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Qualifying for a mortgage.

3/31/2021

When qualifying a client for a mortgage lenders typically look at four key areas. The stronger a client is in each area, the likelihood of qualifying increases.
Income - Depends on how you earn your income, length of time in the same industry and being able to show it on paper. 2 years minimum is preferred. See below for specific income types.
Credit Score - Ranges from 400 to 900. To qualify for a mortgage with less than 20% down, you need a minimum beacon score of 600. Once over 700 clients have access to best rates. An important factor is to ensure you have at least two trade lines (car loan, credit card, lines of credit, personal loan, etc) for a minimum of 2 years. That helps establish and show that you are able to pay your bills on time over a longer period.
Down Payment - In Canada the minimum down payment must be at least 5%. The bigger the down payment, the less insurance premiums a client has to pay. If you put 20% down, you avoid CMHC and insurance premiums altogether and have access to even more mortgage lending options. Down payment can come from gifts from family (in most cases), investments, RRSP's, inheritance, a confirmed sale and a few other sources. It's important that you can prove the source on paper. Typically lenders want to see 3 month bank statements or investment history to see where your down payment is coming from.
Qualifying Ratios - This is the aspect of the mortgage qualification process that is the least understood by clients. Even if a client makes a high salary, they may not be eligible to purchase a home due to outstanding debts and the monthly payments. Qualifying ratios take into consideration your entire picture. Your income, compared to your debts and include heating costs, taxes and other monthly obligations. Depending on your credit score, the maximum combination of property taxes, mortgage payments and monthly liabilities cannot exceed more than 44% of the gross family income.

The reason fixed rates are increasing.

3/2/2021

You may be seeing headlines talking about “rate hikes”, or “massive rate jumps”, and in my opinion those are over-reactions. However, several lenders have already increased their 5 year fixed rates this week (one went from 1.64% to 1.74% on Tuesday, and then last night to 1.94%). Other lenders went from 1.64% to 1.69% and stayed there. I still have several lenders that are at 1.59%-1.64% for an insured 5 year fixed term, however the writing is on the wall that the rates below 1.75% will likely rise a little bit. You may recall from some of my previous emails that I have said that 5 year fixed mortgages rates are tied closely to the 5 year Canada bond yields, and so prior to the pandemic if you asked me what would happen to rates, I would look at the bond yield activity and give you my prediction. Once Covid-19 hit, the relationship between the bond yields and fixed rates got a bit out of whack, but it is still good to look at when understanding rates, and get a rough idea of where rates are going.

The rough rule of thumb is that the “best rates” are typically 1.5% higher then the bond yields. This is because the lenders often buy the bonds for 5 years, and then use the bonds to fund 5 year mortgage terms. The lenders buy the bonds, and then typically tack on 1.5% (for their profit margins and risk), and that is roughly the interest rate they give the client. So if you look back at January 1, 2020, the bond yields were at roughly 1.5, and 5 year fixed rates were in the 2.89%-2.99% arena which would mathematically make sense based on their profit margins (1.5% plus 1.5% = 3%).

If you look at the bond yields during 2020 (below) you will see that they hovered between 0.4% and 0.5% for most of the year. So add on the spread that the lender needs to bake in for risk and profits, then we would be roughly at 1.9% - 2% for 5 year fixed rates. Since summer that is exactly where rates have been, in that 1.74 – 2.14% range, and several weeks ago they dropped further to 1.59%-1.64%.

Now if you look at the bond activity in the last month, you will see that the cost to purchase bonds has doubled (if you want to know more about why this is happening, you can always call or email me, but I wont’ bore you with the details now), which would indicate the lenders need to increase their rates to keep their shareholders happy. With all this being said, I wouldn’t freak out. It seems to be a normal regression to the mean as there has been more and more positive news in North America lately (e.g., vaccines, political stability, and unemployment)

I think I’ve already shared enough, so I won’t go into details, but we don’t expect to see changes to variable rates (those are tied more closely to the BoC’s overnight lending rate, and the BoC has said they don’t intend on making significant changes until 2023).

Don’t hesitate to reach out with any questions,

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Qualifying for a mortgage.

The reason fixed rates are increasing.

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