Helping you get a headstart on homeownership!

When I am working with clients on their mortgage approvals there are several decisions they need to make. The questions differ a bit based on whether we are working on a purchase, a refinance, or a straight renewal. We talk about amortization, term, and the specific mortgage product. These questions differ a bit based on what we are doing and the clients’ specific situation. Amortization refers to the total length of time required to pay your mortgage in full. Term refers to the length of time you choose to lock into a specific rate. Some of the decisions can be scripted if you are purchasing with less than twenty per cent down and your mortgage requires default insurance. These rules have recently changed (again situation specific) but length of term is up to the individual client. Historically many people choose five year terms because lenders offer lower rates for this term. Over the last two years I’ve had far more people opt to pay a slightly higher interest rate and choose a three year term, gambling that rates will be lower then. Over the last year specifically as home prices have risen at the same time as the cost of living has escalated I’ve had different conversations with clients about the amortization they choose. With the recent announcement of changes coming to maximum amortizations for new builds and first time home buyers it will be interesting to see how these discussions change over the next few months. For clients who were working on refinances or purchases with over twenty per cent down we had the option of extending to a thirty year amortization. Some clients are resistant to stretching out the length of their mortgage and for solid reasons. Our parents’ generation was all about getting their mortgages paid off as soon as possible. This is obviously the choice that made the most sense and was more achievable for them and has been ingrained in many of us. Our current reality is that home prices and cost of living have skyrocketed while wages have not kept pace. I’ve heard the argument that our parents were not enjoying a life style that included $6 coffees every day. Fair enough. However, I have clients that live very frugally and are still struggling. Life happens. Divorce or separation happen. Devastating accidents or illness happen. Childcare bills escalate. Jobs are lost. Stuff happens. Particularly when I am working with clients that are consolidating or buying at a significantly higher price point we have a thorough discussion comparing the difference in monthly payments for (usually) a twenty-five amortization versus a thirty year amortization. Signing for a shorter amortization makes better sense for your long-term financial plan. However, if the higher payment causes you stress month after month and you end up in the same boat again a few years down the road the long term benefit is not there. Every lender offers several ways to make extra payments against the principal of your mortgage. Interest rates will likely be different every time you renew your mortgage. Your income and bills change over time. I will always be an advocate for paying your mortgage off sooner but many of my conversations with clients are pretty raw about the reality of making your payments every month. The positive news is that rates have been trending down over the last month which will help provide a bit of relief. The better news is that by making thoughtful decisions around your choices for amortization and term you may help reduce your overall stress level.

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One of the questions I am most often asked is “should I take a fixed or a variable rate”? My answer to this question is different for each client. My answer to this question may change based on the interest rate environment. The last few years have been sobering to say the least. We were riding the high of historically low fixed interest rates and beginning to see them as the norm. Where interest rates are sitting now (mid four to five per cent) is closer to the average interest rate Canadians have paid over the last twenty years. This week I attended a learning event and the economist that presented to the group spoke the words we have all been waiting to hear. He did qualify his thoughts with the comment that no one has a crystal ball and we’ve all seen what can happen with Bank of Canada monetary policy. What he did say is that he feels we will see prime rate drop 1.25 to 1.5 per cent over the next year. What does that mean in dollars and cents? As an example, if your mortgage is $500,000 and your variable rate mortgage is priced at prime less 1.05 per cent, if prime drops one per cent this means your payment will be $283.28 per month lower. This math applies if your variable rate mortgage has a payment that changes every month. If your variable mortgage has a static payment (payment that does not change to follow changes in prime) your payment stays the same but more money goes towards the principal instead of interest. So it seems like variable is the obvious choice if you are finalizing your mortgage right now. But it may not be. Circling back to where I said each client has a unique set of circumstances, variable may not be the best option. Fixed rates for insured mortgages are hovering around 4.59 per cent (some lenders lower, some higher). For clients that are pushing to qualify for the maximum purchase price they can the one per cent difference between fixed and variable rates absolutely affects their borrowing power. Lets say we are working with a family earning $120,000 annually. When we calculate their maximum purchase price using the minimum down payment and assuming $3,000 a year for property taxes here is the difference: Using a fixed rate of 4.59 per cent we are looking at a purchase price of $525,000 Using a variable rate of prime less .95 per cent (5.49 per cent) we are looking at $475,000 Another consideration before choosing fixed or variable is individual risk tolerance. Do you have room in your budget if rates trend up instead of down that you will not be stressing if prime does increase? Exit strategy is yet another thing to consider. With variable mortgages the maximum penalty you will pay if you pay your mortgage in full early is three months’ interest whereas with a fixed rate mortgage you will pay the greater of three months’ interest or your lender’s interest rate differential calculation. There can be quite a spread between the two. If you are planning to pay off your mortgage in the next few years variable may be the route to go strictly for that reason. And if you opt to choose a variable rate mortgage then decide you are not comfortable with potential changes, or if a few years in the fixed rates are far more attractive you can convert from a variable to a fixed rate mortgage. Win-win. Deciding whether to go fixed or variable is absolutely an individual decision for all of the reasons above. When the economist was asked whether he would choose a fixed or a variable mortgage himself right now there was no hesitation whatsoever. “Variable all day long” was his answer.  It will be interesting to see where rates are a year from now.

Getting across the finish line is sometimes more challenging than getting your initial mortgage approval. Lenders have different processes for evaluating mortgage applications. With some lenders we need to submit all of your supporting documents upfront; others send out the initial approval with a list of what they want to review. Process-wise I collect all (or most) of my clients’ documents before I ever submit for an approval. This means we can be flexible when choosing which lender we are going to work with. In some cases when I know it will be a few days before the client is able to provide everything I will work with a lender that sends out their approval then asks for the documents. There are pros and cons to both lender processes. For the lenders that need everything upfront, in an ideal situation their approval arrives with very few additional document requests. This feels smoothest for our clients. Lenders that issue an approval without reviewing all documents are great to work with when we are in a time crunch. If I am pretty confident of the information my clients have provided verbally but am just waiting on certain documents (ie: a T4 or bank statements) I will often use these lenders to make sure we stay on track to meet deadlines like our subject removal for financing. Sometimes, even after working with clients for months, surprises pop up. This week felt like a game of Whack-A-Mole dealing with just such surprises on several of my files. First surprise: my client has a credit score in the high 800s (900 is the highest available) and has been with the same employer for over fifteen years. She is putting down 50 per cent of the cost of her home from savings. A beautiful application all the way around. Our approval came back requiring confirmation that her cell phone bill has been paid in full. Apparently her Transunion credit report shows she is in arrears with her cell bill. The back story was that her employer had sent her out to work one of the active fires and she was putting in long exhausting days so it was an oversight. In view of the application I felt this was an absurd ask but the lender would not budge on it. My client was very unhappy being asked to provide this as the mortgage application was with her bank. Another challenge was after working with clients for almost a year on their preapproval (and having reviewed their credit history ten months ago) they finally had an accepted offer. We pulled their credit history to update their application. There was now an outstanding collection that had not been there before. It was for an old student loan that they assumed had finally gone away. Even trying to verify basic information can seem daunting. As a prime example, CRA has changed the format of the T4s that clients can pull from their My Account portal. The T4s no longer include the clients’ names. To pull from My Account clients need to do a screen shot that includes their name on the portal. This can be a royal pain for clients to access the information in a format that lenders require. All this to be said that lately many clients have been frustrated by some of the document requests we are making. From my perspective, if we are asking to borrow hundreds of thousands of dollars I appreciate that lenders are doing their due diligence. Identity fraud and mortgage fraud are out there and in the long run cost us all money. If you are finding yourself a bit frustrated with the process you are not alone. There are days where I put on my helmet and flak jacket before reaching out to clients for yet another document. This week there were five days. Then there are the days when a particularly challenging mortgage finalizes and my clients now have keys to their dream home. Today is just such a day, and days like this remind me that persistence is worth it in the long run.

Most lenders say that their mortgages are portable. What does this mean? The simplest way to explain porting is this – if you sell your current home, rather than charging a penalty to pay out your current mortgage, your lender transfers the terms and conditions (and balance) of your mortgage to your next home. Key here is knowing that porting isn’t always an option. Its also important to note that porting isn’t always the best option. Its important to do the math to see if porting makes sense. Porting policies differ from lender to lender and product to product. As an example, my favorite lender will only port a variable mortgage on the same day (ie: the current mortgage is paid out and the replacement mortgage finalizes the same day) and dollar-for-dollar. This means you take the exact same amount of money and are not able to increase the size of the mortgage if you need more money. Another of my go-to lenders will allow a port of a variable rate mortgage and use their blend and extend policies so you can increase the amount of funds if needed. Many lenders offer a blend and extend option when porting their mortgages. This means that should you need additional money for your purchase those funds are added to your current mortgage and the lender comes up with a new blended rate based on a calculation of original mortgage funds sitting at the rate you initially signed at and the new funds needed sitting at current interest rates. One of the chartered banks moves the exact same mortgage to the new property and adds a second mortgage for any additional funds required. I like to do the math for clients to see if porting is the best route, or if it makes more sense to pay a penalty to take completely new rates. As an example, I’m working with a young couple right now that renewed into a new five year term in May at 5.14 per cent. After two years of searching their dream home came on the market. They are needing almost three times the amount of mortgage as compared to their current mortgage. In this case, as we are working with the same lender they are being charged three months’ interest penalty instead of an interest rate differential penalty which would be approximately four times higher. They are electing to pay the penalty (calculated at $2600) and take a completely new mortgage at 4.59%. I looked at the interest savings and in this case the clients are saving over $9,000 over the next five years by paying the $2600 penalty. Staying with the current lender and porting the current mortgage is almost always what I recommend to my clients. I do the math and most times it makes sense to port. Sometimes, however, it does make sense to pay a penalty and start fresh. If you are selling and buying mid-way through your mortgage term I encourage you to connect with your mortgage person to see what makes the most sense for you financially. You may be a bit surprised as to where the numbers land.