3 May

WHAT DOES A “RATE HIKE” ACTUALLY MEAN?

General

Posted by: Dheeraj Mand

TD Bank has increased it’s posted rates and RBC did the same on Monday. This increase, from 5.14% to 5.59% at TD, is the “biggest move in years.” The change came because of the bond yields increasing. We do expect every other lender to follow suit.

But, actual interest rates have not changed… so what exactly is going on?

The banks have specifically increased something called the “posted” rate.

A “posted” rate is used for three purposes:

  • Fools clients into thinking rates are higher than they are by being displayed in the “Rates” section of a bank’s website.
  • A ~5% decrease in affordability for many borrowers. The posted rate is the benchmark rate that lenders use for qualifying a mortgage (a bank’s “stress test”).
  • It is used to calculate the bank’s mortgage penalty.

First, let’s address the clients who renew their mortgages when the banks send out renewal letters…

Did you know that 80% of homeowners renew with their current mortgage lender? Did you also know that the Bank of Canada published a study that says:

“Lenders have improved their ability to price discriminate… offering discount rates to different sets of consumers, based on their willingness to pay.”

Lenders know that at renewal, most clients do not shop around as they did when they obtained their initial mortgage, and are therefore less likely to offer their best rate to current borrowers.

So, this higher rate is for people who don’t know better. Please remember that the banks are not there for your client. A recent CBC article shows that the banks are there to make money first and provide advice second.

Second, for qualification, the lenders go by their “posted rate” to qualify a mortgage. If a client gets a variable at 3%, the lender is required to qualify them at the higher rate of posted/benchmark and 2% above their contract rate (in this case, 3%). However, with lenders increasing their posted rates, the client will have to be approved at 5.59% instead of 5.14%. This will affect home buyers and decrease affordability by about 5%.

Third, banks use the posted rate for their penalty calculations. The higher the posted rate, the higher someone’s potential penalty is when they pay out their mortgage. This increase in the posted rate will increase people’s penalties quite substantially for Bank Interest Rate Differential (IRD) penalties. This is definitely not in the clients’ best interests. A borrower could do much better by going with a variable rate penalty or a monoline IRD penalty.

BONUS: OK, so we now know that the Posted Rates have increased. What we don’t know is why…

The first reason for a lender to increase their rates would be when the bond yields increase. We have seen a slight increase but not that much, and definitely not enough to warrant such a high increase in a bank’s posted rate. Generally, when the bond market changes, the discounted rates will change. Discounted rates are the rates that clients actually see when they get their mortgages.

One sentiment is that TD and RBC are trying to warn people to lock in now so they can make more money and have greater “spreads” between the bond yields and mortgage rates.

If I had a crystal ball, or if I was a portfolio manager, I may have more info for you here… Alas, this is all I can say on this matter. If you have any questions, contact a Dominion Lending Centres mortgage professional who can help.

26 Apr

SUBJECT TO FINANCING- A MUST!

General

Posted by: Dheeraj Mand

With most people who are new to real estate and looking for their first home (or possibly second), one of the most significant times is when your offer to buy is accepted by a seller. Unfortunately, that moment is quickly followed by stress, as not many people know what comes next- securing financing. 99% of the time a realtor will ask you if you have been qualified by a bank or a mortgage broker before they write an offer on your behalf. What should be told to you, the client, by the realtor and your mortgage broker is that you need to have a subject to financing condition in your offer.

In order for someone to receive a mortgage from a lender, they need to meet the lender’s (and some times the insurer’s) conditions. Usually, these all revolve around a borrower’s down payment money, their income as well as employment, and the property they are making an offer on. If you make an offer on a home and it is accepted, but for example the lender doesn’t like the property because the strata board doesn’t have enough money in their contingency fund to fix the leaking roof in the next 12 months, they could turn down your application and not lend you money.

If you don’t have the money, you don’t get the home. That is why you have a subject to financing condition, so if for any reason, you can’t meet the lender’s requirements with your income, down payment, or if the property is unacceptable to them or the insurer, you can cancel your offer without any hassle or loss of deposit.

What happens if you make a subject free offer? If you make an offer on a home and it doesn’t have a subject to financing condition in it, that house is now yours once the offer is accepted. Your deposit is no longer yours, and you have to come up with the remaining money. If you cannot and are unable to complete the purchase, the seller may file a lawsuit against you for damages as they have now taken their home off the market potentially losing out on the ability to sell their home to someone else while they waited for you to get financing.

Always, always, always have a condition in your offer that states subject to financing and allow yourself 3 to 5 business days. If you go in without that fail safe and it turns out you really need it, you will potentially be on the hook and if the seller wishes, he or she can sue you for any potential losses. Subject to financing is a must! If you have any questions, contact a Dominion Lending Centres mortgage professional.

22 Apr

BREAKING A MORTGAGE – CAN YOU DO IT?

General

Posted by: Dheeraj Mand

Do you have a mortgage? So do I! Looks like we have something in common. Did you know that 6 out of 10 consumers break their mortgage 38 months into a 5-year term? That means that 60% of consumers break a 5-year term mortgage well before it’s due…but do you also know what the implications are of this? Let’s take a look!

People need to break a mortgage for a variety of reasons. Some of the most common include:

· Sale and purchase of a new home *without a portable mortgage
· To take equity out/refinance
· Relationship changes (ex. Divorce)
· Health challenges or life circumstances are altered

And a whole other variety of reasons. So what happens if you have one of the above reasons, or one of your own occur and you have to break your mortgage? Here is an example of what would happen:

Jane and John Smith have lived in their home for 2 years now. When they bought the home, they recognized that it would need some major renovations down the road, but they loved the location and the layout of the home. They purchased it for $300,000 and have 3 years left but would like to access some of the equity in their home and refinance the mortgage to afford some of the bigger home renovations. This refinancing would be with 3 years left on their current mortgage. So, what are Jane and John looking at for cost? There are two methods that are used to calculate the penalty:

POSTED RATE METHOD (used by major banks and some credit unions)
With this method, the Bank of Canada 5 year posted rate is used to calculate the penalty for Jane and John. Under this method, let’s assume that they were given a 2% discount at their bank thus giving us these numbers:

Bank of Canada Posted Rate for 5-year term: 5.14%
Bank Discount given: 2% (estimated amount given*)
Contract Rate: 3.14%

Exiting at the 2-year mark leaves 3 years left. For a 3-year term, the lenders posted rate. 3 year posted rate=3.44% less your discount of 2% gives you 1.44% From there, the interest rate differential is calculated.

Contract Rate: 3.14%
LESS 3-year term rate MINUS discount given: 1.45%
IRD Difference = 1.7%
MULTIPLE that by 3 years (term remaining)
5.07% of your mortgage balance remaining. = 5.1%

For the Smith’s $300,000 mortgage, that gives them a penalty of $15,300. YIKES!

Now, Jane and John were smart though and used their Dominion Lending Centres broker to get their mortgage. Because of this, a different method is used.

PUBLISHED RATE METHOD (used by broker lenders and most credit unions)

This method uses the lender published rates, which are generally much more in tune with what you will see on lender websites (and are generally much more reasonable). Here is the breakdown using this method:

Rate when you initially signed: 3.24%
Published Rate: 3.54%
Time left on contract: 3 years

To calculate the IRD on the remaining term left in the mortgage, the broker would do as follows:

Rate when you initially signed: 3.24%
LESS Published Rate: 3.54%
=0.30% IRD
MULTIPLE that by 3 years (term remaining)
0.90% of your mortgage balance

That would mean that the Smith’s would have a penalty of $2,700 on their $300,000 mortgage

A much more favourable and workable outcome! Keep in mind that with the above example is one that works only if the borrower has:
· Good credit
· Documented income
· Normal residential type property
· Fixed rate mortgage

For Variable rates mortgages, generally the penalty will be 3 months interest (no IRD applies).

If you find yourself in one of the scenarios that we listed at the start of this blog, or if you just need to get out of your mortgage early, be smart like Jane and John—review your options with a DLC Broker! In the example above, it saved them $12,600 to work with a broker! It really does pay to have a Mortgage Broker working for you.

21 Mar

WHAT IS A “MONOLINE” LENDER?

General

Posted by: Dheeraj Mand

What usually follows once someone hears the term “Monoline Lender” for the first time is a feeling of suspicion and lack of trust. It’s understandable, I mean why is this “bank” you’ve never heard of willing to loan you money when you’ve never banked with them before?

In an effort to help you see the benefits of working with a Monoline Lender, here is some basic information that will help you understand why you’ve never heard of them, why you want to, and the reason they are referred to as lenders, not banks.

Monoline Lenders only operate in the mortgage space. They do not offer chequing or savings accounts, nor do they offer investments through RRSPs, GICs, or Tax-Free Savings Accounts. They are called Monoline because they have one line of business- mortgages.

This also plays into the reasons you never see their name or locations anywhere. There is no need for them to market on bus stop benches or billboards as they are only accessible through mortgage brokers, making their need to market to you unnecessary. The branch locations are also unnecessary because you do not have day-to-day banking, savings accounts, investment accounts, or credit cards through them. All your banking stays the exact same, with the only difference of a pre-authorized payments coming from your account for the monthly mortgage payment. Any questions or concerns, they have a phone number and communicate documents through e-mail.

Would it help Monoline Lenders to advertise and create brand awareness with the public? Absolutely. Is it necessary for them to remain in business? No.

Monoline Lenders also have some of the lowest interest rates on the market, the most attractive pre-payment privileges, and the lowest pre-payment penalties, especially when compared to a bigger bank like CIBC or RBC. If you don’t think these points are important, ask someone whose had a mortgage with one of these bigger banks and sold their property before their term was up and paid upwards of $12,000 in penalty fees. An equivalent amount with a Monoline Lender would be anywhere from $2,000-$4,000 in fees.

Monoline Lenders are not to be feared, they should be welcomed, as they are some of the most accommodating and client service-oriented lenders around! If you have any questions, don’t hesitate to call your local Dominion Lending Centres mortgage professional.

18 Mar

CANADIAN REAL ESTATE; CANDY FOR THE KIDS

General

Posted by: Dheeraj Mand

Housing & Smarties

All levels of government are trying to control a situation akin to that of 22 kids that want a Smartie, and there are only six-and-a-half Smarties to be had.

As authority figures tend to, they are creating all kinds of rules about which kid can have a Smartie, and some kids are being marginalized. As any parent knows, efforts to try and suppress Smartie demand by dealing with the kids themselves is foolish.

And no parent would ever suggest that these Smarties were the last Smarties on the planet Earth.

Seriously, just get another box or two of Smarties (approx 15 smarties per box). Then, each kid can have one, even that kid visiting here from another country. Why not show them some hospitality if we now have more than enough Smarties to go around.

But we clearly do not have enough Smarties on hand, and they seem to be tough to find.

So, why not call up the Smarties manufacturer’s and see how we can help them increase supply?

Let’s build more Smarties!

Instead of consistently singling out one kid or another and saying ‘no Smarties for you’, or ‘you pay extra’, and you over there ‘you need to work harder to earn the right’… in other words restrictions and punishment… let’s start building supply.

Then everyone can have one, two, three, or more.

More importantly when you have enough Smarties, then people will still want to come over to your house, and those people will add value – they’ll do chores in order to pay off those Smarties.

It’s a win-win.

Smarties for all!

1 Mar

FIXED VERSUS VARIABLE INTEREST RATES

General

Posted by: Dheeraj Mand

Fixed Interest Rates

This is usually the more popular choice for clients when it comes to deciding on which type of interest rate they want. There are many reasons why, but the most unsurprising answer is always safety. With a fixed interest rate, you know exactly what you are paying every month and you know that the amount of interest being charged for the term of your mortgage will not increase and it will not decrease. Fixed interest rates can be taken on 1-year, 2-year, 3-year, 5-year, as well as 7 and 10-year terms. Please note, term is not meant to be confused with amortization. When you have a 5-year term but a 25-year amortization- the term is when your mortgage is up for renewal, but it will still take you the 25 years to pay off the entire debt. The biggest knock on fixed interest rates when it comes to mortgages, especially 5-year terms, is the potential penalty. If you want to break your mortgage and pay it out, switch lenders, take advantage of a lower rate, or anything like this and your term is not over, there will be a penalty. With a 5-year term, a fixed rate penalty can be anywhere from $1,000- $20,000 or more. It all depends on the lender’s current rates, what yours currently is, the length of time remaining on your term, and the balance outstanding. The formula used is called an IRD (interest rate differential) and the penalty owed will either be the amount this formula produces or three month’s interest- which ever is greater. Fixed interest rates, especially 5-year terms can be the most favourable. They are safe, competitive interest rates that you will not need to worry about changing for the term of your mortgage. However, if you do not have your mortgage for the entire term, it could hurt you.

Variable Rate Interest

The Bank of Canada sets what they call a target overnight rate and that interest rate influences the prime rate a lender offers consumers. A variable rate, is either the lender’s prime lending rate plus or minus another number. For example, let us say someone has a variable interest rate of prime minus 0.70. If their lender’s prime lending rate is 5.00% in this example, they have an effective interest rate of 4.30%. However, if for example the prime rate changed to 6.00%, the same person’s interest rate would now be 5.30%. Written on a mortgage, these interest rates would look like P-0.7. Variable interest rates are usually only available on 5-year terms with some lenders offering the possibility of taking a 3-year variable interest rate. When it comes to penalties, variable interest rates are almost always calculated using 3-months interest, NOT the IRD formula used to calculate the penalty on a fixed term mortgage. This ends up being significantly less expensive as breaking a 5-year term mortgage at a fixed rate of 3.49% with a balance of $500,000 will cost approximately $15,000. That is if you use the current progression of interest rates and broke it at the beginning of year 3. A variable interest rate of Prime Minus 0.5% with prime rate at 3.45% will only cost $3,800. That is a difference of $11,200. You can expect to pay this kind of amount for the safety of a fixed rate mortgage over 5-years if you break it early.

Which one is best?

It completely depends on the person. Your loan’s term (length of time before it either expires or is up for renewal) can be anywhere from a year to 5 years, or longer. A first-time home buyer typically has a mortgage term of 5 years. Within those 5 years, the prime rate could move up or down, but you won’t know by how much or when until it happens. Recently, variable rates have been lower than fixed rates, however, they run the risk of changing. With fixed interest rates, you know exactly what your payments will be and what it will cost you every month regardless of a lender’s prime rate changing. If you go to the site www.tradingeconomics.com/canada/bank-lending-rate you can see the 10-year history of lender’s prime lending rate. Because lenders usually change their prime lending rate together to match one another (except for TD), this graph is a good representation. As you can see, from 2008 to 2018, the interest rate has dropped from 5.75% to 2.25% all the way back up to 3.45%.  Canada has had this prime lending rate since 1960, and in that time it has seen an all-time high of 22.75% (1981) and all-time low of 2.25% (2010). Whether you want the risk of variable or the stability of a fixed rate is up to you, but allow this information to be the basis of your decision based on your own personal needs. If you have any questions, contact a Dominion Lending Centres mortgage professional near you.

19 Feb

IMPROVING YOUR CREDIT SCORE

General

Posted by: Dheeraj Mand

Your credit score is a big factor when you apply for a mortgage. It can dictate how good your interest rate will be and the type of mortgage you qualify for.

Mortgage Professionals are experienced helping clients with a wide range of credit scores so we can find you a mortgage product even if your credit is far from perfect.

The good news about your credit score is that it can be improved:

  • Stop looking for more credit. If you’re frequently seeking credit that can affect your score as can the size of the balances you carry. Every time you apply for credit there is a hard credit check. It is particularly important that you not apply for a credit card in the six months leading up to your mortgage application. These credit checks may stay on your file for up to three years.
  • If your credit card is maxed out all the time, that’s going to hurt your credit score. Make some small monthly regular payments to reduce your balance and start using your debit card more. It’s important that you try to keep your balance under 30% or even 20% of your credit limit.
  • It’s also important to make your credit payments on time. People are often surprised that not paying their cell phone bill can hurt their credit score in the same way as not making their mortgage payment.
  • You should use your credit cards at least every few months. That’s so its use is reported to credit reporting agencies. As long as you pay the balance off quickly you won’t pay any interest.
  • You may wish to consider special credit cards used to rebuild credit. You simply make a deposit on the card and you get a credit limit for the value of that deposit. They are easy to get because the credit card company isn’t taking any risks.

Contact a Dominion Lending Centres Mortgage Professional if you have any questions.

13 Feb

WHAT’S AN ACCEPTABLE DOWN PAYMENT FOR A HOUSE?

General

Posted by: Dheeraj Mand

Ask people this question and you will get a variety of answers.  Most home owners will say 10% is what you should put down. However, if you speak with your grandparents, they are likely to suggest that 20% is what you need for a down payment.

The truth is 5% is the minimum down payment that you can make on a home in Canada. If you are planning on buying a $200,000 home then you need $10,000.

It all can be explained by the creation of the Canadian Mortgage and Housing corporation (CMHC) by the Canadian government on January 1st, 1946. Before this time, you needed to have 20% down payment to purchase a home . This made home ownership difficult for many Canadians. CMHC  was created to ease home ownership. This was done by offering mortgage default insurance. Basically what CMHC does is it guarantees that you will not default on your mortgage payments. If you do, they will reimburse the lender who gave you the mortgage up to 100% of what the homeowner borrowed. In return lenders allow you to purchase a home with a smaller down payment and a lower interest rate.

CMHC charges an insurance premium for this service to cover any losses that may occur from defaulted mortgages. This program was so successful that CMHC lowered the minimum down payment to 5% in the 1980’s.

However, if you have little credit history or some late payments in the past they may ask you to provide 10% instead of the tradition 5% if they feel there is a risk that you may default at some time.

You should also be aware that the more money you put down, the lower your monthly mortgage payments will be. You also can save thousands in mortgage default insurance premiums by putting 20% down.  At this time,  home buyers who put 5% down have to pay a fee of 4% to CMHC or one of the other mortgage default insurers to obtain home financing. On a $400,000 home this is close to $16,000.

If you can provide a 10% down payment the insurance premium falls to 3.10% and if you can provide 20% it drops to zero.  While 20% can seem like an impossible amount to save, you can use a combination of savings, a gift from family and/or a portion of your RRSP savings to achieve this figure. The best recommendation that I can make is to speak with your Dominion Lending Centres mortgage professional to discuss your options and where to start on your home buying adventure.