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Market news, economic insights, mortgage strategies & tips. For all things mortgage, come enjoy our blog!
Market news, economic insights, mortgage strategies & tips. For all things mortgage, come enjoy our blog!
The new year has arrived & with it, a fresh round of mortgage rule tightening. The new restriction comes in the form of a “stress test” & applies to new mortgages with equity of 20% or more. Qualifying for these mortgages will now have to be done at a rate that is 2% higher than your contract rate.
Previously, a stress test was already in place for all insured mortgages (purchases with less than 20% down), as well as borrowers with uninsured mortgages that took a fixed term shorter than 5 years or a variable rate, meaning that if a borrower with 20% or more down chose a 5 year fixed, they could qualify for the mortgage based off their actual interest rate. Under the new rules, that will no longer be possible through major lenders.
Oddly enough, the new stress test can actually end up being more restrictive than that imposed on insured mortgages. A borrower with the bare minimum down payment of 5% has to qualify for their mortgage based off the 5 year posted rate (4.99%), whereas a borrower with a down payment of, say, 50% who takes a 5 year fixed rate of 3.2% would have to qualify based off the stress test rate of 5.2% (3.2% + 2%). The borrowers impacted by this change will qualify for maximum mortgage sizes of roughly 25% lower than under the previous rules.
My prediction is that the new stress test will actually end up making condos in Vancouver even more expensive, while also driving borrowers to shorter term mortgages & ironically making them more vulnerable to the interest rate fluctuations this was designed to protect them from.
People are always going to want to own property in Vancouver. If borrowers are qualifying for mortgages that are 25% lower, many are still going to want to buy, but will just have to look at lower priced property. Residents of Vancouver have seen the price of property accelerate at warp speed. The FOMO is real & many will be approaching this as a final opportunity to own in Vancouver, regardless of the size of place. This will funnel demand into the lower price points. Those who are no longer able to buy in the price point they want will continue to rent which will keep pressure on the rental market. Both of these would suggest condos are going to end up becoming even more expensive than they are currently.
As I’m sure many of you have heard, for the first time in 7 years the Bank of Canada has raised its key lending rate by 0.25%, which ultimately impacts variable rate mortgages & lines of credit, as prime rate will go up accordingly. This increase comes at a time when Canada is experiencing the lowest inflation level in nearly 20 years & in that sense, this move breaks from tradition. It is clear the Bank of Canada wants to raise rates pre-emptively to try claw their way out of this ultra low rate environment they have created & regain some ammo while they can before another slowdown hits the economy.
What does this mean to you? With the exception of one instance in the late 80s, the variable rate has always been a cheaper path than the 5 year fixed. While you do have the option to “lock in” to a fixed rate, you would be doing so into a higher rate & payment than you have currently.
Those riding the variable rate train have benefitted from some of the lowest interest rates in Canada’s history over the past 9 years. While, psychologically, a rate increase can drive many to panic, keep in mind that a 0.25% increase in rate translates to $12 / month for every $100k of mortgage (amortized over 25 years). In 2010 prime rate rose to 3%, remained there for 4½ years then dropped to 2.7%.
One of the greatest benefits of a variable rate mortgage is exit strategy as the penalty to break the term is just 3 months of interest. Under that light, a fixed rate mortgage can often be riskier path. If there is any uncertainty over the remainder of your term, this is something I urge you to weigh heavily.
There is no shortage of uncertainty in our world right now, both politically & economically. Central banks around the world find themselves in the extremely difficult position of needing to unwind their balance sheets & raise interest rates at a time when core measures are not exactly strong. The deflationary headwinds outweigh the tailwinds in my view so until there are greater reasons for optimism, my advice is to stay the course.
If you have any questions at all, please do not hesitate to get in touch.
A pre-approval may not be what you think. We in the industry should really change the name from “pre-approval” to “rate hold,” as that’s largely what this is.
A pre-approval is not a guarantee that you will get approval, nor should having one be reason to write a subject-free offer. In the best case, a pre-approval means a lender has reviewed your application, told you what mortgage amount you can qualify for & held a rate for you while you look for your home. What the lender doesn’t know at that time, though, is what property you are buying or if the information in your application is accurate, which are key aspects of getting a mortgage approved.
Because pre-approvals aren’t fully underwritten, they aren’t totally accurate. The last thing you want is to waste time looking at properties in a price range that you aren’t going to qualify for so make sure you are as detailed as possible in your application & have your broker review your documents early on to avoid surprises down the road.
What can go wrong? Well, what if the building you want to buy in is a leaky condo? Or a heritage house? Or has a commercial component? What if the property is on leasehold land? What if your offer price is higher than the property is actually worth? Maybe you wrote your expected income in the application, or factored in commission income without a 2 year history of that income. Perhaps your down payment is coming from a family gift but you wrote it as being part of your savings. The reasons for deals falling apart are endless. The reality is most borrowers are going to have a different idea about what is acceptable than the lender.
When you do find a property you’d like write an offer on, let your broker know as early as possible so they can begin gathering the necessary documents & reviewing options for approval. Getting as much done early on will avoid surprises & ensure a smooth approval.
One final note on pre-approvals is that over the last few years, many lenders have flat out stopped offering them or do them based on rates much higher than what you can get on a “live” deal. Setting aside funds at a specific rate costs lenders money, as does paying staff to review & issue your pre-approval. All this work is wasted if the lender doesn’t end up getting your mortgage. Lenders don’t start making money until a mortgage funds & I suspect more & more lenders will trim down their “pre-approvals” in the coming years.
The mortgage industry has completely changed in the last 2 months. With the last round of rule changes, we have now entered a new galaxy of complexity in our industry, where lenders all price their mortgages differently depending on the client, the property & the type of financing requested. It has never been more important for consumers to do their due diligence when shopping for a mortgage.
Before, if a borrower really wanted to do everything on their own & shop lenders themselves, they could. It would require a ton of work – completing many applications, setting up lots of meetings with mortgage specialists, and hours of online research – but for the motivated borrower, it was possible to become a well-informed consumer without drawing on a broker’s service (which is free, by the way). Now? Good luck!
Let me explain: the aftermath of the mortgage rule changes last fall has left every lender with not only drastically different policies than the next, but greatly varying criteria of what types of mortgages they offer & at what rate they will offer them. Even within a single lender’s range of options, the pricing now varies depending on the down payment size (less than 20%? 20%- 25% down? Or greater than 25% down? Greater than 35% down?), amortization & property price.
Many lenders now flat out will only do purchase & not refinances. Some will only do purchases for borrowers who pay for mortgage insurance. Many have eliminated niche programs such as rental purchases or have stopped funding mortgages on properties priced at $1m or higher. It has gotten to the point where brokers, the experts, will have a difficult time knowing what options are available to a client without reviewing their application & studying the matrix of lender policies & pricing nuances.
My point with all this is that it is more important now than ever before to use a mortgage broker. Not only that, but a broker with the experience & size of business to guide you in the best way possible, utilizing the widest range of lenders. Use the experts. If you love how your bank greets you when you walk in & have been with them for 30 years? Great, but understand that they are only 1 option out of 20+ national lenders, not to mention the local institutions. With every bank & nonbank lender sporting drastically different options than the next, there is a very small chance you are getting the best product only speaking with your bank.
The best value you can ask for is someone well versed in the field to help you navigate the wide range of options. Call a broker. Use the expert.
There are a lot of reasons why I love my job. I love people, I love helping people & I love being a part of what is such an exciting & special time in my clients’ lives. I also love building a business & the income opportunities that lay on the horizon. Would I still do this job if I won the lottery? Without a doubt (buuut I might turn my phone off at 5).
When I first started in the business, I was as green as they get, so it was important for me to find a good group who could teach me to build my business the right way. Commission split (the percentage of your finders fee that is paid to your brokerage) was of course something I asked about, but in all honesty it didn’t play a significant role in my decision of where to hang my license & the longer I’ve been in the business, the more firmly I believe that a focus on split is short sighted.
One of the best parts of our office is the support. We have some top shooters who do a ton of volume & brokers who specialize in just about every niche you could imagine. This is a huge resource. I can’t tell you how many times I’ve saved a deal or found a solution way out of left field for a client thanks to insight or a contact from one of my colleagues. The knowledge mine at our office has resulted in a far higher volume & income for me then earning a few extra percentage points on my split.
How many offices have a list of top brokers who will answer their phones at 10:30 on a weeknight or while vacationing abroad to help another broker work through a deal? This is huge for me. Ultimately, it gives me more tools to help my clients & my realtors & pays dividends down the road. Even years later, now that I’m established, there are still files every now & then that may be outside my normal realm of expertise. No one can specialize in all segments of the market (except maybe Rowan Smith… that hamster’s got legs). If a colleague helps me save 2 or 3 deals a year, it’s made up for a 5% difference in split.
For any new broker, the best advice I can give is to find a supportive office & don’t worry about your split. If you come into this business with money as your sole focus, chances are you are not going to be advising clients in terms of what is best for them. The income will come but you have to be in the right environment to learn & grow.
Saving deals, or learning how to be a top broker, is something that can be hard to quantify, while commission split is obviously an easy point of comparison. Just as clients looking for the rock-bottom lowest possible rate are probably setting themselves up for a big (and expensive) disappointment down the road, the same is true in this business with new brokers. The old saying of, “you get what you pay for,” is certainly true in this industry. Like most services, the cheapest (or the highest split) isn’t usually the best thing for you.
If you are a broker who is just breaking into the business, or one who has been at it a few years but wants to hit that next level, I would highly recommend keeping these points in mind & come talk to City Wide.
There are a lot of moving parts when you buy a home. Before you start looking with your realtor, you have to get a price range & pre-approval sorted out with your mortgage broker. Then once that’s all sorted & you’ve found a home, your money needs to be freed up & ready for the deposit, so you might need to speak with your financial adviser or tax adviser, or your family members if any of that down payment money is coming as a gift. Then, before closing you need to sort out your life insurance & your home insurance, and in the midst of getting ready for & coordinating that big move, you have to go in to see your lawyer/notary to sign a small tree’s worth of documents at some point before closing.
The last thing you need on your plate is any hiccups in the mortgage process. Here are the 5 most common mistakes that delay the mortgage process:
If issues come up in the home inspection that the seller drops the purchase price to account for, you need to let your lender know right away. Depending on what the issue is, the lender may need to have it rectified prior to you taking possession. If the bank doesn’t find out about this until they get a copy of the purchase contract from your lawyer a few days before possession, you could put yourself in a real pinch with only a short time until closing.
Nowadays, a pre-approval really just gives you a rate hold & a price range. Lenders don’t fully underwrite pre-approval submissions so it’s vital that you get an approval in writing prior to you removing your financing condition & committing to buy the property. Banks need to look at the whole picture, which includes your financial details AND the property details.
If a portion of your down payment is coming from a family member, or from a line of credit, let your mortgage broker know early on. It’s not uncommon for a client to say down payment is coming from their resources & then we find out that isn’t the case once we start collecting down payment documentation. Lenders want to know about this up front otherwise they will have to go back & get the file re-approved. In some cases, this could even put your approval in jeopardy.
If you recently changed your compensation plan (from salary to commission, or vice versa) or plan to change your employment, tell us right away. Lenders have the right to call your employer at any time before closing to verify your employment details & if something like that comes up late in the game, again, it can jeopardize your approval.
When you get a mortgage, the lender will need to see confirmation of certain details in your application (income, down payment, debts, etc). When I pre-approve my clients, they get a list of what documents will be required for mortgage approval. To make the transaction as smooth as possible, send those in right away. If the lender can get all of those documents up front, you can take a lot of stress & scrambling out of the picture.
Buying a come can be stressful enough. The last thing you need is fuel to that fire so make sure you are upfront with your team of professionals & on the ball in terms of getting them what they need early on.
If you would like to know more about how to ensure a smooth home buying process, contact me at [email protected].
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City Wide Mortgage Services (E, & O, E.). An independent member of Dominion Lending Centres network.