Goooood morning & welcome back from summer,
A LOT has happened. First thing’s first: the Bank of Canada held rates steady this morning but the expectation is that will only last until Oct or Dec at the latest before hopping on the rate drop train.
Global momentum has slowed & commodity prices have drifted down accordingly. The trade war has escalated over the summer & is now turning into a currency war. It’s something like ¼ of all government bonds, $15 TRILLION dollars worth, are negative yielding. Take a moment to consider what that really means.
Bonds have traditionally been where you place money for safety. A negative yielding bond means you are PAYING for the privilege of lending a government money. Think about that. You are guaranteed to lose money if you carry the bond to maturity. This is bananalands. What happened to save your money & be rewarded by having more tomorrow than you’ll have today? What are the implications when you lose money keeping it in what has traditionally been the safety trade? It’s very difficult to wrap your head around how backwards this has become & what impacts this is going to have to the world. Central banks are losing the fight against deflation.
The Bank of Canada expects economic activity to slow in the second half of the year. From what I’m reading, the US needs to drop 50bps at their next meeting & I’ve read as much as 100 bps by the end of the year. That is going to put pressure on Canada to start heading in the same direction. That all sounds great on the mortgage front but when you consider that central banks traditionally need 5% worth of rate cuts to pull an economy out of a recession & we’re a hair under 2%, it’s worrisome to imagine how this is going to end.
I love talking about this stuff so if you have any questions please get in touch. Otherwise, have a lovely day.
Here is a link to the Bank of Canada release: https://www.bankofcanada.ca/2019/09/fad-press-release-2019-09-04/
The federal budget came out yesterday & there were some minor actions targeted to first time buyers I wanted to highlight.
First off, don’t get excited. The impact in Vancouver is likely going to be limited, but basically the gov’t is increasing the home buyers plan RRSP withdrawn from $25k to $35k, effective immediately. Note that the funds still need to be repaid in the same 15 year window.
The second incentive is from CMHC which will provide 5% of a first time buyer’s down payment on a resale property & 10% on a new build. The buyer still needs at least 5% down, but this will help reduce borrowers mortgages to lower their payments.
The loan is interest free so from that perspective, why not take it. Lower payments, less interest. The funds will be repaid upon the sale of the home, but so far it is unclear how this would work exactly. CMHC might share in the capital gain or loss, receiving a portion of the sale price, but we will wait to see how this will be rolled out exactly.
There are requirements to meet this program, namely:
-household income under $120k
-borrowers must have the min 5% down
-the purchase price cannot exceed 4 times the buyers household income.
Based on this, the effective limit on purchases will be less than $500k so the impact of this is going to be limited in our market.
While the budget does allocate $10billion over 9 years for new rental homes, it does not bring in any tax breaks or reduced red tape to developers, which, in my view is a more productive & efficient way to attack these issues, but, hey, I’m not running the country!
Effective Jan 1 the newest mortgage rule was put into effect in Canada – the “stress test.” This video is going to give some background on mortgage stress tests, then explain the new rule.
Currently, if a borrower is buying with less than 20% down payment & is therefore getting an insured mortgage, they already have to qualify off of a stress test rate (being the 5 year posted rate, currently at 4.99%). For borrowers with 20%+ down, they can avoid this same stress test ONLY if they take a 5 year fixed mortgage (or longer), which means that if they want a variable or, say, a 2 year fixed, they would have to qualify off the 5 year posted rate not their actual interest rate.
The new requirement specifically impacts borrowers getting uninsured mortgages, which you can think of as borrowers with 20% down or more. Now, they will have to qualify for their financing based off a new stress test being their interest rate + 2%. So if they chose, say, a 5 year fixed mortgage with a rate of 3%, they would have to qualify based off a rate of 5%.
The irony of all this is that shorter terms generally mean lower rates, which therefore means that borrowers will qualify for larger mortgages taking shorter terms & shorter terms result in a borrower being more vulnerable to interest rate increases which doesn’t exactly benefit clients.
If you’ve bought a presale prior to these new rules being implemented & are curious how this will impact you, as long as you have a purchase contract dated prior to Jan 1, 2018, you’ll be grandfathered under the previous rules.
Additionally, you have a mortgage coming up for renewal & are not able to qualify to switch under the new rules, all is not lost. There are ways we can still qualify you off the previous rules.
If you’re looking to buy a place but can’t qualify for the price point you need under the new rules, give me a call. There are a still a few ways we can still get you into a purchase qualifying of your contract rate.
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.
I’ve wanted to do a video on this for some time, as I keep running into clients who are coming up to the end of their mortgage term, can save money by changing banks only to realize that they can’t actually leave without it costing them money. So we’re going to talk about 2 types of mortgage registration –standard charge & collateral charge mortgages. With some banks moving exclusively to collateral charge mortgages, it’s important to understand the differences.
Standard charge mortgages are what most people are familiar with. With this, the amount of your mortgage is registered on title – no more, no less. If you’re buying a $500k place with $100k down, then only that $400k will be registered.
Now, with a standard registration, once you reach the end of your term, it’s almost like you are a free agent again. You’ll get a renewal offer from your bank & if you find a better offer elsewhere, you can move banks without having to worry about paying legal fees all over again. If you can save money leaving, leave! Easy peasy.
Now the reality here is that an awful lot of people don’t bother to shop around at renewal & they just sign the offer they get in the mail & begin a new term. Well lenders know this & count on this & this is why renewal offers are usually not very good. This is why you should always give me a call when you are 4 months from renewal to see what’s out there.
I bring up renewal b/c the differences between standard & collateral charge mortgages are most evident here. With a collateral charge mortgage, you can’t actually leave your bank unless you pay legal fees all over again. In that sense, the lender has their hooks in you a little deeper. They know it’s going to be more difficult for you to move & because of that they may not be as sharp on their renewal offer. So for borrowers who want to keep their options open at maturity & have some negotiating power with their lender, this may not be the best option.
Further to this, with a collateral charge, all of your secured debt (credit cards, lines of credit) that you have with your bank that is interconnected with your mortgage may have grave implications. If you default on one, the banks can go after your property to pay off those accounts. They can even increase your interest rate by up to 10%. You could potentially lose your house.
So who is a collateral charge mortgage good for? The advantage of this is the bank can advance you more money after closing without involving a lawyer. Provided you aren’t exceed the amount initially registered for, if you wanted to set up or increase your line of credit, take out some equity for renovations or investments, you can do all this & save from having to pay the costs of reregistering.
The problem, is most of the banks that register in this fashion don’t give you the choice.
Know what your options are, know the pros & cons of each & make sure you’re committing to the right product.
I’m Ryan with City Wide Mortgage services, contact me to learn more of the different types of mortgages out there.
Hi Ryan Zupan here with the City Wide Mortgage services. This video is part of our series on what to look for when shopping for a mortgage & today we are going to cover mortgage penalties.
Mortgage penalties, without question, can have the largest impact on how much your mortgage is going to cost you. They can range from very the manageable to the borderline devastating. Some of you have probably heard horror stories or news reports of clients getting hit with penalties of $20k-$30k. I can tell you, these stories are very much true & exactly why you need to know what kind of mortgage you are signing up for.
For this video, we are going to talk primarily about penalties on fixed rate mortgages & the reason for that is with most variable rate mortgages out there, the penalty for breaking is going to be 3 months of interest, so whatever interest you pay per month, multiply that by 3. On the penalty side of things, this is what you want. It’s a lower penalty that what you’ll find with different types of mortgages out there.
Now there are exceptions to that. Right now there are a few variable products out there that have a very low rate, which is great, but they have EXTREMELY high penalties. I’m talking a flat penalty of 3% of the mortgage balance. So on a $400k mortgage, that’s a penalty of $12k, which is huge. Especially when you compare that to what you are saving going with that lower rate option.
On that $400k mortgage, the difference of 0.05% on interest rate, so let’s say 2.3% compared to 2.35%, is around $10 / month, which isn’t really that much. Is it worth risking a penalty that has the potential to be $9k or $10k higher than other options to save a mere $10 / month ? Probably not, so, again, it is vital that you know what you are signing up for.
Now with fixed rate mortgages, the penalty is a bit more complicated. It’s the GREATER of 3 months interest (same penalty as the variable) OR a calculation called the interest rate differential (IRD). The IRD is a formula the lender uses which factors in how much money they will be earning when they relend your money out for the remainder of your term.
For example, if you’re 3 years into your 5 year term, the lender wants to know how much they will earn relending your money out on a 2 year term. If the 2 year rate is higher than your interest rate, then the lender will be better off — the lender is going to make more money. If your rate is 3% & the 2 year rate is 4%, the bank is going to be better off, so your penalty will just be 3 months interest. On the flipside, if rates are lower – if your rate is 3% but the 2 year rate is just 2.5% — then the bank is going to lose money once you break the mortgage. It’s these situations where the penalties can be quite high.
Now, the kicker to all this is that the IRD calculation differs from bank to bank. Some lenders will do a straight rate comparison – if your interest rate is 3% & the 2 year rate is 4%, they compare one rate to the other.
BUT, for some institutions, it is not that simple… some factor in discounts they gave you off of their posted rate, some base the comparison rate on the corresponding bond yield. There are a lot of differences that can really impact what your penalty could end up being.
By no means am I trying to dissuade you from taking a fixed rate. There are certainly advantages of going fixed & for many borrowers that’s definitely the right fit, but I do want you to be asking these questions going in. A mortgage is more than interest rate. Don’t just go for the lowest rate. Know what you are signing up for. Make sure it’s the right fit. You will thank yourself down the road.
I’m Ryan with City Wide Mortgage Services. Please contact me & I’d be happy to go over this in more detail with you.
This is our first video in our series on what you need to look for when shopping for a mortgage & we’re going to talk about prepayment privileges. repayment privileges are your tools to become mortgage free faster. When you buy your home, you do not want to be paying it off for the next 25 or 30 years.
With every mortgage, you have the ability to make more than your required minimum monthly payment. This goes directly to principal & can go a long way in shaving years off that mortgage & the amount of interest you will pay over the life of that mortgage.
The standard prepayment options you want to make sure you have are:
-15% Increase payment: this means increasing your monthly payment by up to 15%.
EXAMPLE: if your regular payment is $1000 / month, you could increase up to $1150 / month in year 1. In year 2, you could increase to 15% above that.
-15% lump sum payment: this refers to putting a large deposit on your mortgage.
EXAMPLE: if you have a $200K mortgage, you could put up to $30K in lump sum payments per year.
-double up payments: on any payment date, paying up to double that amount.
EXAMPLE: $1000 / month payment. You could pay up to $2000 as a one-off payment.
Now these options are not mutually exclusive. You could really utilize all 3 if you wanted to & really, you should use all three. The thing you want to watch out for, is that some lenders will offer you a “low rate” mortgage, where they give you a discounted rate, but slash your prepayment options to 5%/5%, or 10%/10%. Don’t be fooled, it’s not necessary to sacrifice your prepayments to get a low rate.
The other thing you want to watch for is some banks will only allow you to make prepayments on the mortgage anniversary, once / year. I can’t stress enough how much of a pain in the butt this is. For 365 days a year you have a plan how much you’re going to put down on your mortgage. If you end up putting too much or not enough, you have to live with that decision for the next 365 days. It’s far more convenient to make a $1000 lump sum payment every 3 months, than it is to plan for a $4000 lump sum once per year.
So the important thing with prepayments are 15% / 15% / Double up & you want to make sure you can make those prepayments throughout the year, not just on the anniversary.