DLC’s Update on the new Bank of Canada Qualifying Rate.
f it wasn’t for mortgages, most Canadians probably wouldn’t be able to afford a home purchase. But thanks to home loans, investing in these expensive assets is made possible.
Given the sky-high prices of homes these days, it’s nearly impossible to be able to come up with the funds to cover the full purchase price upfront.
As such, would be wise to start searching for a mortgage broker or lender right alongside your search for a new home. But before you settle on one particular lender, there are a few questions you should probably ask first.
1. What Type of Loan is Best?
There are various types of loans out there, and the one that you choose will depend on your comfort level, experience, financial health, and what the lender is able to offer you.
For example, there are fixed-rate loans, variable-rate loans, conventional mortgages, high-ratio mortgages, open or closed mortgage, and so forth. Be sure to ask your lender what they offer and what the benefits and drawbacks of each are before you settle on one.
2. What Interest Rate Can I Get?
Interest rates on mortgages depend on the Bank of Canada’s prime rate and the yield on Canadian government bonds. But banks and lenders also have their own influence on rates and what they can offer. Private lenders tend to charge higher rates compared to conventional mortgage lenders.
Further, your credit health also plays a key role in the rate you can get. A healthy credit score will usually afford borrowers with lower rates, while bad credit borrowers will be more likely to be offered a higher rate because of their higher-risk profile.
In any case, asking a prospective lender what rate they can offer is a crucial question to ask given the impact it will have on how much you end up paying overall. More specifically, inquire about what interest rate you’d be able to qualify for.
3. Are There Any Prepayment Fees?
Mortgages have a specific maturity date, which is the date that the entire loan amount must be repaid in full. However, if you happen to come upon a large sum of money at some point – whether it’s from commissions at work, a pay increase, an inheritance, or a big tax refund – you may want to put that lump sum of money towards the principal portion of your mortgage.
If that’s the case, you would be prepaying part of your mortgage. You’ll want to ask your mortgage broker if there’s a penalty that exists if you were to do so. If there is, ask how much the payment penalty will be and what the terms of the prepayment are.
4. How Much Time Will it Take to Complete the Mortgage?
Depending on the market, you’ll want to find a mortgage lender who will be able to close your mortgage as quickly as possible. This is especially helpful in a hot market where mortgage closing should happen in 30 days or less.
That said, some types of home loans can take longer to process, depending on a number of variables, including your financial health and the type of home being purchased.
5. What Documentation is Required?
Your lender is going to want to see a number of pieces of documentation in order to assess your ability to repay your mortgage. This can include things such as proof of income, employment letter, statement of assets and liabilities, personal identification, and any documentation you can provide about your credit history. Find out exactly what’s needed from the lender before you sign on.
6. What Kind of Down Payment Assistance Can I Get?
It can be tough to come up with a down payment considering how expensive housing is. That said, there may be some down payment assistance programs that you might be able to take advantage of.
Ask your lender if they’ll be able to guide you to any programs that will help you come up with a sizable down payment.
7. Do You Charge to Lock in the Interest Rate?
If rates are rather low right now, you might want to lock into it as soon as possible in case they start to increase shortly after.
Locking in a mortgage rate basically involves a commitment by a mortgage lender to provide you with a specific interest rate as long as the house closes within a certain timeframe. Locking in the rate will ensure that any fluctuation in interest rates won’t affect you.
That said, some lenders might offer a rate lock free of charge, while others might charge a fee for this service. Find out if the lender charges to lock in the interest rate, and if they do, find out what the exact fee is.
Shopping around for a lender is somewhat like shopping for the home itself. Considering how long you’ll be committed to your mortgage, you’ll want to make sure the product and the partnership is just right. And the best way to do that is to ask all the right questions.
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In the 2019 Federal Budget, Finance Minister Bill Morneau announced a new plan to help First Time Homebuyers. The idea is to improve affordability by providing a government 5% Equity Interest (10% on new construction) on home sales: effectively an interest-free loan, with actual repayment terms undetermined, but due upon sale of the home.
Which sounds great, but the devil is in the details: it only applies to Insured mortgages (so 5% – 20% down payment) and is limited to household incomes of less than $120,000. Moreover, the total amount of the mortgage cannot exceed 4x the total household income, and it is there that the whole thing falls apart:
Consider a family with total household income of $100,000, good credit, minimal debt, and 5% down payment. Making some reasonable assumptions (about strata fees and property taxes):
- they would qualify under the existing rules (including the onerous Stress Test) for a $500,000 home: $25,000 (5%) down payment and $ 494,000 mortgage (= $475,000 base mortgage + $19,000 CMHC fees);
- but in order to take advantage of the new program, they are limited to a $400,000 home (= 4 x $100,000)!
As it is currently proposed (final details won’t be announced until fall of 2019), only Buyers who are already well within their means can even participate, and unless the terms of repayment are extremely forgiving, one can’t help but wonder who will want to take “advantage” of this program. We note further that in a continuing low-interest rate environment, the cost of borrowing the 5% – 10% is going to be very low anyway, and will avoid the headache, uncertainty and legal cost of having an additional interest on Title. So what’s the point?
Five-year fixed mortgage rates continued their upward march last week as the five-year Government of Canada (GoC) bond yield they are priced on hit its highest level in seven years. Meanwhile, five-year variable-rate discounts deepened, further widening the gap between five-year fixed and variable rates.
When I started working in the mortgage industry in 2005, variable rate mortgages saved you more money than fixed rate mortgages 95 out of the past 100 years. First time home buyers were worried about what their home costs would be and avoided variable rate mortgages (VRM’s) because of the risk of rates going up higher than the fixed rate, but experienced home owners often took a VRM at mortgage renewal time.
However, in the past 5 years, most people have gravitated towards fixed rates because the gap between fixed and variable rates was small enough that the cost of uncertainty outweighed the potential reward for most borrowers.
Once again , the gap is widening. While fixed rate mortgages are going up due to the bond yield, variable rate mortgages have moved in the other direction. Two years ago a VRM would be offered at Prime rate + .20%, but later it reverted to Prime – .30% . In recent months, rates have dropped even further with some lenders offering Prime -1.0% ! You now have a choice between a 5-year fixed rate of 3.44-3.59% depending on the lender and a variable rate with a discount that calculates out to 2.45% . With a gap this large, it’s worth considering if you are risk tolerant enough to have a VRM.
Even if you are skittish, you can ask your Dominion Lending Centres mortgage broker to notify you if rates are going up and switch you to a fixed rate if they go above a certain percentage. Will your bank do that for you? I don’t think so. Be sure to have this discussion with your broker when your mortgage comes up for renewal or if you are considering a home purchase.
Dominion Lending Centres – Accredited Mortgage Professional
There seems to be some confusion about what it actually means to co-sign on a mortgage… and any time there is there is confusion about mortgages, it’s time to chat with your trusted Dominion Lending Centres mortgage professional!
Let’s take a look at why you would want to have someone co-sign your mortgage and what you need to know before, during and after the co-signing process.
Qualifying for a mortgage is getting tougher, especially with the 2017 government regulations. If you have poor credit or don’t earn enough money to meet the banks requirements to get a mortgage, then getting someone to co-sign your mortgage may be your only option.
The ‘stress test’ rate is especially “stressful” for borrowers. As of Jan. 1, 2018 all homebuyers with over 20% down payment will need to qualify at the rate negotiated for their mortgage contract PLUS 2% OR 5.34% which ever is higher. If you have less than 20% down payment, you must purchase Mortgage Default Insurance and qualify at 5.34%. The stress test has decreased affordability, and most borrowers now qualify for 20% less home.
In the wise words of Mom’s & Dad’s of Canada… “if you can’t afford to buy a home now, then WAIT until you can!!” BUT… in some housing markets (Toronto & Vancouver), waiting it out could mean missing out, depending on how quickly property values are appreciating in the area.
If you don’t want to wait to buy a home, but don’t meet the guidelines set out by lenders and/or mortgage default insurers, then you’re going to have to start looking for alternatives to conventional mortgages, and co-signing could be the solution you are looking for.
In order to give borrowers, the best mortgage rates, Lenders want the best borrowers!! They want someone who will pay their mortgage on time as promised with no hassles.
If you can’t qualify for a mortgage with your current provable income (supported by 2 years of tax returns and a letter of employment) along with solid credit, your lender’s going to ask for a co-signer.
Ways to co-sign a mortgage
The first is for someone to co-sign your mortgage and become a co-borrower, the same as a spouse or anyone else who you are actually buying the home with. It’s basically adding the support of another person’s credit history and income to those initially on the application. The co-signer will be put on the title of the home and lenders will consider them equally responsible for the debt should the mortgage go into default.
Another way that co-signing can happen is by way of a guarantor. If a co-signer decides to become a guarantor, then they’re backing the loan and essentially vouching for the person getting the loan that they’re going to be good for it. The guarantor is going to be responsible for the loan should the borrower go into default.
Most lenders prefer a co-signer going on title, it’s easier for them to take action if there are problems.
More than one person can co-sign a mortgage and anyone can do so, although it’s typically it’s the parent(s) or a close relative of a borrower who steps up and is willing to put their neck, income and credit bureau on the line.
Ultimately, as long as the lender is satisfied that all parties meet the qualification requirements and can lessen the risk of their investment, they’re likely to approve it.
Before signing on the dotted line
Anyone that is willing to co-sign a mortgage must be fully vetted, just like the primary applicant. They will have to provide all the same documentation as the primary applicant. Being a co-signer makes you legally responsible for the mortgage, exactly the same as the primary applicant. Co-signers need to know that being on someone else’s mortgage will impact their borrowing capacity while they are on title for that mortgage. They’re allowing their name and all their information to be used in the process of a mortgage, which is going to affect their ability to borrow anything in the future.
If someone is a guarantor, then things can become even trickier the guarantor isn’t on title to the home. That means that even though they’re on the mortgage, they have no legal right to the home itself. If anything happens to the original borrower, where they die, or something happens, they’re not really on the title of that property but they’ve signed up for the loan. So they don’t have a lot of control which can be a scary thing.
In my opinion, it’s much better for a co-signer to be a co-borrower on the property, where you can actually be on title to the property and enjoy all of the legal rights afforded to you.
The Responsibilities of Being a Co-signer
Co-signing can really help someone out, but it’s also a big responsibility. When you co-sign for someone, you’re putting your name and credit on the line as security for the loan/mortgage.
If the person you co-sign for misses a payment, the lender or other creditor can come to you to get the money. The late payment would also show up on your credit report.
Because co-signing a loan has the potential to affect both your credit and finances, it’s extremely important to make sure you’re comfortable with the person you’re co-signing for. You both need to know what you’re getting into. I recommend looking into Independent Legal Advice between all co-borrowers.
Co-signing is NOT a life sentence Just because you need a co-signer to get a mortgage doesn’t mean that you will always need a co-signer.
In fact, as soon as you feel that you’re strong enough to qualify without your co-signer – you can ask your lender to reconsider your application and remove the co-signer from the title. It is a legal process so there will be a small cost associated with the process, but doing so will remove the co-signer from your loan (once you are able to qualify on your own), and release them from the responsibility of the mortgage.
Removing a co-signer technically counts as changing the mortgage, so you need to check with your mortgage broker and lender to ensure that the lender you choose doesn’t count removing a co-signer as breaking your mortgage, because there could be large penalties associated with doing so.
Co-signing is an option that could help a lot of people buy a home, especially first time home buyers who are typically starting their career and building their credit bureau.
A final mortgage tip: a couple of alternatives to co-signing that could help someone out:
- providing gift funds for a down payment
- paying off someone else’s debt, giving them more funds to pay the mortgage
Dominion Lending Centres – Accredited Mortgage Professional
25-year amortization or 30 years? Insured or Uninsured? With an A Lender or B Lender? These are just a few of the questions people have to decide on when they are pursuing a mortgage. But the biggest question of all: Fixed Rate or Variable Rate?
With the instability of the market, and the Bank of Canada’s continuous rate hikes, many people now are flocking towards a fixed rate mortgage over a variable rate. What this means is that they are choosing to essentially “lock in” at a rate for the term of their mortgage (5 years, 10 years, 1 year…you name it). Now there are benefits to this…but there are also disadvantages too.
For example, did you know that 60% of people will break their mortgage by 36 months into a 5 year term? Whether it’s due to career changes, deciding to have kids, wanting to refinance, or another reason entirely, 60% of mortgage holders will break it.
And just like any other contract out there, if you break it, there is a penalty associated with it. However, there is a way to avoid paying more than is necessary. This applies directly to a fixed rate mortgage and we can help you decide what lenders you should go with.
If you have a FIXED RATE MORTGAGE:
There are two ways your penalty will be calculated.
Method #1. If you are funded by one of the Big 6 Banks (ex. Scotia, TD, etc.) or some Credit Unions, your penalty will be based on the bank of Canada Posted Rate (Posted Rate Method) To give you an example:
With this method, the Bank of Canada 5 year posted rate is used to calculate the penalty. 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: 5.59%
Bank Discount given: 2% (estimated amount given*)
Contract Rate: 3.59%
Exiting at the 2-year mark leaves 3 years left. For a 3-year term, the lenders posted rate. 3 year posted rate=3.69% less your discount of 2% gives you 1.44%. From there, the interest rate differential is calculated.
Contract Rate: 3.59%
LESS 3-year term rate MINUS discount given: 1.69%
IRD Difference = 1.9%
MULTIPLE that by 3 years (term remaining)
5.07% of your mortgage balance remaining. = 5.7%
For that mortgage $300,000 mortgage, that gives a penalty of $17,100. YIKES!
Now let’s look at the other method (one used by most monoline lenders)
This method uses the lender published rates, which are 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: 3.34%
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%
MULTIPLY that by 3 years (term remaining)
0.90% of your mortgage balance
That would mean that you would have a penalty of $2,700 on a $300,000 mortgage.
That’s a HUGE difference in numbers, just by choosing to go with a different lender! Knowing what you know about fixed rate mortgages now, let a Dominion Lending Centres Mortgage Broker help you make the RIGHT choice for your lender. We are here to help and guide you through the mortgage process from pre-approval onward!
Dominion Lending Centres – Accredited Mortgage Professional
Last week’s fixed-rate interest hikes at major banks—as well as the likely Bank of Canada prime increase on Wednesday—could spell bad news for Vancouver house hunters.
Tim Hill, a mortgage broker with DLC Primex Mortgages, says that interest rate increases and tighter lending standards are adversely affecting Lower Mainland housing affordability, and short shrifting first-time buyers, in particular.
“As far as homebuyers go, there’s been a lot of pressure on buyers over the last couple of years, both with lending standards becoming more restrictive and, more recently, with rates increasing,” he said. “A lot of buyers are feeling the pressure to buy, particularly in higher-end markets like the Lower Mainland. A lot of middle-class people feel like, ‘If I don’t buy now, I’ll never get in.’”
Making matters worse for potential buyers scrambling to enter the market, sellers don’t have much incentive to list and help alleviate the supply crunch. Compounding the problem, says Hill, is the likely prime rate increase on Wednesday.
“I’ve never heard of anyone predicting a decrease—not any time soon—so people aren’t waiting for something more affordable; they’re trying to get in before it keeps going up. The more they increase rates, the more fuel it adds to the fire,” said Hill. “Sellers see it too because they see things going up and they don’t feel any real pressure to sell. There’s a supply shortage, which makes it even harder on the buyers. It’s a vicious cycle.”
The increasing rates are being catalyzed by strong employment and healthy yields on the bond market. Hill added that much of the economic vitality impelling the rate hikes is derived from Canada’s buoyant real estate market, and wonders whether rising interest rates will stunt it.
“As we all know, rate increases have an inverse relationship with the real estate market,” he said. “It’s interesting to see what’s going to happen because if they do raise rates, it’s probably going to affect the one positive sector that we have right now.”
Boris Bosic, president of Merix Financial, wasn’t surprised by last week’s hike and expects another one on Wednesday, the result of which will be tapered consumer expectations.
“From the qualifying standpoint, the higher the rates go, be it the fixed or variable, the less money can be borrowed, meaning consumers will have to lower their expectation on price point with what they’re prepared to buy, or they’re going to have to look at alternative financing,” said Bosic. “We truly believe there will be another rate hike on Wednesday; the prime will go up.”
Bosic added, “There’s the saying, ‘When people want money, they find it,’ so it will either be through Sched-As or alternative financing.”
Sherwood Mortgage Group agent Walter Faria doesn’t think a rate hike is necessary, and says too many things, like B-20, are working against the industry right now. But it isn’t all doom and gloom.
“If you’re dealing with A lenders, it can have an effect, but if you’re dealing with credit unions you have to look at it a different way,” said Faria. “If you’re looking variable, it will affect everybody, but with a credit union for a fixed-rate, it’s not such a big issue. There’s no draw back to credit unions.”