Why early payout penalties matter now more than ever

We are deep in the competitive spring real estate market! And we’re seeing a very interesting rate anomaly. Fixed-rate mortgages are very competitively priced and gaining in popularity, while variable-rate mortgages are looking overpriced. We’re even seeing ten-year mortgages at good rates back in the news. If the market is telling us that fixed-rate mortgages have an advantage, then be sure to look at the fine print because the devil is in the details and early payout penalties matter.

Why? Sometimes you just need to get out of your mortgage! It’s impossible to plan for many of the things that will happen in our lives, like job loss, illness, divorce, relocation, or another personal matter. Or when much better mortgage rates become available. Your needs and the market can shift easily during the term of your mortgage and the last thing you want is a painful penalty to get out early. That’s why it’s important to consider what your early payout penalty might be before you get your mortgage. We all want to believe that none of these scenarios will transpire, but when they do, it’s a relief to have a cost-effective option to get out.

Generally, to break your mortgage, you can expect to pay the greater of either a) three months’ interest, or b) the interest-rate differential (IRD). With the IRD, your mortgage lender will want you to pay the equivalent of what they will lose by releasing you from your mortgage and lending the money at current rates.  Not all lenders calculate IRD the same way, and the differences can amount to thousands or even tens of thousands of dollars.

Early payout penalties are particularly important to consider if you are looking at a 10-year mortgage. If you break a 10-year mortgage before 5 years, the penalty with most lenders can be substantial. If there is a chance you could break the mortgage in the first 5 years, you may not want to consider a 10-year term.

Don’t let anyone tell you early payout penalties are “all the same”. They’re not. When choosing between mortgages, be sure to compare how the early payout penalty will be calculated. If you ever need to get out of your mortgage early, having the right mortgage could save you stress and big money.

Advice on how to avoid painful penalties is part of the service I provide to my clients every single day!

The Lowdown on Downpayments

We get questions about downpayment all the time! So here is the lowdown on how much you need, and how you might get it.

How much do you need? Not surprisingly, most Canadian homebuyers purchase a property with the absolute minimum downpayment. The thing is, the minimum can vary, so you want to be sure you know how it's calculated.

Will you live in the home? If the house will be owner-occupied, then you need 5% down for the first $500,000 of the purchase price, and 10% for any amount over $500,000 up to $999,999. If the purchase price is $1,000,000 or more, the minimum down is 20%.

Hoping to skip the cost of mortgage default insurance? Then you'll need at least 20% down. Any downpayment less than 20% of the purchase price requires this insurance, which will be added to your mortgage principal.

Buying a rental or recreational property? If it's not going to be your own principal residence, then you'll need 20% down. Genworth and CMHC have a vacation/second home program that allows you to put 5% down but mortgage default insurance will be required. Rental properties require 20% down.

Are you new to Canada? If you're a permanent resident, then you'll need the same downpayment as a Canadian citizen: 5% for the first $500,000 and 10% after that. If you are a non-permanent resident, then you may need 10% down. And if you're not a resident of Canada, then you'll need at least 35% down from your own resources (not borrowed).

Smart ways to come up with a downpayment

If you're looking to buy a second home, then your best path to a downpayment is often to refinance your existing home. A review of your situation is the best starting point.

If you're saving for your first home, here are some ways to come up with the cash:

  1. A financial gift: If you're lucky enough to have financial support from a parent or other blood relative, you'll need to get a form signed that says the funds are a gift and that you are not required to pay the money back at any time.

  2. Your RRSP: You can withdraw up to $35,000 tax-free from your RRSP or $70,000 per couple. The recent federal budget increased this from $25,000 and also announced that in 2020, this program will be available to divorced individuals. You will be required to pay the funds back over 15 years.

  3. TFSA/Investments: If you withdraw from your TFSA to boost your downpayment, you're allowed to re-contribute, so you never lose your TFSA room. If you haven't set up a TFSA, then do it today and set it up so money goes in every month.

  4. Early inheritance: Many parents and grandparents would rather help with the purchase of a home while they're alive rather than having their children wait for an inheritance.

  5. Sell assets: For instance, a vehicle, or jewelry. You need to show 3 months of bank statements to support your downpayment, and explain any large deposits.

  6. Money from outside of Canada: If you're bringing funds from outside of Canada, you'll want to have those funds in Canada for at least 30 days before closing, and you'll need to provide 3 months of financial history from the original account they came from.

Often home buyers are actually closer than they think to buying that first or next property. Get in touch any time. Early advice can save time, money and stress!

Bank of Canada will likely press pause on 2019 rate hikes

Interesting article written by Katherine Greifeld, Bloomberg News

The world’s largest money manager expects the Bank of Canada to hit the brakes on policy

tightening in 2019.

With officials set to convene in Ottawa, BlackRock Inc. says the central bank will probably hold

rates steady until at least next year as Canadian growth cools and lower oil prices work their way

through the economy, weighing on the inflation outlook. Short-end traders largely agree:

Overnight index swaps are barely pricing in any tightening over the next 12 months.

Investors have slashed expectations for hikes following a dovish December policy meeting and

amid a broad reassessment of the prospect of central-bank tightening as global growth shows

signs of slowing. Given increased market volatility and more restrictive financial conditions, the

BOC will likely pause to see the effects of its five rate hikes since mid-2017, according to

BlackRock’s Aubrey Basdeo.

“The bank has latitude to go on an extended pause,” said Basdeo, the firm’s Toronto-based head

of Canadian fixed income. “What’s the rush to get to neutral if inflation’s not an issue?”

The Canadian dollar sank almost 8 per cent against the greenback in 2018, the second-worst

performer among Group-of-10 currencies, although it’s rebounded along with oil to start 2019.

Basdeo expects the dollar-loonie pair to stick to a $1.30-$1.36 range as policy makers take a

wait-and-see approach, from about $1.33 currently.

Different View

Not everyone agrees. Morgan Stanley recommended shorting the greenback against the Canadian

dollar in a note to clients Monday, targeting a move to $1.28. While a sputtering housing market

and weak business investment pose challenges to the Canadian economy, “the risk of a hawkish

surprise is growing” from the Bank of Canada given such low market expectations.

“Increasing prospects for a weaker USD, an underpriced BOC curve, increasingly balanced risks

on oil and supportive technicals suggest USD/CAD should fall from here,” wrote foreignexchange

strategists David Adams and Sheena Shah.

Citigroup Inc., while anticipating policy makers will keep rates unchanged Wednesday, sees a 40

percent chance of a hawkish hold, and recommends clients short the U.S. dollar relative to the

loonie ahead of the meeting.

“Disappointment to dovish expectations may trigger a bullish CAD reaction as the BOC is

interpreted as one of the most hawkish central banks within the G-10,” FX strategist Kiranpal

Singh wrote Monday.

Mortgage rates in Canada explained

Article from the Financial Post November 2018 to further explain why interest rates are different on insured versus uninsured mortgages in Canada.

—————————————————————————————————————

Ted Rechtshaffen: The government has effectively decided

to support home buyers who do not necessarily have the

funds to buy a house

November 13, 2018 Financial Post

I used to think paying down debt and having a good credit rating would reward me.

Then I went to renegotiate my mortgage and was told that my five-year fixed mortgage rate

would be 3.84 per cent. I thought that was pretty good until the neighbour’s 27-year-old kid told

me the rate on his mortgage was 3.39 per cent for the same term.

Wait. What?

How did that kid get such a great mortgage while I’m paying an extra 0.45 per cent a year?

The answer is that in 2018, he is a much better credit risk for the bank. This may not make sense

on the surface, but let me explain how crazy our mortgage system has become. From the bank’s

perspective, they would rather lend to someone who put down very little but had their loan

guaranteed by the Canadian Mortgage and Housing Corporation (CMHC), than to someone

borrowing $300,000 on a $1.5 million house with no insurance or guarantee on the payment of

that mortgage.

Now, it is true that in order to qualify for the low mortgage rates you would have to pay a onetime

insurance payment to CMHC or another Insurer. At the moment, this insurance cost is

usually a little more than the mortgage rate benefit of getting a lower rate for a low down

payment, although there have been times this year, when it was actually better to pay for the

insurance and get a much cheaper mortgage.

To understand how we got here, let’s start with the concept of an insured mortgage, an insurable

mortgage and an uninsurable mortgage. These terms are key in 2018 to understanding the

mortgage-rate mayhem.

Today, an insured mortgage is one where the value of the home is under $1 million, the down

payment is less than 20 per cent, the amortization period is at a maximum 25 years, and the home

is not a rental property. A person in this scenario can get a rate as low as 3.39 per cent on a fiveyear

fixed mortgage. The borrower pays the mortgage default insurance premium. Mortgage

insurers in Canada are CMHC, Genworth and Canada Guaranty.

An insurable mortgage is one where the value of the home is under $1 million, the homeowner

puts down more than 20 per cent of the purchase price and the amortization period must be a

maximum of 25 years. This person can get a rate as low as 3.74 per cent on a five-year fixed

mortgage. The rate is higher as most lenders are insuring these mortgages at the lender’s cost. In

other words, the lender is paying the mortgage default insurance premium instead of the

borrower.

An uninsurable mortgage covers everything else, but is often simply one where the value of the

home is more than $1 million. It also includes refinancing an existing mortgage or equity

takeouts (meaning borrowing more to take some cash out of your home), or an amortization

period up to 30 years. This person can get a rate as low as 3.84 per cent on a five-year fixed

mortgage. The rate is the highest of the three scenarios as the lender cannot acquire default

insurance for these mortgages.

According to Walter Lee, director of business development at First Financial Inc., the person in

better financial shape, and with an uninsurable mortgage is facing one more hurdle they didn’t

expect.

“Not only are these types of clients facing higher rates, but the renewal rates they receive from

their current lender are less competitive than before, because the lender knows that you will face

a stress test if you go elsewhere,” said Lee.

By stress test, Lee is referring to the new rule whereby you must qualify for a mortgage based on

a formula that assumes you are borrowing at a rate two per cent higher than the actual rate you

have negotiated or the Bank of Canada Qualifying Rate — whichever is higher. These days the

Bank of Canada Qualifying Rate is 5.34 per cent. While this stress test may not really affect

those with high income and good credit, for many people it is restricting the funds available to

them to buy a house. With less credit comes lower house prices.

Based on these rules, is it any surprise that more expensive homes are suffering the most in terms

of price decreases?

According to Lee, “clients often are shocked at the rate difference. They say ‘You are telling me

I can get a better rate to put down less?’” Not only that, but many first-time buyers say that they

are not going to wait another year to save up more, when they think mortgage rates will be

higher in a year. Essentially, the message to them is put down less and buy today.

The government has effectively decided to support home buyers who do not necessarily have the

funds to buy a house. This may get me in trouble but why do we want this at this stage of the

housing cycle with increasing rates? Don’t we want people to buy a house when they can afford

to do so? Especially now?

On the other end of the spectrum, what about the person who has no mortgage but owns a house

worth more than $1 million. Even without a mortgage, there is clearly a challenge for them. Most

people that are in the market for that house can’t purchase it without a mortgage. Because they

are now facing a higher rate on their borrowing cost, they are less likely to pay as much for that

house. More importantly, because they can get less total credit from a lender, they are less likely

to pay the asking price. The big crime is that this person owns a house worth over $1 million.

The current mortgage environment is a prime example of how politicians have decided to

interfere with the natural market and the result is some very strange rules that make winners of

the banks and put higher costs on those who should have the lowest costs in a free market

system.

Whether it is right or wrong, the end result is a situation that is built in Ottawa and the provincial

capitals. It is one that has become misaligned in terms of borrowing costs and borrower risk. In

the lending world, that is almost never a good situation.

https://business.financialpost.com/real-estate/mortgages/why-your-neighbours-kid-is-getting-a-bettermortgage-rate-than-you

Broker vs Banker

Broker vs Banker

You want it all: the best available rate with exactly the right features you need to live comfortably with your mortgage and pay if off in record time. If you want the perfect mortgage, you need to shop around. And that’s our strength. we offer access to over 50 of Canada’s leading lenders, including major banks, credit unions, and national, regional and private lenders. We do the research for you, finding you the best mortgage across multiple lenders.

Fixed or Variable-Rate Mortgage?

If you are rate shopping, you’ll notice that the lowest available rate will be for a variable mortgage, which is why we are often asked “what does variable mean and how is it different from a fixed-rate mortgage?”

 With a variable mortgage, your rate will move in conjunction with your lender’s Prime lending rate, which in turn tracks the Bank of Canada’s rate, and will typically be quoted as Prime minus a specified percentage. Unless you have an economic ouija board, you won’t be able to predict what kind of rate ups and downs might be ahead of you.

 With a fixed-rate mortgage, your payments are fixed for the term of the mortgage, which offers stability.  Fixed-rates are usually better suited to first-time buyers or those who haven’t owned a home for a very long period. Ask yourself these questions: Do you like or need to know exactly what your payment is going to be over a longer period of time? Do you want to avoid the need to watch rates? Do you have less than 20% down? If you answered “yes” to all or most, a fixed-rate mortgage could be the better choice for you.  

 A variable-rate mortgage is best suited to people who have a flexible budget and can tolerate slightly more risk. Ask yourself these questions: Do you watch market conditions? Can you handle any rate increases that could increase your payment? Do you have more than 20% equity in your home? If you answered “yes” to all or most, a variable-rate mortgage might best suit your needs. Most variables allow you to exercise an option to “lock in” a fixed rate at any time for the remaining portion of your mortgage term or longer. You can also set up your payments at what they would be if you took the higher rate, which helps you pay down your mortgage faster, and creates a financial buffer for you if rates rise later. 

 If the uncertainty of a variable rate is going to give you sleepless nights, you’re in good company. Many Canadians prefer the certainty of a fixed-rate mortgage. They know exactly how much they will pay over the term of their mortgage, and they can plan accordingly… with no financial surprises.  However, lower-rate variable mortgages with a strong Prime minus offer give you the potential to save a lot on interest. And, if your circumstances change and you need to get of out of your mortgage, you will appreciate the lower penalty to get out of a variable versus a fixed-rate mortgage.  

 Your best option is to get professional and personalized advice.  We would be happy to help you determine which option is best suited to your needs.

 

5 Reasons to refinance

For many Canadians, their home is a terrific repository of wealth. Home equity can build nicely by chipping away at payments and through increasing home values. Accessing home equity through a refinance (min 20% home equity) has for years been an easy, low-cost way to get needed funds. Various new mortgage rules and “stress-testing” has made refinancing more complicated, but it’s a strategy that continues to make good financial sense for certain homeowners that qualify. Here are five reasons why:

  1. Fresh start. If you have too much high-interest debt, you may be able to roll everything into one manageable monthly payment on a low-interest mortgage. Then you get a financial re-set, and can potentially save thousands of dollars in interest.
  2. Dream home. If you’ve found the perfect cottage, chalet, or the retirement home of your dreams, refinancing may be the way to make that purchase happen now if you’re not quite ready to sell your primary residence.
  3. Renovate. Renovating your home is often a less expensive option than moving. And the right renovations can improve the quality of your life and increase the value of your home.
  4. Wealth building. A rental property can give you a great wealth building opportunity and a source of retirement income. Or you may want to invest in a new business venture.
  5. Large expenditures. You may be able to get the funds you need for major expenses (tuition, wedding etc.): a much better strategy than loading it all onto high-interest credit cards.

We have access to dozens of lenders, including alternative lenders that are not subject to the new rules and have less stringent qualification guidelines. If you are interested, we can provide you with a personalized analysis so you can determine whether a refinance makes sense. Our job is to help you pay down debt, build wealth, create financial security, and enjoy life to the fullest!

Prepare Early For Your Mortgage Renewal

Simply put, it’s become a lot more complicated to renew a mortgage in Canada. Some clients are surprised to discover they don’t qualify for the best rates with their current lender, or that they can’t switch their mortgage to a new lender for a better rate. Our advice? Start preparing early. Here’s why:

New accounting rules called IFRS 9 (IFRS stands for International Financial Reporting Standard) will cause lenders to pay closer attention to any warning signals that clients may have trouble paying their mortgage. As a result, if your lender feels your risk has increased i.e. perhaps your credit score has slipped, they may then offer you a higher rate at renewal, even if you have never missed a payment.  

Do you have an “uninsured mortgage”? If you want to switch to a new lender for a better rate, that new lender will need to qualify you using the new .”stress test”, which may affect your ability to move your mortgage, and giving your lender no incentive to offer you the best rates at renewal. We can help you understand your options. One of the things we’ll look at is whether we can switch your mortgage to a lower-rate insurable mortgage: a move that could offer huge savings over the long term. Not sure if your mortgage is insured or not? We can find that out for you.

Mortgage rate trends. While fixed rates are higher today than they were a year ago, many lenders are offering exceptionally low rates on their variable rate mortgages. In addition to offering the ability to save on interest, a variable mortgage can be significantly less expensive to get out of should you need to.

It’s critical that you work with a mortgage expert like Brian at Yhard Mortgages who has access to more than 50 different lending options, including credit unions that aren’t subject many of the same rules. So as soon as you hear from your lender about your mortgage renewal, get in touch with us! Or let’s have a conversation about credit improvement tips or discuss the potential impact of changes in your personal situation like reduced household income

Why variable rates are creating a surge in Mortgage activity

This Spring we’re seeing lenders getting aggressive with their pricing for variable rate mortgages: a sign that lenders are fighting for market share, making it a great time to be shopping for a mortgage!

First a reminder of the difference between fixed vs variable.  Fixed rates are often well suited to first-time buyers or those who haven’t owned a home for long because they want to know with absolute certainty what their payment will be for a set number of years.  A variable mortgage has an interest rate that will move in conjunction with your lender’s Prime rate, which in turn tracks the Bank of Canada’s overnight rate, and will be expressed as “prime minus x percent.”  If the Bank of Canada raises or lowers its rate, then you’ll likely see that reflected in your mortgage payment.

Right now, lenders are shaving off those variable rate mortgage offers: creating some of the best rates we’ve seen in many months. Consider the advantages:

1.        Save big on interest. It’s true that your payments could go up if the Bank of Canada’s rate starts to move up. But it would have to go WAY up to wipe out the savings you’d get from some of the current deep “prime minus” variables being offered right now.

2.        Build a buffer. You can set up your payments at what they would be if you took the higher fixed rate, which helps you pay down your mortgage faster, and creates a financial buffer for you if rates rise later.

3.        Easier to get out. If your circumstances change and you need to get out of your mortgage – a situation that happens more frequently than people anticipate -- you will appreciate the lower penalty to get out of a variable vs a fixed mortgage.  You could save thousands!

4.        Lock in later. Most variables allow you to exercise an option to “lock in” a fixed rate at any time for the remaining portion of your mortgage term or longer.

I’ve even got clients breaking their existing mortgages to take advantage of this sudden crop of very low variable rates being offered right now.

It’s not for everyone. But the possibility of big savings is out there right now, and it won’t last forever. Get in touch with us at Yhard Mortgages and we can review the numbers to see if it’s something you should be taking advantage of.

 

Nearly half of existing mortgages in Canada are due for renewal in 2018

Nearly half (47%) of all existing mortgages will need to be renewed this year according to a recent report by CIBC Capital Markets.  A typical year the renewal rate is 25-35%.

This significant increase in renewals comes at the same time mortgages rates are increasing.  Five year fixed rates are up approximately 0.70% from the same time last year.

Under the new tighter guidelines known as B20 that started earlier this year homeowners must now prove they can service the mortgage debt at a qualifying rate of the greater of the contractual mortgage rate plus 2% or the 5 year benchmark rate published by the Bank of Canada currently at 5.34%.

What does this all mean?  Interest rates still remain incredibly low & your options when your existing mortgage is up for renewal is incredibly high.  We highly recommend contacting us at 902-401-8143 to discuss your mortgage renewal options and help to get you thru this B20 Stress test.