Morneau Takes Out the Big Guns to Slow Housing

General Katie Hommy 4 Oct

Yesterday, Ottawa unveiled major initiatives to slow housing activity both by potentially discouraging foreign home purchases and, more importantly, by making it more difficult for Canadians to get mortgages. As well, the Finance Minister is limiting the degree to which mortgage lenders can buy portfolio insurance on mortgages with downpayments of 20% or more. Ottawa has clearly taken out the big guns to slow housing activity, which is widely considered to be too strong in Vancouver and Toronto. Ironically, home sales have already slowed precipitously in Vancouver in recent months and the BC government introduced a new 15% land transfer tax on foreign purchases of homes effective August 6, the effects of which are yet to be fully determined.

The measures announced by Finance Minister Morneau are more far reaching than anything considered to date and could well have quite a significant impact. Not only are these initiatives intended to close loopholes for foreign investors, which might help to make housing more affordable for domestic purchasers, but they will actually make homeownership less attainable for the marginal borrower, which is often younger Canadian first-time home buyers.

Officials at the Department of Finance have been studying the housing market and have led a working group with municipalities and provinces, as well as federal agencies such as the Office of the Superintendent of Financial Institutions (OSFI) and Canada Mortgage and Housing Corporation (CMHC). This in-depth analysis has informed today’s announcement.

 Measures Aimed At Foreign Homebuyers

  • The income tax system provides a significant income tax benefit to homeowners disposing of their principal residence, in the form of an exemption from capital gains taxation.
  • An individual who was not resident in Canada in the year the individual acquired a residence will not—on a disposition of the property after October 2, 2016—be able to claim the exemption for that year. This measure ensures that permanent non-residents are not eligible for the exemption on any part of a gain from the disposition of a residence.
  • The Canada Revenue Agency (CRA) will, for the first time, require all taxpayers to report the sale of a property for which the principal residence exemption is claimed.

Measures Affecting All Homebuyers

The Finance Department says in its press release that, “Protecting the long-term financial security of Canadians is a cornerstone of the Government of Canada’s efforts to help the middle class and those working hard to join it.” This is a “Nanny State” measure to protect people from themselves, as the Bank of Canada has long been concerned about the growing number of households with excessive debt-to-income ratios. It will make housing less attainable, at least in the short run. If it, therefore, substantially reduces housing demand, home prices could decline, ultimately improving affordability. This, of course, is not what the 70% of Canadian households that already own a home would like to see.

  • Broadened Mortgage Rate Stress Tests: To help ensure new homeowners can afford their mortgages even when interest rates begin to rise, mortgage insurance rules require in some cases that lenders “stress test” a borrower’s ability to make their mortgage payments at a higher interest rate. Currently, this requirement only applies to a subset of insured mortgages with variable interest rates (or fixed interest rates with terms less than five years). Effective October 17, 2016, this requirement will apply to all insured mortgages, including fixed-rate mortgages with terms of five years and more.
  • A buyer with less than 20% down will have to qualify at an interest rate the greater of their contract mortgage rate or the Bank of Canada’s conventional five-year fixed posted rate. The Bank of Canada’s posted rate is typically higher than the contract mortgage rate most buyers actually pay. As of September 28, 2016, the Bank of Canada posted rate was 4.64%, compared to roughly 2% or so on variable rate mortgages.

For borrowers to qualify for mortgage insurance, their debt-servicing ratios must be no higher than the maximum allowable levels when calculated using the greater of the contract rate and the Bank of Canada posted rate. Lenders and mortgage insurers assess two key debt-servicing ratios to determine if a homebuyer qualifies for an insured mortgage:

  • Gross Debt Service (GDS) ratio—the carrying costs of the home, including the mortgage payment and taxes and heating costs, relative to the homebuyer’s income;
  • Total Debt Service (TDS) ratio—the carrying costs of the home and all other debt payments relative to the homebuyer’s income.

To qualify for mortgage insurance, a homebuyer must have a GDS ratio no greater than 39% and a TDS ratio no greater than 44%. Qualifying for a mortgage by applying the typically higher Bank of Canada posted rate when calculating a borrower’s GDS and TDS ratios serves as a “stress test” for homebuyers, providing new homebuyers a buffer to be able to continue servicing their debts even in a higher interest rate environment, or if faced with a reduction in household income.

The announced measure will apply to new mortgage insurance applications received on October 17, 2016 or later.

  • Tighter Mortgage Insurance Rules

Lenders have the option to purchase mortgage insurance for homebuyers who make a down payment of at least 20% of the property purchase price, known as “low-ratio” insurance because the loan amounts are generally low in relation to the value of the home. There are two types of low-ratio mortgage insurance: transactional insurance on individual mortgages at the point of origination, typically paid for by the borrower, and portfolio (bulk pooled) insurance that is acquired after origination and typically paid for by the lender. The majority of low-ratio mortgage insurance is portfolio insurance.

Lender access to low-ratio insurance supports access to mortgage credit for some borrowers, but primarily supports lender access to mortgage funding through government-sponsored securitization programs.

Effective November 30, 2016, mortgage loans that lenders insure using portfolio insurance and other discretionary low loan-to-value ratio mortgage insurance must meet the eligibility criteria that previously only applied to high-ratio insured mortgages. New criteria for low-ratio mortgages to be insured will include the following requirements:

  1. A loan whose purpose includes the purchase of a property or subsequent renewal of such a loan;
  2. A maximum amortization length of 25 years;
  3. maximum property purchase price below $1,000,000 at the time the loan is approved;
  4. For variable-rate loans that allow fluctuations in the amortization period, loan payments that are recalculated at least once every five years to conform to the original amortization schedule;
  5. A minimum credit score of 600 at the time the loan is approved;
  6. A maximum Gross Debt Service ratio of 39 per cent and a maximum Total Debt Service ratio of 44 per cent at the time the loan is approved, calculated by applying the greater of the mortgage contract rate or the Bank of Canada conventional five-year fixed posted rate; and,
  7. property that will be owner-occupied.

These tighter mortgage insurance regulations will reduce the supply of mortgages and/or increase their cost to the borrower.

Consultation on Lender Risk Sharing

The Government announced that it would launch a public consultation process this fall to seek information and feedback on how modifying the distribution of risk in the housing finance framework by introducing a modest level of lender risk sharing for government-backed insured mortgages could enhance the current system.

Canada’s system of 100% government-backed mortgage default insurance is unique compared to approaches in other countries. A lender risk sharing policy would aim to rebalance risk in the housing finance system so that lenders retain a meaningful, but manageable, level of exposure to mortgage default risk.

This proposal by CMHC has been floated for some time and, needless to say, the Canadian Bankers’ Association, is against it. The measure would certainly increase the risk associated with funding mortgages and therefore likely increase the capital required to be set aside against this additional risk. Therefore, in essence, it increases the cost to the lenders to finance mortgages. The lenders will undoubtedly attempt to pass off this increased cost to the borrower or reduce its supply of credit. Right now, the cost of mortgage insurance is borne by the taxpayer.

Bottom Line: These are very meaningful initiatives to slow housing demand, making it more difficult for Canadians to borrow. Finance Minister Morneau has taken out the big guns. I have no doubt that the pace of mortgage lending will slow from what it would otherwise be as a result of these government actions. However, these actions do nothing to address the shortage of housing supply in Vancouver and Toronto.

Housing has been a very important pillar for the Canadian economy, especially at a time when oil price declines have decimated the oil sector and manufacturing continues to struggle. This is a case of being very careful what we wish for– I’m concerned that we might see more of a slowdown in housing than the government was counting on, which will certainly affect jobs and growth and reduce tax revenues at a time when budget deficits are mounting and fiscal stimulus has yet to do its job.

8 Things To Avoid Before Buying A Home

General Katie Hommy 19 Sep

The following is a list of things you’ll want to avoid if you plan on purchasing a new home in the near future.

1. Don’t apply for new credit: It may seem natural to apply for a credit card at a home improvement store or a furniture store when you are about to become a homeowner, but applying for credit can lower your credit score. Not only will you lose a few points because of a credit inquiry, and if you are approved for new credit, a lender may worry that you will spend up to your new credit limit and then default on your loan.

2. Don’t close any credit accounts: You may be feeling that this is a good time to get your financial house in order by closing unused credit accounts or transferring your debt to a new credit card with a zero-interest balance transfer offer. While that’s a smart move financially, it’s a bad one for your credit score because you lose points when you have a higher usage of debt compared to your limit on one credit card and to your overall credit availability. Wait until your closing is complete before you make these changes.

3. Don’t move your money around without a paper trail: Your lender will need the most recent bank statements before you go to settlement, so if you have any unusual deposits you will need to provide complete documentation of where the money came from. If possible, it’s best to move the cash you will need for your home purchase into one account before you apply for a mortgage. If not, make sure you have complete and accurate records readily available.

4. Don’t increase your debts: In addition to your credit score, your debt-to-income ratio is extremely important to your mortgage approval. If you take on more debt you could be in danger of going above the maximum acceptable debt-to-income ratio.

5. Don’t skip a payment or make a late payment: One of the most important elements of your credit score is your history of on-time, in-full payments; so don’t get so caught up in your move that you forget to keep up with paying basic bills.

6. Don’t buy a car: You may be feeling that a new car would be a nice addition to the driveway of your new home. Resist that feeling. Even if you can easily afford a new car, the depletion of your savings or the addition of a new car loan could derail your mortgage application. Wait until after you have moved to switch to a new car.

7. Don’t change jobs if you can help it: While a job change could mean a raise or a path to a better future, it could also delay your settlement.Your lender needs to verify employment and will need pay stubs to prove your new income before your mortgage conditions are fully satisfied. 

8. Don’t spend your savings: You’ll need cash on hand at the acceptance for your down payment and closing costs and your lender may even verify your cash reserves one more time, so make sure the funds stay in place.

In other words, no matter how hard it is at this exciting time, it’s better to do nothing than to do anything.

 

Courtest of Brent Shepheard

Dominion Lending Centres – Accredited Mortgage Professional
Brent is part of DLC Canadian Mortgage Evolution West based in North Vancouver, BC.

It’s Property Tax Time!

General Katie Hommy 31 May

It’s Property Tax Time! Tax Statements are starting to arrive in mailboxes today.

Many lenders collect the taxes on your behalf and you can find out if yours are collected by the lender on your mortgage statement (every bank sends one in January) or simply look online, and it will show your tax account balance.

If there’s any shortfall you will pay the difference, any over-payment will go towards next years taxes.

If your house is not a rental don’t forget to claim your Homeowner’s Grant to get your discount. You can do that online or fill out the form on the bottom of your tax Bill and mail in ๐Ÿ™‚

Don’t hesitate to call us if you have any questions!

Sincerely, your Integrity Mortgage Team

Top 5 Things Millennials Should Know When Buying Real Estate

General Katie Hommy 24 Oct

There are 9 million Millennials in Canada, representing more than 25 percent of the population. Born between 1980 and 1999, the eldest are in the early stages of their careers, forming households and buying their first homes. Buying a home is a daunting process for anyone, but especially so for the first-time home buyer. This is the largest and most important financial decision you will ever make and it should be done with the appropriate investment in time and energy. Making the effort to be financially literate will save you thousands of dollars and assure you make the right decisions for your longer-term financial security.

  1. Don’t rush into the housing market–do your homework: learn the basics of savings, credit and budgeting.

Lifelong savings is a crucial ingredient to financial prosperity. You must spend less than you earn, ideally saving at least 10 percent of your gross income. Put your savings on automatic pilot, having at least 10 percent of every paycheck automatically deducted. Money you don’t see you won’t spend. Contributing to an RRSP, at least enough to gain any matching funds your employer will provide, is essential. The Tax Free Savings Account (TFSA) is an ideal vehicle for saving for a down payment and now you can contribute as much as $10,000 a year.

You also need to establish a good credit record. Lenders want to see a record of your ability to pay your bills. As early as possible, get a credit card and put your name on cable, phone or other utility bills. Pay your bills and your rent in full and on time. Do not run up credit card lines of credit. The interest rates are exorbitant and the only one who benefits is your bank. Keep your credit card balances well below their credit limit.

Do a free credit check with Equifax every six months to learn your credit score and to see if there are any problems. Equifax tracks all of your credit history, which includes school loans, car loans, credit cards and computer loans.  Equifax grades you based on your responsible usage and payments.

Budgeting is also essential and it is easier than ever with online apps. You need to know how you spend your money to discover where there is waste and opportunity for savings. The CMHC Household Budget Calculator helps you take a realistic look at your current monthly expenses.

  1. Make a realistic projectory of your future household income and lifestyle and understand its implications for choosing the right property for you.Millennials are likely relatively new to the working world. Lenders want to see stability in employment and you generally need to show at least two years of steady income before you can be considered for a mortgage.  This also applies if you have been working for a few years in one career and then decide to change careers to something completely different. Lenders want to see continuous employment in the same field. If you are self-employed, it is more challenging, and you need professional advice on taking the proper steps to qualify for a mortgage.

    Assess the stability of your job and the likely trajectory of your income. Millennials will not follow in the footsteps of their parents, working for one employer for forty years. In today’s world, no one has guaranteed job security. Take a realistic view of your future. Will your household income be rising? Will there be one income or two? Are there children in your future? Will you remain in the same city? The answers to these questions help to determine how much space you need, the appropriate type of residence, its location and the best mortgage for you.

    Financial planning is key and it is dependent on your goals and expectations.

    1. This is not a Do-It-Yourself project: build a team of trusted professionals to guide you along.

    You need expert advice. The first person you should talk to is an accredited mortgage professional. There is no out-of-pocket cost for their services. Indeed, they will save you money.

    These people are trained financial planners and understand the ever-changing mortgage market. Take some time with them to understand the process before you jump in and find your head spinning with all the decisions you will ultimately have to make. They will give you a realistic idea of your borrowing potential. Before you fall in love with a house or condo, make sure you understand where you stand on the mortgage front. Mortgages are complex and one size does not fit all. You need an expert who will shop for the right mortgage for you. There are more than 200 mortgage lenders in Canada and they will compete for your business.

    It is a very good idea to get a pre-approved mortgage amount before you start shopping. This is a more detailed process than just a rate hold (where a particular mortgage rate is guaranteed for a specified period of time). For a pre-approval, the lender will review all of your documentation except for the actual property.

    There is far more to the correct mortgage decision than the interest rate you will pay. While getting the lowest rate is usually the first thing on every buyer’s mind, it shouldn’t be the most important. Six out of ten buyers break a five-year term mortgage by the third year, paying enormous penalties. These penalties vary between lenders. The fine print of your mortgage is key and that’s where an expert can save you money. How the penalty for breaking a mortgage is calculated is key and many monoline lenders have significantly more consumer-friendly calculations than the major banks.[2] A mortgage broker will help you find a mortgage with good prepayment privileges.

    The next step is to engage a real estate agent. The seller pays the fee and a qualified realtor with good references will understand the housing market in your location. Make sure the property has lasting value. Once you find the right home, you will need a real estate lawyer, a home inspector, an insurance agent and possibly an appraiser. Make any offer contingent on a home inspection and remediation of significant deficiencies.

    1. Down payments, closing costs, moving expenses and basic upgrades need to be understood to avoid nasty surprises.The size of your down payment is key and, obviously, the bigger the better. You need a minimum of 5 percent of the purchase price and anything less than 20 percent will require you to pay a hefty CMHC mortgage loan insurance premium, which is frequently added to the mortgage principal and amortized over the life of the mortgage as part of the regular monthly payment.

      Your lender will want to know the source of your down payment. Many Millennials will depend on the largesse of their parents to top up their down payment.

      The down payment, however, is only part of the upfront cost. You can expect to pay from 1.5-to-4 percent of the purchase price of your home in closing costs. These costs include legal fees, appraisals, property transfer tax, HST (where applicable) on new properties, home and title insurance, mortgage life insurance and prepaid property tax and utility adjustments. These amount to thousands of dollars.

      Don’t forget moving costs and essential upgrades to the property such as draperies or blinds in the bedroom.

      1. Test drive your monthly housing payments to learn how much you can truly afford.

      Affordability is not about how much credit you can qualify for, but how much you can reasonably tolerate given your current and future income, stability, lifestyle and budget. Most Millennials underestimate what it costs to run a home, be it a condo or single-family residence.

      The formal qualification guidelines used by lenders are two-fold: 1) your housing costs must be no more than 32 percent of your gross (pre-tax) household income; and, 2) your housing costs plus all other debt servicing must be no more than 40 percent of your gross income.

      Lenders define housing costs as mortgage payments, property taxes, condo fees (if any) and heating costs.[3] But homes cost more than that. In your planning, you should also other utilities (such as cable, water and air conditioning), ongoing maintenance, home insurance and unexpected repairs. Taking all of these costs into consideration, the 32 percent and 40 percent guidelines might well put an unacceptable crimp in your lifestyle, keeping in mind that future children also add meaningfully to household expenses and two incomes can unexpectedly turn into one.

      The best way to know what you can afford is to try it out. Say, for example, you qualify for a mortgage payment of $1400 a month and adding property taxes and condo fees might take your monthly housing expense to $1650.  A far cry from the $500 you pay now to split a place with 3 roommates. Start making the full payment before you buy to your savings account and see how it feels. Do you have enough money left over to maintain a tolerable lifestyle without going further into debt?

      Keep in mind that this is not a normal interest rate environment. Don’t over-extend because there is a good chance interest rates will be higher when your term is up. Do the math (or better yet have your broker do it for you) on what a doubling of interest rates five years from now would do to your monthly payment.  A doubling of rates may be unlikely, but it makes sense to know the implication.

      Do Your Calculations Look Discouraging?If so, here are some things you can do to improve your situation:

      • Pay off some loans before you buy real estate.
      • Save for a larger down payment.
      • Take another look at your current household budget to see where you can spend less. The money you save can go towards a larger down payment.
      • Lower your home prichttp://webcms.dominionintranet.ca/user/user_blog_edit.phpe — remember that your first home is not necessarily your dream home.

      Footnotes:

      [1] I would like to acknowledge and thank the many mortgage professionals of Dominion Lending Centres who made contributions to this report.

      [2] People break mortgages because of job change, decision to upsize, change neighbourhoods, change in family status or refinancing. The last thing you want to discover is that discharging a $400,000 mortgage 3.5 years into a 5-year term is going to cost you $15,000.

      [3] Lenders now also assess your qualification compliance if interest rates were to rise meaningfully, a likely scenario in this low interest rate environment.

    2. Post Courtesy of Dr. Sherry Cooper, Chief Economist for Dominion Lending Centres

5 Common Mortgage Mistakes

General Katie Hommy 10 Apr

Obtaining financing on a new or existing home can be a stress-free, straight-forward process if you’re prepared. But if you’re not prepared, there are many common mistakes you can make. Most of these mistakes are easily avoidable with some preparation and informed advice – feel free to call or email with any questions/concerns! 

Below are the Top 5 Mortgage Mistakes people make when trying to secure financing for their home:

  1. Failing to choose the best product for their situation
  2. Automatically renewing their current mortgage with their existing lender
  3. Signing documents without reading them
  4. Taking it to the limit – running up credit
  5. Not planning for your mortgage application

1. Failing to choose the best product for your situation
There are many different types of loans out there. There are fixed- and variable-rate products, hybrid and no-frills mortgages, lines of credit, term options, amortization choices, and more.

And although choice is great, it can be quite overwhelming without expert advice. While one person would benefit from a variable-rate product, their neighbour may be better suited to a fixed-rate product. The key is to always explain your current situation and future goals in detail so we can select a product that best meets those needs.

2. Automatically renewing with your existing lender
Although you may feel an allegiance with the current financial institution that holds your loan, they may not be able to offer you the best products. When refinancing or renewing, it’s

 

important to always shop the market for your best available option, much like you did when securing your first mortgage. This ensures you end up with the best mortgage rate and terms customized to your unique situation. In many cases your bank will offer you the posted rate in hopes that you’ll simply sign and return the commitment without shopping around. Make sure you do your due diligence when refinancing and renewing. After all, this is your home, your mortgage and your money!

3. Signing documents without reading them
Never sign documents without reading them. If you’re unsure about something, always ask for clarification. Remember that you’re the one entering into the agreement, so you need to understand and agree with that commitment.

4. Taking your credit to the limit
Make sure that your credit balances are in your favour when it comes to your mortgage application. Lenders are looking for an appropriate debt-to-income ratio. In other words, you need to have more income than you have debt. Avoid running up a balance on your credit cards and pay down existing debts as much as possible.

5. Failing to plan ahead
If you know that you’ll need to obtain, renew or refinance a mortgage, it’s essential to plan for it by ensuring your credit is in order. If it’s not, start preparing. Don’t make any purchases on your credit cards that you can’t pay off and if you carry a balance on your credit cards, start paying them down. Refrain from making any large purchases before securing your mortgage. If you’re planning to buy a car, wait until after you have secured financing, as your debt-to-income ratio will rise and you don’t want this while trying to secure a mortgage.

Understanding how the mortgage process works and how lenders qualify your loan will help you avoid the above mistakes. As always, if you have any questions or concerns, clarification is just a phone call or email away!

Does Your Mortgage Mature in 2013?

General Katie Hommy 21 Feb

A lot of mortgages are maturing in 2013 and with all of the changes that the Government has implemented during the past 12 to 24 months, I strongly recommend reviewing your mortgage at least 6 months prior to the maturity date.  The banks know that they are now in a position of “power” when dealing with renewals as the new changes make it more difficult for you to qualify or refinance.  In addition many of the banks and credit unions have “collateral mortgage documents” which means that you are not able to take advantage of the simple switch mortgages that are available and have to go throught the cost and appraisals to register a new mortgage.

I am committed to providing you with ongoing service that includes regular mortgage check ups and identifying areas for potential savings.  I look forward to speaking with you and invite you to extend this offer to any friends, co-workers or family members who might benefit from a mortgage analysis.

With 5 year interest rates hovering around 3%, it is a great time to review your current mortgage to see what is the best option for you and your family’s goals!

Insulation Retrofits For Your Home

General Katie Hommy 6 Feb

If you own an older home, chances are, you’re always on the lookout for ways to reduce your heating costs. Adding insulation to your home not only helps you save money right now, but it’s also a way to “future proof” your home – protecting you against energy cost increases down the road. A well-insulated, energy-efficient home reduces the need for heating in the cooler months and cooling in the warmer months.

By far the best time to upgrade your home’s insulation is when you’re doing other renovation work. For instance, it may not make much economic sense to remove the exterior cladding on your home simply to add more insulation, but if you’re replacing the cladding because it’s worn or you want to upgrade the curb appeal of your home, this is the perfect time to add insulation to the outside of the walls and seal up leaks.

Fortunately, there are many different options to achieve different levels of energy performance in typical older homes by adding insulation to the attic, walls and foundation, and reducing air leakage.

Increasing energy performance
The first step should always be to make your house more airtight. Use caulking and spray insulating foam to close up gaps around windows and doorways, and under thresholds. Inspect and replace worn weather-stripping and seals on windows and doors. Add foam gaskets behind the faceplates of electrical outlets and switches on exterior walls. Seal around outside faucets and vent hoods.

Doing this reduces drafty spots, making your home more comfortable, reduces exterior noise and dust, and actually helps the insulation you have in your house work better.

Air sealing is also one of the least expensive and most cost-effective energy-saving retrofit measures you can complete. Without it, you won’t gain the full benefit of increasing the existing insulation in your home as air leakage can reduce the effectiveness of many types of insulation.

You can save up to 10% on the space heating costs for a typical older home by improving the air tightness of the home by 30% and adding an additional R20 worth of insulation in the

 

attic, R10 on the basement walls, or R10 in the above-grade walls. The cost can range from $7,500 to $15,000 or more, depending on the insulation you choose, how much you install, other renovation work you are having done and how energy-efficient your house is to begin with.

To reduce your space heating costs by 25%, you may need to improve the air tightness of the home by 30%, add another R20 in the attic, and R15 to the exterior and basement walls. This work can cost anywhere from $18,000 to $30,000 or more depending on the full extent of the actual work that needs to be done.

Alternatively, instead of adding insulation, you may be able to achieve the same 25% goal by installing new Energy Star-rated windows. The cost of new windows is in the order of $15,000 or more depending on the number of windows to be replaced and the features selected. Ensure any new windows are well-sealed into their wall openings as air leakage can undermine their insulating value.

It’s important to consider the effect of adding insulation and air sealing on the whole house.
While improved air tightness goes hand-in-hand with reduced drafts and heat loss, it also reduces the amount of fresh air that can leak into your house, leading to moisture build-up and lingering odours if not balanced with energy efficient ventilation – a heat recovery ventilator, for example.

This is the reason that “build tight-ventilate right” has been the credo of energy efficient builders and renovators for more than 30 years.

Keep in mind that it’s always a good idea to get an energy audit of your house completed before you decide what to do and how much to invest. To formulate specific retrofit plans for your house, Canada Mortgage and Housing Corporation (CMHC) recommends that you retain the services of a qualified residential energy service provider to undertake an EnerGuide audit. Audits and ratings can be obtained from service organizations licensed under Natural Resources Canada’s EnerGuide program. For more information on finding a qualified service organization, visit http://oee.nrcan.gc.ca/residential.

CMHC has a wide range of helpful information for homeowners on sustainable technologies and practices and renovating for energy available from www.cmhc.ca or by calling 1-800-668-2642.

 

How Much Does Rate Matter?

General Katie Hommy 6 Feb

Often times, borrowers are fixated on their mortgage rate because it’s the one aspect of their home financing they know to ask about. But, it’s important to look beyond mere rates into the bigger picture surrounding what’s significant when it comes to your specific needs.

If we dollarize the difference between 2.99% and 3.04%, for instance, it works out to an additional $2.66 in your monthly payment per $100,000 of your mortgage. Over the course of a five-year term, this culminates into just $159.60 per $100,000.

While “no-frills” mortgage products typically offer a lower – or more discounted – interest rate (like the 2.99% used in the example above), when compared with many other available products, the lower rate is really their only perk.

The biggest problem with looking at rate alone is that you may end up paying thousands of dollars in early payout penalties if you opt for a five-year fixed-rate mortgage, for instance, and then decide to move before the five years is up.

No-frills mortgage products won’t let you take your mortgage with you if you purchase another property before your mortgage term is up – ie, portability is not an option with this product. Portability is an important option that could save you money over the long term if the home of your dreams is within your reach before your mortgage term is up and rates have risen, which they have a tendency to do over a five-year period.

This type of product is only plausible for those who have minimal plans to take advantage of benefits that will help pay off your mortgage faster – such as prepayment privileges including lump-sum payments.

Essentially, this product is only ideal for: first-time homebuyers who want fixed payments and have limited opportunities to make lump-sum payments during the first five years of their

 

mortgage; and property investors who need a low fixed rate and aren’t concerned with making lump-sum payments.

It’s understandable why these products may seem appealing. After all, not everyone feels they have the extra cash to put down a huge lump-sum payment. And who needs a portable mortgage if you’re not planning on moving any time soon?

But it’s important to remember that a lot can change over the course of five years – or whatever term you choose for your mortgage. You could get transferred, find a bigger house, have babies, change careers, etc. Five years is a long time to be anchored to something.

Many people won’t sign a cell phone contract for longer than three years that they can’t get out of, so why would they then sign a mortgage for five years that they can’t get out of?

The thing is, you can still obtain great mortgage savings without giving up the perks of traditional mortgages. For starters, many lenders are willing to offer significant discounts if you opt for a 30-day “quick close”.

And there are many other ways to earn your own discounts. For instance, by switching to weekly or bi-weekly mortgage payments, or by obtaining a variable-rate mortgage but increasing your payments to match those of the going five-year fixed rate, you’ll be ahead of the typical discount of a no-frills product before you know it – and you won’t have to give up on options.

Banks don’t give anything away for free – they’re there to make money. That’s why it’s essential to discuss the full details surrounding the small print behind the low rates. It’s also important to take into account your longer-term goals and ensure your mortgage meets your unique needs now and into the future.

As always, if you have questions about mortgage rates, or other mortgage-related questions, I’m here to help!

The Fixed Vs. Variable Conundrum

General Katie Hommy 7 Jan

“To get anywhere, or even to live a long time, a person has to guess, and guess right, over and over again, without enough data for a logical answer.” — Robert Heinlein

Imperfect-Data Mortgage rates are doing things that few people expected one year ago. Variable discounts have been sliced in half and those cunning banks are persuading us to pay disproportionately high fixed rates despite near-record-low funding costs.

Looking forward…

Some say rates have only one way to go from here (up).
Some say rates will stay flat for two years.
Some say rates will drop again soon.

Mortgage shoppers trying to pick a term might find all this uncertainty paralyzing. So what do you do when you don’t know what to do? You take your best educated guess.

There is never enough data to make perfectly optimal mortgage decisions. You’d need a really powerful time machine for that. But understanding the true risks of each term can improve your lot substantially.

On that note, we’ve compiled a fairly comprehensive list of pro-variable-rate and pro-fixed-rate arguments below. At the very bottom, we try to boil it all down.

 

 

Variable-Mortgage-Rates

Why Go Variable?

  1. Statistics, Statistics: 77% of the time, variable wins—historically speaking. That’s according to the usual widely-quoted mortgage research. (This conclusion is based on fully discounted rates.) BMO says variables have been cheaper 83% of the time, but we’re not sure what assumptions they used.
  2. Lower Penalties: People often break their mortgages early, for various reasons (including refinancing, selling, divorce, moving to a mortgage with a better rate/more flexibility, etc.). The average duration of a 5-year variable is about 3.3 years according to bank sources. Most variables let you escape your contract with a 3-month interest penalty, whereas fixed rates can hit you hard with interest rate differential (IRD)—even if rates stay relatively flat (many people don’t know that). “Everyone I know that’s mad about their mortgage attributes it to IRD,” says Peter Majthenyi, one of Canada’s highest volume brokers.
  3. Less Rate Risk: Compared to prior economic recoveries, economists believe that it won’t take as many rate hikes to cool Canada’s overleveraged slow-growth economy this time around. A 3% policy rate may do the trick today, whereas it’s taken a 4.20%+ rate (on average) to bring the economy and inflation to equilibrium in the past (see: neutral policy rate). If true, a 3% key lending rate implies a 5% prime rate over the next five years. That’s a quite tolerable 2% higher than today.
  4. Slower Rate Hikes: CIBC economist Benjamin Tal says: “We know the five-year (fixed) rate is attractive, but we also know short-term rates are not [rising].” The U.S. Fed has pledged to remain on hold till 2013. Moreover, TD says: “The Bank of Canada has repeatedly noted that there are limits to how much Canadian short-term rates can diverge from those in the United States.” Here’s an associated factoid: Since 1996, when the BoC started adjusting rates in 25 bps increments, rate-increase campaigns have lasted an average of 14.6 months, during which time rates increased an average of 170 bps. Of course, by definition, each rate-increase cycle was followed by a plateau, and then a rate decrease cycle.
  5. A Free Option: Variables let you lock in anytime for free. Majthenyi is a big proponent of variables largely for this reason. “If you have huge vacillations in rates and you want to take advantage of those (i.e., lock in if rates drop further, or lock in if rates look like they’ll blast off), you can do it for free in VRM…but not in a fixed.” Being able to renegotiate sooner appeals to Majthenyi, and he applies that logic to shorter fixed terms as well. Even if a 4-year fixed had the same rate as a 2-year fixed for example, he says: “I’d rather come up for renewal sooner so I’d take the 2-year over the 4-year hands down.”
  6. Fixed Payments: Some lenders let you fix your payments so that they don’t move when prime rate moves. Fixed payments, therefore, provide some peace of mind when rates start climbing. The exception is if prime skyrockets and your “trigger rate” is hit (i.e., rates jump so high that you’re not covering all your monthly interest). In that case, your payments will generally be adjusted higher.
  7. Payment Matching: When variable rates are lower than fixed rates, you can increase your variable payments to match a 5-year fixed payment. That whittles down principal faster and cuts your interest paid (not interest rate) by perhaps three-quarters of one percent over five years. For example, if you pay $50,000 of interest over five years on a $300,000 mortgage, this strategy might save you something like $350-$400 in a slow rising rate environment. It’s not as much savings as some advocates of this strategy make it sound, but it’s definitely something. (Note: The precise savings depends on your mortgage terms, rate trends, etc. We’ve made certain assumptions including: a 25-year amortization, a prime – 0.50% rate vs a 2.99% four-year fixed, 100 bps of rate hikes starting Dec. 2012, 100 bps more starting Dec. 2013.)
  8. Timing is Futile: Even if you had the ability to predict rates one year ahead of time, it wouldn’t help. That’s what Prof. Moshe Milevsky found in a 2008 study (See “Locking In” on page seven of this.) The problem is, knowing short-term rates doesn’t help you predict long-term rates, and the majority of mortgages are 3+ years. In the past, short-term rates have often surged, only to fall back within 18-24 months. People who lock in on the way up frequently lose out as a result. Associated fact:  In the four previous rate cycles, rates reversed lower within 4 months (on average) from the last rate hike.

Mortgage-Rates-3 Why Go Fixed?

    1. Research Bias: Historical research clearly establishes that variable rates have had an edge, but past performance does not foretell the future. Rates have fallen steadily since 1981. By definition, variable mortgages can’t help but outperform with that kind of trend.
    2. Cheap Insurance: The difference between today’s variable rates (prime – 0.45% on the street) and good fixed rates (e.g., 2.99% for a 4-year) is remarkably tight at 44 basis points. That “safety premium” is the equivalent of less than two Bank of Canada rate hikes. Knowing that you won’t get skewered by escalating rates is worth something.
    3. Economic Lows: It’s somewhat debatable, but one could assume that we’re somewhere near the bottom of an economic cycle. If so, rates will ascend as the economy makes a comeback. RBC writes: “Our assessment is that the market has become too pessimistic on the growth outlook and that the economy will re-accelerate, resulting in steadily rising rates during 2012.” Adds BMO: “Considering the likely upward trend in interest rates, this may be one of those rare periods when a fixed rate turns out to be the superior choice.” (If you think banks have a fixed-rate bias and that statement makes you cynical, we can’t blame you.)
    4. Abnormally Low Yields: Fixed rates are at generational lows, largely for temporary reasons (like the safe-haven bond buying that’s driving down yields). Remember, bond yields lead fixed mortgage rates. Could yields go lower? Yes. Will they stay that low? Many think not. 1.40%-1.50% is a meagre reward for loaning the government money for five years—however safe it may be. Mind you, people said the same thing about Japanese bonds (exceptions to economic “rules”  never cease).
    5. Certainty: Not having to monitor and time the market means one less thing to worry about in life. If you intend on locking in your variable down the road, you’ll need to be exceptionally accurate with your timing. People who are that prescient may be better off quitting their jobs to manage a hedge fund.
    6. Fixed Demand: When the BoC starts tightening next, some think fixed mortgage rates could shoot up faster than normal. According to John Bordignon of Paradigm Quest, there is as much as $350 billion worth of variable-rate mortgages at the moment. “This is probably the highest level (of outstanding VRMs) we have seen in the Canadian mortgage market.” If there were a flood of variable-to-fixed conversions in any given quarter, and demand for fixed rates doubled in that quarter, “There is just not enough 5-year money out there,” he says. June 2010 provided a small taste of what could happen. “Fixed-rate cost spiked 60 basis points. Merix (a prominent non-bank lender) experienced four times the number of conversions as normal. People panic.” This, of course, increases the risk of locking at a bad rate.
    7. Qualification: High-ratio borrowers cannot always qualify for a variable rate. That’s because lenders approve you based on your ability to make much higher payments (See: qualification rate). But don’t despair, you can always get a fixed-rate today and then go variable at renewal. In fact, when you renew you may not even have to qualify at a higher rate. (Default insurers don’t require requalification on renewal, assuming you’ve paid your mortgage as agreed. That is subject to your lender’s own policies of course.)
    8. Costly Conversion: Variables are sold with the benefit of being able to convert to a fixed rate anytime. But that entails “slippage.” In other words, the fixed rate you’ll get when converting is worse than the rate you may expect. Some banks’ conversion rates are as high as posted – 1%. Meanwhile, those same banks give new customers posted – 1.50%. Never expect a great rate when locking in a variable to a fixed. You’ll get an okay rate, even a decent rate if you’re really lucky, but never a great rate. That slippage multiplied by several months can boost borrowing cost materially.
    9. Assumptions Favour Fixed:When making decisions in uncertainty, you’re forced to make assumptions. If you’re a bearish mortgage analyst, you might assume:
      • Prime rate will stay as is until April 2013 (near when the U.S. Fed’s conditional rate-hold pledge expires)
      • Rates will then rise 150+ bps in the next 1.5 years.

      In this scenario, a 2.99% four-year fixed costs less than a variable over five years, other things being equal (including payment matching for equal monthly payments).

    10.  

 

5-year-Bonds-vs-BoC-Target-Rate
(Click chart to enlarge) 

Parting thoughts…

Term selection relies on so many things:

  • fixed/variable suitability factors
  • the probability of breaking the mortgage early (and needing to pay a penalty)
  • the chance you’ll want/need to lock in
  • interest rates (present and future),
  • etc. etc.

The above conclusions and five years of research have convinced us of one thing. It’s a Vegas-style gamble to select a variable-rate mortgage with intentions of locking in “at the right time.”

You’re better off either:

a) Going variable and staying variable (barring a personal/financial crisis that would necessitate locking in).

b) Going fixed and staying fixed (assuming you find an unusually good fixed rate).

c) Going half fixed and half variable (In that case, you’ll never be more than half wrong.)

Keep in mind, there are lots of fixed terms besides the age-old 5-year. The sweet spot today—assuming economist rate forecasts are remotely accurate—is a 4-year fixed under 3%. You’ll find this through approved Street Capital and Industrial Alliance brokers, among other places (no telling how long that rate will last).

Qualified borrowers should also consider Scotia’s 2-year special. It has a tantalizing fixed rate of 2.49%, which is below most variables on the market.

Whatever you pick, the good news is this. The cost of choosing the wrong term has probably never been lower. Fixed-variable spreads are tight as a vice, money is almost as cheap as ever, and expectations are that long-term rates will stay “lower for longer.” (Economists seem to love that buzzphrase.)

As a result, if you screw up and select the wrong term, it should be a lot less costly than it would have been in years like 1980-81, 1989-90, and 1999-2000.

Courtesy of canadianmortgagetrends.com

5 Questions Every Borrower Should Ask

General Katie Hommy 16 Nov

5 Questions Every Borrower Should Ask

As a mortgage borrower – particularly if this is your first time embarking upon homeownership – there’s no doubt you have a load of questions related to the mortgage process. Aside from the most common questions, such as those relating to mortgage rate, the maximum mortgage amount you’ll be able to receive, as well as how much money you’ll need to provide for a down payment, the following five questions and answers will help you dig a little deeper into the mortgage financing process.

1. Can I make lump-sum or other prepayments on my mortgage without being penalized? Most lenders enable lump-sum payments and increased mortgage payments to a maximum amount per year. But, since each lender and product is different, it’s important to check stipulations on prepayments prior to signing your mortgage papers. Most “no frills” mortgage products offering the lowest rates often do not allow for prepayments.

2. What mortgage term is best for me? Terms typically range from six months up to 10 years. The first consideration when comparing various mortgage terms is to understand that a longer term generally means a higher corresponding interest rate and a shorter term generally means a lower corresponding interest rate. While this generalization may lead you to believe that a shorter term is always the preferred option, this isn’t always the case. Sometimes there are other factors – either in the financial markets or in your own life – you’ll also have to take into consideration. If paying your mortgage each month places you close to the financial edge of your comfort zone, you may want to opt for a longer mortgage term, such as five or 10 years, so that you can ensure that you’ll be able to afford your mortgage payments should interest rates increase.

3. Is my mortgage portable? Fixed-rate products usually have a portability option. Lenders often use a “blended” system where your current mortgage rate stays the same on the mortgage amount ported over to the new property and the new balance is calculated using the current rate. With variable-rate mortgages, however, porting is usually not available. This means that when breaking your existing mortgage, you will face a penalty. This charge may or may not be reimbursed with your new mortgage. Some lenders allow you to port your mortgage, but your sale and purchase have to happen on the same day, while others offer extended periods.

4. What amortization will work best for me? The lending industry’s benchmark amortization period is 25 years, and this is also the standard used by lenders when discussing mortgage offers, as well as the basis for mortgage calculators and payment tables. Shorter timeframes are also available. The main reason to opt for a shorter amortization period is that you’ll become mortgage-free sooner. And since you’re agreeing to pay off your mortgage in a shorter period of time, the interest you pay over the life of the mortgage is, therefore, greatly reduced. A shorter amortization also affords the luxury of building up equity in your home sooner. While it pays to opt for a shorter amortization period, other considerations must be made before selecting your amortization. Because you’re reducing the actual number of mortgage payments you make to pay off your mortgage, your regular payments will be higher. So if your income is irregular because you’re paid commission or if you’re buying a home for the first time and will be carrying a large mortgage, a shorter amortization period that increases your regular payment amount and ties up your cash flow may not be your best option.

5. How do I ensure my credit score enables me to qualify for the best possible rate? There are several things you can do to ensure your credit remains in good standing. Following are five steps you can follow: 1) Pay down credit cards. This the #1 way to increase your credit score. 2) Limit the use of credit cards. If there’s a balance at the end of the month, this affects your score – credit formulas don’t take into account the fact that you may have paid the balance off the next month. 3) Check credit limits. Ensure everything’s up to date as old bills that have been paid can come back to haunt you. 4) Keep old cards. Older credit is better credit. Use older cards periodically and then pay them off. 5) Don’t let mistakes build up. Always dispute any mistakes or situations that may harm your score by making the credit bureau aware of each situation.

As always, if you have any questions about the information above or your mortgage in general, I’m here to help!