
So when you hear about the possibility of a no down payment mortgage, it’s completely understandable that you’ll definitely want to consider is as an option. But the problem is that a no down payment mortgage, while it might seem like a great idea in theory, technically it’s not a great idea for the average person looking to purchase a home. Here’s everything you need to know about the no down payment mortgage, this way you’ll be able to make the best choice for you and your finances.
Should you get a mortgage with no down payment?
A no down payment mortgage sounds like a great idea, especially if you’re currently giving away a large chuck of your income to rent an apartment while trying to save so you can purchase your first home. But before you’re seduced by the idea you need to decide whether or not this financing option is the best strategy for you at this point in your life. There are a few conditions that should be met before you should consider a no down payment home loan:
- A stable income
- Above average credit
- Being able to afford both a monthly mortgage payment and other life expenses
- Being able to financially handle a decrease or loss of income
If all of these conditions describe your current financial situation then a no down payment mortgage is in fact a good idea and you could potentially seriously benefit from it, just remember that while you might think you can handle it a lender still needs to decide whether or not they agree.
Unfortunately if none of the above conditions describes you and your current financial situation then a no down payment mortgage is definitely not a good idea for you right now, we suggest you continue to save while rethinking your current spending and saving strategies.
Where should I get my down payment from?
Purchasing a home with no down payment saved doesn’t mean that you don’t have to make a down payment; it simply means that you’re not using your own hard earned and saved cash to pay for the down payment. It means you’re going to borrow your down payment (at least 5% in Canada), which in return means you’re taking on even more debt. This is why it’s important that you’re in good financial standing before you take on even more debt than is technically necessary.
Here’s the thing, the government doesn’t allow Canadians to borrow their down payment from their mortgage lender if their lender is a bank or federal trust company. So if you’re planning on not saving up for a down payment and want to borrow it instead, you’ll need to find an alternate lender. There are a few different ways you can get a down payment without having to save for it:
- Line of credit. But not from the same bank you’re getting your mortgage from.
- Personal Loan. This could potentially be a good option for someone who is in great financial standing but doesn’t want to wait any longer to purchase a house.
- Credit card. This is probably the worst option as charging at least 5% of the purchase price of your home could put you into credit card debt for years.
- Borrowing from a family member. If you have a generous family member then you could potentially borrow your down payment from them.
- Government programs. Depending on what province you live in there are special government programs that can provide lower income families with down payment assistance.
There are obviously a few major issues with borrowing your down payment and these absolutely need to be carefully considered before you make any final decisions. If you borrow your down payment you’re taking on even more debt, this could potentially be extremely financially draining for years. Also the interest rates associated with borrowing your down payment can be very high, sometimes higher than the interest rate associated with your actual mortgage.
The Bottom line
If you’re currently trying to save up for a down payment on a home and are having trouble with how long it’s taking then now is the time to look into the possibility of purchasing a house with no down payment. Deciding early on is a great idea as it will allow you to take your time and make all the necessary plans and take all the appropriate steps.
Just remember that purchasing a house without any cash on hand is a serious decision and that qualifying for a mortgage and another loan to cover your down payment doesn’t mean that it’s the best option for you, take your time and consider all scenarios before you take the plunge.
Bank of Canada raises overnight rate target to 1 ½ per cent
July 12, 2018
The Bank of Canada today increased its target for the overnight rate to 1 ½ per cent.
The Bank Rate is correspondingly 1 ¾ per cent and the deposit rate is 1 ¼ per cent. The Bank expects the global economy to grow by about 3 ¾ per cent in 2018 and 3 ½ per cent in 2019, in line with the April Monetary Policy Report (MPR). The US economy is proving stronger than expected, reinforcing market expectations of higher policy rates and pushing up the US dollar. This is contributing to financial stresses in some emerging market economies. Meanwhile, oil prices have risen. Yet, the Canadian dollar is lower, reflecting broad-based US dollar strength and concerns about trade actions. The possibility of more trade protectionism is the most important threat to global prospects.
Canada’s economy continues to operate close to its capacity and the composition of growth is shifting. Temporary factors are causing volatility in quarterly growth rates: the Bank projects a pick-up to 2.8 per cent in the second quarter and a moderation to 1.5 per cent in the third. Household spending is being dampened by higher interest rates and tighter mortgage lending guidelines. Recent data suggest housing markets are beginning to stabilize following a weak start to 2018. Meanwhile, exports are being buoyed by strong global demand and higher commodity prices. Business investment is growing in response to solid demand growth and capacity pressures, although trade tensions are weighing on investment in some sectors. Overall, the Bank still expects average growth of close to 2 per cent over 2018-2020.
Stress Test Best Practices Tool Kit
April 25, 2018
With the new Office of the Superintendent of Financial Institutions stress test rules firmly in place since January, Canadian homebuyers have learned they need to arm themselves with practical information on how they can ensure they are “stress-test ready”.
The following is a guide and best practices tool kit for those about to embark on securing their new or next mortgage:
Make a financial plan
Any time a big purchase is at stake, laying out a financial plan is always the best first step to take. By creating a plan, home buyers can protect themselves from increased interest rates and ensure they are staying on budget.
Have a contingency fund
Without question and now more than ever, home buyers need to establish contingency funds. It’s incredibly important to have funds set aside when unexpected costs such as property repairs arise. An established contingency fund also looks good to financial lenders.
Pay off debts and increase downpayment
The most important tool in the Best Practices Tool Kit is to pay off debts as quickly as possible and maximize your down payment. If you already have a mortgage, increase the frequency of payments by taking advantage of what the financial institution offers such as accelerated bi-weekly payments.
Broaden search parameters
Although you may have an ideal neighbourhood in mind, it is important to also consider broadening those search parameters. Often there are homes in other neighborhoods that could be a perfect choice if you are willing to commute a little longer.
I’m here to help you
I can help you to navigate confusion surrounding the stress test. Ultimately, being stress test ready means being ready for future increases in rate so that you can afford your next home comfortably on your budget.
Bank of Canada maintains overnight rate target at 1 1/4 per cent
March 7, 2018
The Bank of Canada today maintained its target for the overnight rate at 1 1/4 per cent. The Bank Rate is correspondingly 1 1/2 per cent and the deposit rate is 1 per cent. Global growth remains solid and broad-based. In the United States, new government spending and previously-announced tax cuts are anticipated to boost growth in 2018 and 2019. However, trade policy developments are an important and growing source of uncertainty for the global and Canadian outlooks.
In Canada, the national accounts data show that the economy grew by 3 per cent in 2017, bringing the level of real GDP in line with the projection in the Bank’s January MonetaryPolicy Report (MPR). In the fourth quarter, GDP growth was slower than expected, largely due to higher imports, while exports made only a partial recovery from their third-quarter decline. The gain in imports mainly reflected stronger business investment, which adds to the economy’s capacity.
Strong housing data in late 2017, and softer data at the beginning of this year, indicate some pulling forward of demand ahead of new mortgage guidelines and other policy measures. It will take some time to fully assess the impact of these, as well as recently announced provincial measures, on housing demand and prices. More broadly, the Bank continues to monitor the economy’s sensitivity to higher interest rates. Notably, household credit growth has decelerated for three consecutive months. The implications of the recent federal budget for the outlook for growth and inflation will be incorporated in the Bank’s April projection.
Inflation is running close to the 2 per cent target and the Bank’s core measures of inflation have edged up, consistent with an economy operating near capacity. Wage growth has firmed, but remains lower than would be typical in an economy with no labour market slack. Inflation is fluctuating because of temporary factors related to gasoline, electricity, and minimum wages.
In this context, Governing Council maintained the target for the overnight rate at 1 1/4 per cent. While the economic outlook is expected to warrant higher interest rates over time, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target. Governing Council will remain cautious in considering future policy adjustments, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.
2018 CMHC Prospective Home Buyers Survey
February 7, 2018
In October 2017, CMHC surveyed 2,507 prospective home buyers on-line. Respondents were all prime household decision-makers who intend to purchase a new home within the next two years, including approximately 1,500 First-Time Buyers, 500 current owners, and 500 previous owners.
The survey results highlight that:
• First-Time Buyers and Previous Owners share the same top motivator to purchase a home: they want to stop renting. Improved accessibility (physical obstacles and barriers) and investment opportunity were also noted as top motivators across all groups. Changes to mortgage regulations and concerns about possible future interest rate increases were not among the top motivators.
• Over four-in-ten First-Time Buyers and Previous Owners say they would delay their home purchase if they were not able to find their ideal home, with a fairly similar proportion saying they would be willing to compromise on the size of the home and location.
• The majority of future home buyers intend to obtain a mortgage to finance their home purchase, with First-Time Buyers showing higher incidence compared to Previous Owners and Current Owners.
• Across all future home buyers groups, more than six-in-ten say they are likely to have a financial buffer in case their expenses change in the future. Furthermore, the majority of future home buyers, especially Current Owners, agree that they feel confident they have the necessary tools and information to manage their mortgage and debt load.
• Among all groups, the two most common actions completed one to two years prior to the purchase of a home were saving for a down payment and determining what type of home to buy. On the other hand, in the last three months before purchasing, about two-in ten of prospective buyers pre-qualify for a mortgage.
• About one-in-four prospective home buyers stated that they would be very likely to consider delaying their purchase in the event of an increase in interest rates.
Bank of Canada increases overnight rate target to 1 1/4 per cent
January 17, 2018
The Bank of Canada today increased its target for the overnight rate to 1 1/4 per cent. The Bank Rate is correspondingly 1 1/2 per cent and the deposit rate is 1 per cent. Recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity. However, uncertainty surrounding the future of the North American Free Trade Agreement (NAFTA) is clouding the economic outlook.
The global economy continues to strengthen, with growth expected to average 3 1/2 per cent over the projection horizon. Growth in advanced economies is projected to be stronger than in the Bank’s October Monetary Policy Report(MPR). In particular, there are signs of increasing momentum in the US economy, which will be boosted further by recent tax changes. Global commodity prices are higher, although the benefits to Canada are being diluted by wider spreads between benchmark world and Canadian oil prices.
In Canada, real GDP growth is expected to slow to 2.2 per cent in 2018 and 1.6 per cent in 2019, following an estimated 3.0 per cent in 2017. Growth is expected to remain above potential through the first quarter of 2018 and then slow to a rate close to potential for the rest of the projection horizon.
Time for a mortgage review
January 15, 2018
The start of a new year almost always inspires individuals to commit to resolutions that will improve the quality of life. And in the spirit of the new year, new you mantra, a mortgage review reminder is aptly timed.
Many mortgage holders underestimate the value of proactively reviewing their finances and in particular their mortgages. Yet just like annual health checkups, annual mortgage reviews are every bit as important as reviews can sometimes result in hundreds or even thousands of dollars in savings. They also are very useful when trying to determine if the mortgage plan still fits one’s circumstances.
Reviewing a mortgage allows the holder to look at several factors that include reviewing the mortgage term, the monthly payments and even the insurance coverage on the loan. The review can include looking at individual credit and the value of your home. As a mortgage broker, I can discuss the impacts on your long term finances if we create a plan that that could potentially include making increased monthly payments or contributing a lump sum.
With the new year underway and Canadians’ buying power being impacted due to new stress test rules that came into effect as of January 1, home owners and buyers need to seek the advice of a licensed mortgage professionals, such as myself. I can expedite the review process with a simple check of current rates and fees for a refinance and the terms of the current loan.
Contact me today to start the conversation and ultimately find the best mortgage for your needs.
Tips to take charge of your finances and live within your means
November 13, 2017
Are you stressed about money? Being in control of your spending is one way of reducing stress in your life.
According to Statistics Canada, most of us are burdened with high levels of household debt. Simply put, too many people are spending more than they earn. They are saving less and not saving enough for retirement. At the same time, people are living longer.
Living within your means is not always easy, especially when money is tight, but it is the best way to avoid excessive debt. A heavy debt load makes you vulnerable if you lose your job, have unexpected expenses or interest rates go up on your loans.
Here is how you can start:
Make a budget. Having a budget that lays out sources of income and monthly expenses can help you commit to a spending plan.
Know the difference between your wants and needs. Put your needs first; your wants can wait.
Choose your credit card wisely. Pay off the balance in full each month so you can build a good credit history and avoid high interest charges.
Think ahead to retirement. Canadians are living to an average age of 86. If you retire at 65, that could mean you are living off savings for 21 years or more. Start saving as soon as you can.
Find more tips from the Financial Consumer Agency of Canada online at canada.ca/it-pays-to-know.
OSFI tightens mortgage rules
October 25, 2017
The Office of the Superintendent of Financial Institutions Canada (OSFI) published the final version of Guideline B-20 − Residential Mortgage Underwriting Practices and Procedures. The revised Guideline, which comes into effect on January 1, 2018, applies to all federally regulated financial institutions.
The changes to Guideline B-20 reinforce OSFI’s expectation that federally regulated mortgage lenders remain vigilant in their mortgage underwriting practices. The final Guideline focuses on the minimum qualifying rate for uninsured mortgages, expectations around loan-to-value (LTV) frameworks and limits, and restrictions to transactions designed to circumvent those LTV limits.
OSFI is setting a new minimum qualifying rate, or “stress test,” for uninsured mortgages.
- Guideline B-20 now requires the minimum qualifying rate for uninsured mortgages to be the greater of the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate +2%.
OSFI is requiring lenders to enhance their loan-to-value (LTV) measurement and limits so they will be dynamic and responsive to risk.
- Under the final Guideline, federally regulated financial institutions must establish and adhere to appropriate LTV ratio limits that are reflective of risk and are updated as housing markets and the economic environment evolve.
OSFI is placing restrictions on certain lending arrangements that are designed, or appear designed to circumvent LTV limits.
- A federally regulated financial institution is prohibited from arranging with another lender a mortgage, or a combination of a mortgage and other lending products, in any form that circumvents the institution’s maximum LTV ratio or other limits in its residential mortgage underwriting policy, or any requirements established by law.
To find out how this will affect you, please contact me at anytime.
A Practical Guide to Getting a 2nd Mortgage in Ontario
October 1, 2017
Taking a second mortgage in Ontario can allow home owners to use their equity without any effects on the first one. If the first mortgage has a large pre-payment penalty or a low rate, taking another loan can be a major advantage. For those who are self-employed, those with poor credit, or those in need of fast cash, it can be easier to qualify for your second mortgage than your first.
Common Uses of a 2nd Mortgage
- Home Renovations
- Consolidate credit cards
- Pay off debts
- Pay off property tax or loan arrears
- Access equity in the form of cash
- Unexpected expenses / emergencies
- Purchasing a new car
- Renovations to your house
- Various investments
- Paying for an investment property
- For debt consolidation
- For an expensive luxury vacation
Debt consolidation is the most common reason that people choose to take out a second mortgage. Taking out a loan against your home will let you pay off other financial obligations allowing you to focus on repaying a single debt rather than many. This can make payments much easier to manage.
Consolidating your debts into a second mortgage can be extremely beneficial for eliminating outstanding debts that have higher interest rates, as it will allow you to effectively cut those interest rates down to match those for the new mortgage.
Second Mortgage Rates in Ontario
Due to the fact that a second mortgage is much riskier for the lender, the interest rates on your 2nd mortgage will typically be higher than the first to reflect this added risk. However, it will be easier to negotiate for lower rates if you are currently in good financial standing. This includes having a good credit rating, owning a higher percentage of equity in your home, and being able to demonstrate reliable income to lenders.
In Ontario, usually the rates for a 2nd mortgage vary in the range from 4.99 percent to 14.99 percent. The rate depends on factors including marketability, location, and credit.
Finding a Lender & Qualifying for a Second Mortgage
Banks and other large financial institutions will often be averse to taking on the risk of a 2nd mortgage, so being accepted for a loan application from a bank may prove more difficult. Private lenders may be more inclined to take on this risk, however they may present you with a higher interest rate as a result.
Major banks often offer what's called a Home Equity Line of Credit (HELOC). This functions in the same way as a second mortgage in that it allows you to access the value of your home's equity, however unlike a mortgage a home equity line of credit functions as a revolving debt. This means that rather than having a fixed term and monthly payments as you would with a typical mortgage or loan. Instead you will instead be able to utilize the credit as you see fit on an ongoing basis and make payments on it as you would a typical line of credit.
It's important to "shop around" and compare options from various lenders to ensure you get the best possible rate. This is where consulting a broker comes in handy. In addition to their market knowledge, mortgage broker will have access to many different lenders which means that they can find you the best possible rate.
A broker can also help you plan your 2nd mortgage to ensure that the details of the loan will work for you and your financial situation. The most essential information to consider when planning a 2nd mortgage are loan to value rate, the payments, the amortization term, and the exit strategy.
The 2nd mortgage term refers to the length of time for your loan. In order to use the 2nd mortgage to your advantage you'll have to find the right term length for you. In general, the 2nd mortgage is taken on a term shorter than your first. A common format for a second mortgage is a 1 year term with interest only payments.
Want More Information on Second Mortgages in Ontario?
Contact ecMORTGAGE today for expert advice on getting a second mortgage in Ontario.
Things To Know Before Taking Out a Second Mortgage in Canada
September 29, 2017
Buying a home or condo is a big step for many individuals and couples. As years go on, your house or condo might need repairs or improvements done, or you might find yourself in financial difficulties. One option people consider to help with these situations is taking out a second mortgage on their house or condo. Before doing this, you want to make sure you know exactly what you are doing. Below is a guide to what you should know before taking out a second mortgage in Canada
When you are considering taking out a second mortgage, the most important thing to consider is whether or not you can afford to make these monthly payment. The Canadian governments made changes to the first and second mortgage laws. Before the law changes, mortgages could be taking out with a 40 year payment plan. Now the maximum amount of years you can take a mortgage out for is 25 years. This means your payments are higher.
Second Mortgages in Canada come with a higher interest rate. These interest rates are determined by your bank. Even though there are guidelines set by the Canadian government on how high interest rates can be, second mortgage interest rates are always higher than your first mortgage. If you have bad or so so credit, your interest rates will be twice and sometimes three times as much as your first mortgage.
Many financial advisors will advise against a second mortgage especially if you are doing this for financial hardship. Some people take out a second mortgage on their house or condo, and fall deeper into financial hardship. When this happens, your first mortgage takes priority, and many individuals and couples end up having their house foreclosed on. A person can only be three months behind on their second mortgage before the bank is able to take control of the property.
The best thing to do when you are considering taking out a second mortgage is go ever your finance several times beforehand. Some people create a spreadsheet or meet with a financial advisor to go over there financial needs. This allows you to only take out the exact amount you need. It’s important to keep in mind the less amount of money you take out the less you have to pay back. Also, the lower mortgage loans come with lower interest rates.
Because of all of the mortgage law changes by the Canadian government, there are several things you want to consider before you take out a second mortgage in Canada. It’s a good idea to meet with a financial advisor before making the final decision. Keep in mind the higher interest rates, as well as, the limited amount the loan can be taken out for. You also want to consider what you will do if you fall into a situation where you can’t pay your mortgage payment. By considering these simple things, you will be able to make an informed decision on taking out a second mortgage in Canada.
First-time Buyers Mortgage Guide
September 27, 2017
Deciding to purchase your first home is can be one of the most exciting and significant decisions you’ll ever make in your lifetime. However, buying your first home can be quite daunting and stressful. Several factors must be considered before you buy your dream home. The most important thing to do first is secure your mortgage.
There are several types of mortgage products and choosing the right one can feel overwhelming. Hiring ecMORTGAGE advisor can ease the process, especially for first time home-buyers. ecMORTGAGE advisor will help you by offering the right advice and ensuring the application process is simple, fast and accurate.
If you’re ready to start shopping for a mortgage, we’ve compiled a list of things to consider as you look around.
The Size Of Your Down Payment
The size of your down payment affects the type and rate of mortgage you will qualify for. The larger your deposit, the more options you’ll have.
A common down payment is 20%. For example, you would provide a $20,000 down payment for a home that costs $100,000. However, you do not always require twenty percent down payment to buy a home. It’s important to note that with a down payment amount of less than 20%, you may be subject to private mortgage insurance (PMI). We can help you decide the right down payment amount for you.
Your Credit Score
Your current credit score is the primary qualifier as you apply for a mortgage. With a good credit score, you’ll have access to the entire list of mortgage options. Lower credit scores reduce the available types and rates of mortgages. It’s a good idea to know your credit score before applying for a mortgage.
Current Mortgage Rates
First-time home buyers have access to several types mortgage products. To help narrow down which options are best for you, find information on the current mortgage rates. You can find current mortgage rates with a quick online search but a mortgage expert can help you make sense of numbers and explain the options in greater detail.
A mortgage will be your financial responsibility for years to come, and is one of the most crucial decisions you will make during the home buying process. Working with a mortgage expert can help you find the right financing options for your home.
We will help you choose a lender with the right term, the best rate, and the lowest closing costs. We’ll work quickly and efficiently to get you into your new home as soon as possible.
Re-financing may be an option
September 25, 2017
The rapid increase in housing values over the past 2-3 years or so has created huge equity in most cases on a property purchase prior to, say, 2014. That appreciation has now made re-financing both feasible and sensible with a goal of taking out accumulated high-interest debt and replacing with today’s historically low mortgage interest rates.
If you have equity in your home yet can’t seem to manage your debt payments, re-financing may be an option. With credit card interest rates often pushing 20% or more,and unsecured LOCs (Lines of credit) in the 7%+ range and higher, paying off high interest debts makes good sense.
With a re-finance, specifically you are increasing the amount of your mortgage to pay off high-interest debt. Your actual new mortgage payment may or may not increase, depending on a number of factors. For example, you may incur a penalty to break your existing mortgage if you are refinancing mid-term, but your overall monthly payments should decrease since you would be paying off the re-financed debt at a much lower interest rate. This in turn should save you thousands of dollars in interest in the long run.
Despite record low interest rates, some new home buyers are finding difficulties qualifying for a mortgage due to new Federal Government rule changes announced late last year, such as down payments, and amortization periods. Without at least 20% downpayment, for example, CMHC mortgage insurance would be required and the conditions under which mortgage financing could be arranged if the purchasers do not qualify for CMHC coverage (because of low credit scores for example) would make it difficult to impossible. These changes have also affected existing mortgage holders who may want to refinance to get a lower rate, so bearing in mind that in a re-financing deal, the maximum financed amount cannot exceed 80%, this has to be taken into account. So ensure that at least you are getting rid of the credit cards bearing the highest interest rate.
Some reasons to consider a refinance:
- Decrease your overall monthly debt payments by using your equity to pay off those high-interest credit cards or unsecured loans, which can help you better manage your budget.
- Refinance to purchase another property. Using the existing equity in your home can be a great way to buy a rental property, for example, which, if done right, can also make the interest you pay tax deductible.
- You could also take out some of the equity for investment purposes.
- You may want to refinance to renovate, e.g. new bathroom/kitchen installation, landscaping, swimming pool/spa installation etc.
- Helping your children to purchase their first home. In today’s tough housing market, many millennials are precluded from purchasing their first home because of insufficient down payment.
This is where a Mortgage Broker can help out. Since the banks usually have just one product to sell – namely their own – this may prove difficult as banks will not usually undertake any transaction involving risk. A Mortgage Broker, on the other hand, works with as many as 40 or more lenders from coast to coast, thus offering clients flexibility and a host of choices to meet their requirements. If I can be of help in this regard, please do not hesitate to contact me.
September 21, 2017
Financial Plan is the range of main areas developed in the life of a family, whether it is a family of newcomers or old-timers in Canada. Sooner or later this plan comes into the mind of any family. That is why I want to introduce to you basic trends of how to build a financial plan, so that you can decide on your priorities, what you do first and what second. When we move to a new country, we cannot say that we know everything here. We learn; we absorb new information. Not everything that we hear from our friends or in school is right; depending on circumstances, information can be wrong. This Internet site is created for you to be able to get the right information, analyze it, make a conclusion and start making your own financial plan. I can always answer your questions, talk individually with your family and help you to make contracts for your specific situation.
- Pension program
- Educational benefits for your children
- Purchase of real estate
- Emergency fund
- Savings for personal needs
Those are the priorities, which are created and controlled by the desires and resources of the family. Only the family decides: what, in what order and when needs to be done.
Retirement Savings is retirement program, which everyone makes in addition to the government pension. This program has very good conditions and people like to use it. This plan allows getting a tax break and the interest, which was accumulated in a year, is not taxed. Excellent conditions, but this retirement plan can be opened only a year after you started to work. Obviously, family and only family will control the instalments and withdrawals of the money from the retirement account.
Home is buying real estate. It is a part of Controllable Priorities. And it is true, because only family itself can decide when and on the basis of what financial circumstances they should buy real estate (a house or a condominium). After you choose your real estate with the help of an agent, there arises a question of mortgage and mortgage insurance; both done in the same bank. Try to compare interest and mortgage conditions in other financial groups. I can help you compare. It is advantageous to insure mortgage outside the bank.
Emergency Cash is a fund used when it is unexpectedly needed (when “a rainy day” comes). The major part of a budget in Canada is used for mandatory payments, such as: apartment rent, car insurance, property tax, monthly bills, etc. That is why it is important that a sum, which equals 3 to 6 monthly salaries should be available at any moment. It will be a kind of protective mechanism for your family enabling you to cover necessary payments, which may arise as the result of job change, business problems or other unexpected situations.
Canada is a developed country with well-organized financial laws and life conditions. Debt Reduction Program implies the fact, that almost all residents of Canada have different kinds of debts. Credit cards (even if it is accurately paid every month), credit lines, loans, mortgages, payment deferment (if you buy goods for which you can pay a year later) – all these are debts. Much depends on how a family treats its debts. Some people make debts, others do their best to pay back what they owe immediately, and some people pay only interest, because they cannot afford to pay the whole sum. But only the family itself can decide how to treat their debts; that is why we consider it to be a controllable event.
Personal Savings is a program designed to save money during a short period of time. This program also completely depends on the family.
Growth Opportunities is the next step in family development, when the family has an opportunity to multiply their savings through investments or by purchasing things, the value of which grow in time (coins, antiques, real estate, gold things, etc.)
Market-Based Investments are investments based on the market of securities. It is the next step in the development of the family, when they can afford to invest their money to gain profit. It usually does not happen in the beginning of adaptation in Canada, even for those people who came with money. One may need money in a new country unexpectedly: to buy a business or real estate. Investments imply long-term result. The result, which was expected, will not be reached in a short period of time.
Art, Coins, Gold, Real Estate
Art, Coins, Gold, Real Estate all these show that the family has reached the standard of living and is able to invest money in profitable things like antiquities, pieces of art, gold, real estate.
All the listed above events like buying a house; building pension and educational plans, etc. depend on the income. If there is no income, all plans are ruined. Special safety programs were designed to protect people in cases when they cannot earn their living. One cannot make money if he is sick or dead. That is why people buy Life Insurance, Disability Insurance (for cases of illness), Critical Illness Insurance (for cases when a serious disease is diagnosed). Non-controllable events also include making a Will and Power of Attorney. Because humankind is still unable to control such occurrences like death and disease, life and health insurance compose foundation for the structure of financial plan. Without these protective mechanisms all hopes, plans and businesses can be easily destroyed.
Death is one of uncontrollable events, which destroys all plans and hopes of the family. People start this kind of insurance program having different reasons for that:
- protect family and children from bankruptcy
- cover the debts ( mortgage, personal debts ) and avoid making new debts
- provide for the needs of the family for a period of time (rent, food)
- To secure the family against taxes in case they receive legacy in the form of property like real estate, country house, and business.
Life insurance is key to understand and build financial plan. In reality it is fundamental for all other programs.
Will/Power of Attorney
These plans are very important in this country, especially for families, which have children under age and real estate. Power of Attorney provides opportunities for a trustee to fulfill legal actions in case the person is alive, but cannot make independent decisions. The Will gives instructions on how to divide the property according to the will of the deceased and also empowers the trustee for legal actions after the death of the person.
Disability and Health Insurance
This is not the kind of Health Insurance, which people buy because they have no group cover at work. Health Insurance plays important role in the structure of financial plan, providing financial cover for a person in case of serious health problems.
Disability Insurance is done for time when a person may lose ability to work as the result of an accident or illness. This kind of program is a very important link in building a financial plan. There are many different kinds of programs in Canada, which provide government support for a person who lost ability to make living as the result of an accident or illness. All individual and government programs are paid in addition to each other. That is why it is important to find out whether you have such insurance and whether you are liable to have sick-list (employment insurance) paid by the government; all that should be done before buying individual insurance. You must ask yourself a simple question: what is the maximum period of time you can afford to be out of work? 1 week? 1 month? A year? Or just a few days, but you need money for living, for food and other things? And what if you get an injury or fall ill? It is the same as stop working. You must know beforehand whether you are liable for government support, employer’s support or support from your personal insurance contract in case you lose ability to work as the result of accident or illness. If the answer is “Yes”, the next question should be: When, how long and who is going to pay?
What are some ways to increase your pension?
September 20, 2017
This article is specifically important to those, planning to retire in the near couple of years.
I constantly meet with retired people and those that plan to soon retire. Most of those planning to retire are not aware as to how their income will work and what amount of support will be received from the government. Many are confused about the amount of their pension and do not fully understand what does and what doesn’t effect their pension.
Some take wrong steps in their retirement:
- Afraid to hold money on an account and keep it “under the mattress”
- Transfer everything to children who will have later pay taxes on gains (whose children would like that?)
- Begin to assign property to children
- sell property
- even divorce to receive a couple hundred extra dollars
There is a lot of misunderstanding and this can have negative effects on health. We all know that worry and stress do not end well.
We want the retirees to feel really well, confident and comfortable in their retirement age. Government will not leave anyone out, but we all understand the phrase – “GOOD LIFE IS BETTER”.
So the goal of this article is – better, confident and comfortable LIFE!
Let’s analyze the following life scenario.
Family, husband and wife, age 62, have a combined income of $75,000. Their residence (townhouse) is worth approximately $600,000. Unfortunately the mortgage is not fully paid yet and the remaining balance is $100,000.
The family really likes their townhouse, and it is close to area where children and grand children are so the family wants to stay in their current residence permanently.
Ongoing costs of owning the property are as follows:
- Maintenance fee $350
- Property tax $280
- Utilities $300
- House insurance $70
- Mortgage payment $750 (amortization period – 13 years)
In total ongoing costs are $1,750 per month.
After tax household income is $4,500 less house expenses – $1,750, remaining living expense for the family is $2,750 per month.
3 years go by and family members now are 65 years old, they are on their way to retirement, total amount of pension from all possible sources is $2,500 per month for both.
In 3 years value of the house, with a moderate growth of 5%, is at $695,000.
Remaining mortgage amount will be $80,000.
Ongoing property expense are as follows:
- Maintenance fee is now $450
- Property tax – $350
- Utilities increased – $350
- House insurance – $80
- Mortgage payment $770
In total property expenses have increased to $2,000 per month.
What to do if pension is $2,500 and house expenses alone are $2,000?
Let’s look at possible options.
Sell the house and buy a nice condo with no mortgage.
$695,000 – 5% (commission) and HST on 5% = $655,000
$655,000 – $80,000 (remaining mortgage) = $575,000
Condo expenses include:
- maintenance fee $750
- property tax $250
Total condo expenses will be $1000 per month.
$2,500 – $1,000 = $1,500
The family is left with $1,500 for everything else. No too much and may end up away from children and grand children, less opportunities to see them often.
Continue living in the house they love, obtain home equity line of credit and stop paying for everything associated with the mortgage.
Let’s calculate – age of the couple is 65, townhouse value is $695,000.
Available line of credit.
Line of credit allows to create a situation, in which payment for property is not necessary. The expenses accumulate on the credit line.
|$212||+ $450||+ $350||+ $350||= $1,362 per month|
|interest on line of credit||maintenance fee||property tax||utilities|
$1,362 x 12 months = $16,344
$16,324 x 20 years = $326,880
In this case we have fully used up the line of credit.
Value of a property, especially on detached homes and town houses has been recently rising at a very high pace. We will be conservative and assume a growth will only be 3% per year.
Even with such a conservative estimate of average growth in 20 years our house (when the retired couple will be at age 85) will be $1,225,000.
- $459,000 ($327,009 including interest for all the years) and
- $234,000 (remaining mortgage $80,000 including interest for all the years)
Will be approximately $555,000
This means, even after such a long time, we still leave inheritance for our loved ones. ($555,000).
What do we get
Today, at 62 years of age, after expenses on the house there is $2,750 left for other expenses.
At retirement age – $2,500, not including costs associated with the property, which we don’t pay.
The family can afford to:
- Go on vacations, as long as health permits
Everybody knows that retirement breaks into 2 stages:
1 stage – when your health is still ok and you are ready to go wherever, as long as there are means.
2 stage – would be happy to travel but the doctor recommends against it and it’s kind of scary
or not even think about traveling – deal with ongoing sicknesses.
- Bring grand children on the trips
It feels amazing to be able to help your children and even more so when spend some time with the grand children while there is strength and health, and the children are little. They will grow up and then nothing will convince them to come along.
- Make significant gifts to your loved ones while still being around them.
Simple situation – you hear that your grand child wants to change his car, what’s stopping you from gifting him $10,000 or more to buy a car of his dream. You don’t have to burden yourself with interest for this money. Let it accumulate on credit line. You are not taking your house with you into the grave. This money will still go to your family in form of inheritance, it just may be more useful today… (in fact you handing out inheritance during your life)
I think you will agree that giving person is happier than the recipient.
- Don’t have to think about tomorrow – what will it take to get through.
All of this allows retirees to feel confident with their financial situation, full of life, useful to children and grand children and be happy.
What else do we need in this life?
Bank of Canada increases overnight rate target to 1 per cent
September 7, 2017
The Bank of Canada is raising its target for the overnight rate to 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent. Recent economic data have been stronger than expected, supporting the Banks view that growth in Canada is becoming more broadly-based and self-sustaining. Consumer spending remains robust, underpinned by continued solid employment and income growth. There has also been more widespread strength in business investment and in exports. Meanwhile, the housing sector appears to be cooling in some markets in response to recent changes in tax and housing finance policies. The Bank continues to expect a moderation in the pace of economic growth in the second half of 2017, for the reasons described in the July Monetary Policy Report (MPR), but the level of GDP is now higher than the Bank had expected. The global economic expansion is becoming more synchronous, as anticipated in July, with stronger-than-expected indicators of growth, including higher industrial commodity prices. However, significant geopolitical risks and uncertainties around international trade and fiscal policies remain, leading to a weaker US dollar against many major currencies. In this context, the Canadian dollar has appreciated, also reflecting the relative strength of Canadas economy. While inflation remains below the 2 per cent target, it has evolved largely as expected in July. There has been a slight increase in both total CPI and the Banks core measures of inflation, consistent with the dissipating negative impact of temporary price shocks and the absorption of economic slack. Nonetheless, there remains some excess capacity in Canadas labour market, and wage and price pressures are still more subdued than historical relationships would suggest, as observed in some other advanced economies.
Penalties for breaking mortgage – how much do we know about it and how do they get so high?
August 30, 2017
When the time comes to purchase a property or to renew a mortgage, many people take their business to a major bank. Why? Simple reasons; it’s convenient (all of your banking is done through one place), reliable (it is a major bank), “they already know me” (true, they did ask for your photo ID around the time you first met to confirm your identity).
But how much do we know about the conditions of the mortgage contract we process through a major bank and why are we so surprised that, when we have to break the contract, the penalties are astronomical? We are often angered by the numbers, and then, we settle and tell ourselves: “Yes, that is how banks work and nothing can be done.”
So why not do your homework ahead of time, analyze and pick conditions that will not result in these outrageous penalties?
Let’s compare conditions on a mortgage at a few financial institutions. For simplicity, we will refer to them as big and small bank.
By the way, there is absolutely no risk from going with a smaller bank. The most important thing is to understand the conditions in the contract. That is why we have mortgage specialists. They will surely assist you with understanding these details. Until the term of the contract expires, it cannot be modified, even if the institution goes bankrupt. There will always be another bank that will assume the responsibilities of the smaller bank and will continue to service existing contracts. The new bank will have no legal right to modify contracts until the end of the term.
Of course, mortgage specialist would know that the small banks offer a variety of products that also have defined larger penalties. These products often have unique names: Low Rate Mortgage, No-Frills Mortgage, etc.
Often clients will demand the best rate and it is the mortgage broker’s responsibility to explain what kind of consequences to expect when obtaining such a low rate.
I would like to compare standard mortgage conditions of a small bank with the same mortgage conditions at a big bank.
I will not focus on the conditions that are identical or almost identical between different banks.
For example: PREPAYMENT PRIVILEGES
Big banks allow increase in monthly payments by 15%, making a double payment, prepaying additional 15% of the original mortgage amount. (Some will allow only 10% prepayment and only at each anniversary; some 15% through the year.)
Small banks allow increasing monthly payments by 20%, prepaying up to additional 20% of the original mortgage amount and allow that through the year. Some will say that a big bank will allow a double payment, while a small bank only allows a 20% increase on regular payment. Few people realize that the limit of increasing payments with a small bank actually works out to be much higher. For example, you have $400,000 mortgage amount with, let’s say, a monthly payment of $2,000. You can increase regular monthly payments by $400 per month (20% of $2,000) and still have the second prepayment option available to you. It means the 20% prepayment, $80,000, can be broken down and added to your regular payment up to as much as $6,667 extra per month, you can basically set $8,667 as your regular monthly payment.
Majority of people do not need this, they simply cannot afford it. What I am trying to present here is that small banks really compete for your business and offer truly better flexible conditions. Additionally, majority of smaller banks provide online banking allowing you to monitor and adjust your mortgage at any time.
Ability to switch your mortgage from variable to fixed during the contract term.
In reality, all banks offer the option to switch from variable to fixed rate. The question is what are the conditions offered by the bank at that time?
As an example I want to use my conversation with a TD bank from December of 2009.
In December 2009 I purchased a property and chose the variable rate, understanding that the penalties on a variable rate mortgage are smaller if I choose to break the contract. I knew that I would likely break it in the next couple of years. At the time, the variable rate was exactly 3% (Prime with no reductions), fixed rate at the time was 4%. 3 weeks later I contacted the bank, specifically to find out what would happen if I decided I wanted to switch from a variable to a fixed rate. I called because one person told me that his TD bank will always offer him the best deal. I decide to make the call right in the front of that person and ask what will happen if I decide to switch from variable to fixed rate.
The bank representative told that switching from variable to fixed rate is available at any time but after a 10-minute conversation I was told that the fixed rate I would be able to get is 5.79%. That was the posted rate at the time. I questioned such high rate, just 3 weeks ago I was offered 4%, I was told that “today” that is the only rate that can be offered to me.
Let’s understand what the “today” means:
3 weeks prior I was a new customer, I had the freedom of going to any other bank. Today I am the person that cannot go anywhere without having to pay penalties. The bank understands this and offers me, lightly put, not their best rate.
Unfortunately all big banks at the time of switching variable to fixed rate, offer either Posted Rate or Posted minus 1%. In either case, it will not be a good rate that is offered in the market at the time.
Smaller banks do not have a posted rate and offer a better rate when switching from variable to fixed rate. It wouldn’t be the best rate (the best rates are only possible with broker buying down the rate with own commission), but it would be a good rate, currently available on the market.
Penalties for breaking the mortgage contract prior to completion of current term.
Everyone knows that if the contract is broken under a Variable Rate Mortgage the penalties are the 3 months interest. This is how it works unless other conditions are specified in the contract. As we already mentioned the broker should be informing you of any such conditions in advance.
But if you are breaking a Fixed Rate Mortgage the penalties can be quite substantial. All banks have the same explanation of the penalty: it will be the higher amount of 3 Months Interest or Interest Rate Differential (IRD).
3 Months Interest is easy to understand and calculate, the Interest Rate Differential is harder to describe and calculate.
Smaller banks, in the absence of Posted Rate, are guided by “LOGICS”. The logics are as follows – If the bank receives the payout from you and passes it as a loan to another client, they lose money and they want to compensate their loss. If these losses are more than 3 months interest, bank will charge you a higher penalty.
Big banks will calculate their, so called, losses in a much different way. The most interesting part is that bank employees cannot explain how it is calculated. They just say that there is a formula and it calculates…
I would like to estimate and calculate the following scenario:
Just recently a family obtained a mortgage from Scotia Bank in the amount of $400,000 with a 2.69% interest.
At the same time another family obtained same mortgage at the same rate but with a smaller bank.
First I want to note the initial information such as Posted Rate for all terms – 1 – 5 years – as well as the real rates that I am able to obtain with both of these institutions as a mortgage broker.
Posted rate is the rate officially posted at a Scotia Bank website.
The fixed rates posted on the bank’s website are as follows:
1 year (Posted Rate) – 3.29%, a good client or a broker rate of 2.79% can be obtained.
2 year (Posted Rate) – 3.09%, lowest available 2.29%.
3 year (Posted Rate) – 3.39%, we get 2.39%.
4 year (Posted Rate) – 3.89%, we get 2.59%.
5 year (Posted Rate) – 4.49%, we can get 2.69%.
Have any of you ever thought as to why the bank posts all these rates on their website? Have you? Great! Have you come up with the answer? Most likely not because it is almost impossible, you could lose all your clients like that. But the banks do not worry, they have many clients and surely someone will ask what rate can you offer me on a mortgage?
This is where the bank starts telling you how valuable you are, and that you will get the best discount of 1.8%. The client asks what does that translate into for me? The bank says – 2.69% – great rate, sign me up. Sometimes a client will enquire about a variable rate. The response will usually be why, get the fixed rate and sleep well at night.
If those clients knew the penalties they may have to pay, they probably would not be sleeping so well. Not many people get into many details on this when they sign the contract though.
At the same time, smaller banks offer the following rates:
1 year – 2.69%; 2 year – 2.29%; 3 year – 2.34%; 4 year – 2.54%, 5 year – 2.79%
For brokers with larger business volumes, the banks offer slightly better rates. I am using this particular bank to try to closely match the information we have for the big bank.
1 year – 2.59%; 2 year – 2.19%; 3 year – 2.24%; 4 year – 2.44%; 5 year – 2.69%
You may have noticed that a better rate can be obtained; I am using the numbers considering broker receives full commission. If the broker is eager for business he can obtain a lower rate and get paid less. This all depends on each specific situation. I am just analyzing a standard situation.
So the rates are approximately same. Let’s pretend that, in a few years, we have to break a contract on a $400,000 mortgage (let’s not talk about such things not happening and the existence of portability – these situations happen very often). For simplicity we will assume that all rates remained the same.
With a smaller bank:
3 months interest = $400,000 x 2.69% = $10,760 : 12 month x 3 months = $2,690
Interest Rate Differential (IRD) = difference for the remaining 3 years between your rate (2.69% ) and the rate offered by the bank on a 3 year term (in this example it will be 2.44%).
$400,000 x 0.25% (2.69% – 2.44%) = $1,000 x 3 years = $3,000
Of course, the bank will take the higher, $3,000.
Now, let’s look at how the larger bank will calculate this.
3 months interest = $400,000 x 2.69% = $10,760 : 12 month x 3 months = $2,690
Interest Rate Differential (IRD) = difference for the remaining 3 years between your rate (2.69% ) and the rate that is calculated as follows – Posted Rate, offered by the bank on the remaining period (in this example 3 years, so it will be 3.39%) minus the discount that you received at the time you signed the contract, which was 1.8%.
$400,000 x 1.1% (2.69% – 1.59% (3.39% – 1.8% = 1.59%)) = $4,400 x 3 years = $13,200
Of course, the bank will take the higher, $13,200.
You know we can’t avoid using big banks, at times, they offer products that are not available through other financial institutions. But, if you are to get the same rate from a mortgage broker or a large bank, please, consider this before deciding on a major bank.
Additionally, brokers will almost always offer a better rate than a large bank. As far as our office goes, we always offer rates that often even bank employees cannot get at their bank with their employee discounts.
We hope to hear from you soon.
Canadian home sales fall further in July
August 16, 2017
According to statistics released today by The Canadian Real Estate Association (CREA), national home sales declined further in July 2017. Highlights: National home sales fell 2.1% from June to July. Actual (not seasonally adjusted) activity in July stood 11.9% below last Julys level. The number of newly listed homes edged back by 1.8% from June to July. The MLS Home Price Index (HPI) was up 12.9% year-over-year (y-o-y) in July 2017. The national average sale price edged down by 0.3% y-o-y in July. Julys interest rate hike may have motivated some homebuyers with pre-approved mortgages to make an offer, said CREA President Andrew Peck. Even so, sales activity continued to soften in the Greater Golden Horseshoe region. Meanwhile, sales and prices in Montreal continue to strengthen. All real estate is local, and REALTORS remain your best source for information about sales and listings where you live or might like to. July marked the smallest monthly decline in Greater Golden Horseshoe home sales since Ontarios Fair Housing Plan was announced in April, said Gregory Klump, CREAs Chief Economist. This suggests sales may be starting to bottom out amid stabilizing housing market sentiment. Time will tell whether thats indeed the case once the transitory boost by buyers with pre-approved mortgages fades.
Decline in single-family component moderated by gain in multi-family dwellings
August 11, 2017
Canadian municipalities issued $8.1 billion worth of building permits in June, up 2.5% from May and the second highest value on record. Higher construction intentions for multi-family dwellings and commercial buildings were mainly responsible for the national increase. All building components reported gains in June, except for single-family dwellings. The value of residential building permits fell 0.9% in June to $5.0 billion, the fourth decrease in five months. The decline was mainly the result of lower construction intentions in four provinces, notably Ontario. In June, the value of permits for single-family dwellings decreased 12.5% to $2.4 billion. Seven provinces registered declines, with Ontario being the main contributor to the decrease. Conversely, construction intentions for multi-family dwellings rose 12.5% in June to $2.7 billion, marking a third consecutive monthly increase. Seven provinces registered gains, led by Ontario and British Columbia.
Is a home equity line of credit right for you?
July 26, 2017
Buying a new home is an exciting but often stressful experience. The variety of financing options now offered by lenders is overwhelming. One of the most popular options is a home equity line of credit. With interest rates typically lower than other forms of credit, this line of credit can help you reach your financial goals. However, there are several factors to consider when deciding if this product is right for you. Banks market home equity lines of credit under different names, which might make it challenging to recognize when you are being offered one. They are commonly combined with a regular term mortgage in the form of a readvanceable mortgage. When combined this way, the credit limit on your home equity line of credit will often increase automatically as you pay down the principal on your mortgage. A readvanceable mortgage may also tie together other credit and banking products such as personal loans, credit cards and car loans under a single credit limit. Benefits of bundling these products together include convenience and lower interest rates. But the downsides include fees and restrictions if you want to switch to another lender, and variable interest rates that could increase on short notice. Your financial institution also has the right to demand that you pay the full amount owing at any time. When deciding if this lending product is right for you, remember that your home is likely your biggest investment. You should beware of overborrowing against its equity, especially if youre counting on it to fund your retirement. Most lenders allow you to make interest-only payments on your home equity line of credit, making it easier to delay repaying the principal balance, explains Lucie Tedesco, commissioner of the Financial Consumer Agency of Canada. Continually borrowing against your homes equity without repaying the principal can jeopardize your long-term financial security. For instance, in the event of a housing market correction you might owe more than what your home is worth. Ask yourself if a low interest rate and easy access to credit may encourage you to spend more than you can afford to pay back. You could find yourself in a debt spiral, using additional home equity just to stay current on your mortgage. This could make you more vulnerable to unforeseeable events, like job loss, illness or an interest rate hike. Consider creating your own plan to pay down the principal amount borrowed over a fixed period. Aim to pay more than the minimum payment or interest every month. With a home equity line of credit, there is usually no penalty to pay back as much as you can at any time.
Bank of Canada increases overnight rate target to 3/4 per cent
July 12, 2017
The Bank of Canada is raising its target for the overnight rate to 3/4 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1/2 per cent. Recent data have bolstered the Banks confidence in its outlook for above-potential growth and the absorption of excess capacity in the economy. The Bank acknowledges recent softness in inflation but judges this to be temporary. Recognizing the lag between monetary policy actions and future inflation, Governing Council considers it appropriate to raise its overnight rate target at this time. The global economy continues to strengthen and growth is broadening across countries and regions. The US economy was tepid in the first quarter of 2017 but is now growing at a solid pace, underpinned by a robust labour market and stronger investment. Above-potential growth is becoming more widespread in the euro area. However, elevated geopolitical uncertainty still clouds the global outlook, particularly for trade and investment. Meanwhile, world oil prices have softened as markets work toward a new supply/demand balance. Canadas economy has been robust, fuelled by household spending. As a result, a significant amount of economic slack has been absorbed. The very strong growth of the first quarter is expected to moderate over the balance of the year, but remain above potential. Growth is broadening across industries and regions and therefore becoming more sustainable. As the adjustment to lower oil prices is largely complete, both the goods and services sectors are expanding. Household spending will likely remain solid in the months ahead, supported by rising employment and wages, but its pace is expected to slow over the projection horizon. At the same time, exports should make an increasing contribution to GDP growth. Business investment should also add to growth, a view supported by the most recent Business Outlook Survey. The Bank estimates real GDP growth will moderate further over the projection horizon, from 2.8 per cent in 2017 to 2.0 per cent in 2018 and 1.6 per cent in 2019. The output gap is now projected to close around the end of 2017, earlier than the Bank anticipated in its April Monetary Policy Report (MPR). CPI inflation has eased in recent months and the Banks three measures of core inflation all remain below 2 per cent. The factors behind soft inflation appear to be mostly temporary, including heightened food price competition, electricity rebates in Ontario, and changes in automobile pricing. As the effects of these relative price movements fade and excess capacity is absorbed, the Bank expects inflation to return to close to 2 per cent by the middle of 2018. The Bank will continue to analyze short-term inflation fluctuations to determine the extent to which it remains appropriate to look through them. Governing Council judges that the current outlook warrants todays withdrawal of some of the monetary policy stimulus in the economy. Future adjustments to the target for the overnight rate will be guided by incoming data as they inform the Banks inflation outlook, keeping in mind continued uncertainty and financial system vulnerabilities. Information note The next scheduled date for announcing the overnight rate target is September 6, 2017. The next full update of the Banks outlook for the economy and inflation, including risks to the projection, will be published in the MPR on October 25, 2017.