The Mortgage Minute |
The Mortgage Minute |
Crashing stock markets, plummeting oil prices, and fears over the COVID-19 pandemic have resulted in multi-year lows in mortgage interest rates, making it an excellent time to consider buying or refinancing your mortgage.
Since most lenders have dropped their Prime rates by 1% in the last 3 weeks (from 3.95% to 2.95%), clients with variable rate mortgages are seeing significant decreases to their mortgage payments, as variable rates go up and down with the Prime rate. For example, you may have a variable rate of Prime minus 0.75 meaning that today your rate would be 2.20%. Fixed mortgage rates continue to drop and are between 2.39% - 2.69% for 5 year fixed terms. The lowest rates go to clients with insured mortgages (less than 20% down), and clients with conventional mortgages or rentals will have rates around 2.69%. To put this in perspective, last year at this time the most competitive rates were between 3.19%-3.39%. Keep in mind however, that rate is only one small piece of the mortgage discussion. Making a mortgage decision solely based on rate can be a costly mistake if you aren't fully aware of what you're signing up for, especially when it comes to break penalties. All lenders calculate penalties differently, so it is important to review all of the conditions before selecting a term. Now is a great time to consider buying, or refinancing, as the mortgage rates are the lowest that they have been in years. I will help you navigate all of your options, and will break down the differences between fixed and variable terms, and will help you choose the type of mortgage that is best for you.
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By now you will likely have heard that on Wednesday the Bank of Canada (BOC) announced a 0.50% rate cut to the overnight target rate, which is the lowest its been since the 2008 recession. The rate cuts by the Bank of Canada and the U.S. Fed are mainly in reaction to the threat to the global economy poised by COVID-19 (the coronavirus), and were intended to stabilize the housing markets.
In the wake of the BOC's decision, the big 6 banks have all dropped their Prime rates by 0.50%, meaning that most of the big banks are now using 3.45% as their Prime rate. This will instantly reduce the rates of homeowners with variable rates. Also know that variable rates are always communicated in relation to Prime. For example, my best variable rate right now is Prime minus 105 basis points. (3.45% - 1.05%= 2.40%). So clients that had this term earlier in the week would have had a rate of 2.90% (the old Prime minus 105 bps), but now wake up to a 2.40% rate. Right now is a great time to consider variable interest rates, as I am anticipating that Prime rates will drop again in the next 8 months. Variable rates also offer the most flexibility for home owners, as break penalties are a fraction of the break penalties associated with fixed rate mortgages. Fixed rates are also continuing to plummet. Fixed rates are impacted by bond yields, and with bond yields also falling, the fixed rates have been dropping consistently over the last month, and will continue to do so throughout the spring. Keep in mind however that your bank or credit union may not be as quick to pass on these rate drops to you (if you don't work with me), but all of my lenders have already sliced their rates within hours of the BOC's announcement. Now is a great time to think about taking out equity at a low interest rate to buy rental properties or invest in other ways. Some clients with high interest rates are also breaking those terms and signing up at much lower rates, and I can give you a free mortgage check-up to see if that would be the best option for you. Getting approved for a mortgage is more challenging today than it was five years ago. Qualifying requirements have changed, and there is more emphasis on verifying your information in your application. If this isn’t your first mortgage, then don’t be surprised if you’re getting asked for documents you didn’t have to provide before. While each mortgage situation is unique and requires different compliance documents, some standard verification documents are common to every mortgage approval. The following are a list of the most common documents requested when applying for a mortgage.
Credit Report Typically, the mortgage professional you’re working with will order your credit report and submit it to the lender with your mortgage application. Government Issued Identification This identification is required to verify your identity and also to ensure the correct spelling of your full legal name. Information on your driver’s license should be current and accurate. Social Insurance Number All income tax paying Canadians have this 9-digit number, also known as your SIN. Providing it when your broker is ordering your credit report ensures the report generated is for you and not for someone with the same or similar name and birth date. Down Payment Confirmation If the down payment is coming from your own funds, then the lender requires a 3-month history via bank statements or a statement of investments using GICs and RRSPs. If there is a large deposit in your account within the 90 days, an inheritance for example, then lenders will need to know where the money came from and will require verification. For gifted funds, you will need a gift letter from an immediate family member. Often lenders will ask for proof the funds have been deposited to your bank account. If your funds are borrowed, then you’ll be asked for paperwork to confirm the amount and terms. Income Confirmation You will usually have to provide your two most recent pay stubs, a Letter of Employment and in many cases, your last two years of tax returns and Notices of Assessment to confirm no outstanding taxes. Solicitor Information If your lender requires a lawyer to close your mortgage, you will need to provide the contact details including the name of the law firm, phone number, fax number, office address and email address. If you need a lawyer, I would be happy to refer a number of them to you. Existing Property Information If you are on the title of any other property, you will have to provide documentation to confirm the monthly costs related to that property. Agreement of Purchase and Sale If you are purchasing, this contract is required along with the property’s MLS sheet. Your Realtor will draw up the contract. If there are conditions such as subject to financing or subject to sale of your existing home, then the lender will need confirmation that those conditions are lifted. Your Realtor will provide that document. Appraisal Property appraisals are becoming more common these days, especially when you are putting down more than 20% and the mortgage is not insured. The lender wants to know the real value of the home, independent of its listing or negotiated price, to compare against what you’ve agreed to pay and to make sure the house is, in fact, worth the money. There may be a cost to you and varies depending on region, property, and lender requirements. Working with a Mortgage Professional An experienced mortgage professional will guide you through the mortgage process. Because they have developed relationships with lenders, they are equipped to work with lenders on your behalf. By working with a mortgage professional, you have a trusted advisor and problem solver who takes the time first to understand your needs. Both short-term and long-term, they can recommend the right mortgage and options available. The changes to the Stress Test will on average increase purchasing power by 3%, so if you were qualified to purchase up to $300,000, you might qualify for a $309,000 purchase come on April 6th. Clients with higher incomes and larger down payments will notice a greater increase in purchasing ability, and some examples I’ve read about show that on a $500,000 purchase for a high income earner, they might be able to increase their purchasing power up to $525,000. Just remember that everything is case by case.
The Government of Canada has announced that the on April 6, 2020 the Stress Test will be revised to make qualifying for a mortgage a reality for more Canadians. To qualify for a mortgage loan in Canada, homebuyers need to pass a “stress test” to prove they can afford payments at a qualifying interest rate which is typically higher than the actual rate in their mortgage contract. The government implemented this measure to ensure that Canadians can afford their mortgage payments if interest rates were to rise in the future. Today we have to qualify clients at the benchmark rate of 5.19%, regardless of their contract rate.
The changes will mean that instead of using 5.19% to qualify clients, I will be able to use a weekly median rate plus 2.00%. So let’s say the weekly median rate was set at 2.85% today, we would use 4.85% as the qualifying rate which is 34 basis points less than the old qualifying rate (5.19%). 34 basis points is a massive difference that will make the debt servicing ratios much more reasonable. Every other week I see situations where clients can debt service the real contract rate on a mortgage amount, but don’t pass the stress test at that same mortgage amount. In these scenarios we reduce the purchase price they would be approved for. Please reach out if you want me to walk you through the process, let's get you into a house! Government of Canada Announcement https://www.canada.ca/en/department-finance/news/2020/02/minister-morneau-announces-new-benchmark-rate-for-qualifying-insured-mortgages.html OSFI Announcement https://www.osfi-bsif.gc.ca/Eng/fi-if/in-ai/Pages/bnchrt-let.aspx New clients often call me and tell me that they want to buy a house but won't have the down payment resources until they sell their current home. What clients want is a bridge loan, and there are many misconceptions of what a bridge loan is, and how you can get one. To help reduce the stress of buying and selling, I've put together a brief run-down on what a bridge loan is, and how you get one.
Bridge Loan Information
“I want the lowest rate” are usually the first words I hear when meeting a new client. And I get it, we all want to save money, but focusing on the “lowest rate” can be a costly mistake if you don't know what you're signing up for.
On average Canadians break or refinance their mortgage term every 3.7 years, meaning that if you sign up for a 5-year fixed term and have to break your term or refinance, you could be in for a hefty penalty. Selecting a term with a slightly higher interest rate but more flexibility could end up saving you a lot of money. When deciding on a term and a lender, it is important to understand that there are several factors that affect how break penalties are calculated. First off, there are different penalties for fixed-rate terms and variable rate terms. Secondly, each lender decides how they calculate break penalties and I will review those with you prior to making a decision. Third, we need to discuss your plans and goals. At the end of the day, you need to determine what is most important to you and your family; flexibility or the lowest rate. Do you want the lowest rate, or do you want to pay less? At the end of the day, I want you to know that there is much more to discuss than just rate. And don't worry, if you are rate conscious, I will always have the lowest rates on the market. |
AuthorPaul holds a Master's degree in Business Administration, loves to golf, watch hockey, and drink black coffee. Archives
February 2024
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