The Bank of Canada is the central bank of Canada and plays a crucial role in the country's monetary and financial system. Its primary mandate is to promote the economic and financial well-being of Canada. Here are the main functions and responsibilities of the Bank of Canada:
In a significant move reflecting the country's economic optimism, the Bank of Canada announced a rate increase today. This decision holds immense significance for the Canadian economy and has the potential to impact various sectors and individuals across the nation. Let's delve into the key takeaways and implications of this rate increase.
The Bank of Canada's rate increase carries substantial significance, indicating a vote of confidence in the nation's economic trajectory. It demonstrates the central bank's commitment to maintaining price stability and managing inflationary pressures. While borrowers may face higher costs, savers can benefit from increased interest rates.
The Bank of Canada can indirectly influence mortgage rates through its monetary policy decisions. The central bank's primary tool for influencing interest rates is the target for the overnight lending rate, also known as the policy rate or the key interest rate.
When the Bank of Canada adjusts the target for the overnight lending rate, it affects the cost at which banks and other financial institutions can borrow money from the central bank. Changes in the policy rate can influence the overall interest rate environment in the economy, including mortgage rates.
When the Bank of Canada lowers the policy rate, it incentivizes banks to lower their own lending rates to stimulate borrowing and economic activity. This, in turn, can lead to lower mortgage rates. Conversely, when the central bank raises the policy rate, it can cause banks to increase their lending rates, which can result in higher mortgage rates.
However, it's important to note that mortgage rates are also influenced by other factors such as the overall state of the economy, inflation expectations, creditworthiness of borrowers, and competition among lenders. Market forces and the supply and demand dynamics of the mortgage market can also impact mortgage rates.
Ultimately, while the Bank of Canada's monetary policy decisions can have an impact on mortgage rates, the final determination of mortgage rates is influenced by a variety of factors and is set by individual lenders based on their risk assessments and market conditions.
Monoline mortgage lenders in Canada are specialized financial institutions that focus solely on providing mortgage loans. Unlike traditional banks, monoline lenders do not offer other banking services such as savings accounts or credit cards. Their sole purpose is to originate and underwrite mortgage loans.
Monoline lenders operate under a different business model compared to traditional banks. They rely on mortgage brokers to connect them with borrowers rather than having their own branch network. Mortgage brokers act as intermediaries between borrowers and lenders, helping borrowers find the most suitable mortgage product and guiding them through the application process. Monoline lenders often offer competitive interest rates and terms, as they have lower overhead costs compared to traditional banks. They may specialize in specific types of mortgages, such as high-ratio mortgages (where the down payment is less than 20% of the property's value) or self-employed mortgages (for individuals who have non-traditional income documentation).
Some well-known monoline lenders in Canada include First National, Merix, MCAP, and RMG. These lenders work with mortgage brokers across the country to provide a range of mortgage options to borrowers. It's important to note that while monoline lenders may not have physical branches, they are subject to the same regulations and oversight as traditional banks. Borrowers can have confidence in their reliability and adherence to industry standards.
When selecting a mortgage rate in Canada, it's crucial to understand the differences between fixed and variable options. Both fixed and variable mortgage rates have distinct characteristics and benefits. In this concise blog post, we'll explore the key disparities to help you make an informed decision aligned with your financial goals.
Fixed Mortgage Rates:
Preparing in advance of house-shopping is the best thing a homebuyer can do. There are several reasons why it is helpful to prepare in advance:
1. Clear understanding of the process: By talking to a mortgage advisor early on in the process, clients can become familiar with the offer process, the steps needed to secure a mortgage, and their options available.
2. Reduce the time needed for mortgage financing approval: When the majority of documents are prepared and on hand, the mortgage application can be submitted to a lender much more quickly, and the lender will be able to review the application and supporting documents up front, meaning the approval can be wrapped up in just a few days.
3. Reduced stress: The joy of a new home purchase can quickly turn into a stressful time when scrambling to find documents, discuss rates/lenders, ideal timelines, etc. Preparing in advance provides more lender options, more rate options, and an overall more enjoyable process.
The process starts with a simple phone call, and doing a bit of pre-work up front can save you money and energy later on.
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As a result of the pandemic, most homeowners are spending more time at home, resulting in an increased desire to make home improvements. Some homeowners have savings set aside for renovations, while many others have most of their assets tied up in the equity of their home. Home equity is the homeowner’s interest in a home, and the equity increases as the homeowner pays down their mortgage principal, and as the home increases in value. With mortgage interest rates at historical lows, here are two common ways that homeowners access their equity to complete home renovations.
A qualified mortgage professional will be able to advise if the timing to access the equity makes sense. Depending on the type of mortgage the homeowner has, refinancing requires can result in a prepayment penalty. The penalty amount is based on a combination of several different variables: the lender, the contract interest rate, the current mortgage rates, and the months remaining in the term. Most of the time the refinance transactions require an appraisal and a lawyer, however some lenders cover the fees or reimburse the homeowner after the transaction is complete.
While taking out equity can be beneficial, a qualified mortgage advisor can review the home and mortgage details and offer professional advice based on all available options.
You may have read headlines mentioning that OSFI (Office of the Superintendent of Financial Institutions) is considering a June 1 “hike” to the qualifying rate (i.e., Stress Test). Qualifying rates were introduced to mitigate the risk of mortgage default by ensuring that borrowers can continue to make their payments in the event that mortgage rates increase over the course of their term. The projected Stress Test rate increase would be from 4.79% to 5.25% (or the contract rate + 2%, whichever is greater), which is not much more than the 5.19% rate that was in place until spring of last year, and is less than the 5.34% that was in place prior to the 5.19% qualifying rate.
What does this all mean? For example, if client gets a mortgage rate of 2.09% today, they would have to be able to qualify for a mortgage with an interest rate of 4.79% (which is greater than 2.09% plus 2.00%). Many news outlets, mortgage agents, and others are making this sound like it is going to have a major impact on home-buyers, and in my opinion this is definitely not the case.
First, the potential increase to the qualifying rate from 4.79% to 5.25% would only be for uninsured mortgages. The change would reduce an average borrower’s purchasing ability by approximately 5%. Here are the types of mortgages that are uninsured:
Second, OSFI regulates only the chartered banks in Canada; so not all lenders are directly impacted by OSFI’s decisions.
Third, many people are asking if the qualifying rate will increase for insured purchases. Based on what I’m reading, and what I’ve seen, the proposed changes are designed mainly to cool down some of the major markets with the million dollar mortgages and offers coming in up to half a million over list. The majority of purchases in Toronto and Vancouver are going for one million dollars and up, and in order to cool things down OSFI is tightening up the lending guidelines on those uninsured transactions (i.e., over $1 million). The other bucket of uninsured mortgages that tend to be the riskiest to the lenders are those with 30 year amortizations, as stretched borrowers often need the 30 year amortization to qualify. The qualifying criteria already in place for insured purchases has already done a good job of limiting the risk of mortgage default on insured mortgages, and therefore I don’t expect to see a change in the qualifying rate for insured mortgage any time soon.
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.
Paul holds a Master's degree in Business Administration, loves to golf, watch hockey, and drink black coffee.