Time for a better rate?

Mortgage interest rates have continued to drop during the last few weeks.

I’ve had many calls from clients wondering if it is worthwhile to break their current mortgages and re-do them into today’s lower rates.

The straight answer is it all depends. It depends on:

  • Where you are in your current mortgage term (how much time is left until your maturity date)\
  • What your current interest rate is
  • Which lender you are with
  • Whether you are in a fixed or variable rate

Most lenders have prepayment penalty calculators online. It is fairly straightforward to calculate what your penalty might be.

If your mortgage is with a chartered bank, you will need to know the “discount” they gave you off their posted rate when you originally signed your mortgage.

Often that discount is around two per cent, and you should be able to see it on one of your annual mortgage statements.

Incidentally, this discount is one of the reasons that I love to work with monoline lenders. Monoline lenders are companies that just do mortgages. They calculate their prepayment penalties by comparing your rate to the best rate currently available.

This is a small piece of the puzzle for choosing the right lender, but what it means is (generally) a prepayment penalty that is considerably smaller. If you are considering mortgage options, this is an important piece to understand.

So back to whether now is the time to re-do your mortgage.

If you calculate your penalty and it seems reasonable, the next step is to compare how much the penalty is to the difference in interest cost between your current mortgage and what the cost would be if you re-did your mortgage.

If there is a cost savings, it might be wise to re-do your mortgage now.

If there isn’t much of a savings, but you want the security of a low rate for another five years, you may want to re-do you mortgage.

I run these calculations daily lately. I don’t like to see people pay the penalty (which usually equates to interest for the remainder of their current term) unless there is a significant interest savings.

Other factors do come in to play.

Some people want to roll existing consumer debt in with their mortgage and are less concerned about the penalty.

Some people are in variable rate mortgages so their prepayment penalty would only be three months’ interest.

If you are wondering how the numbers look for you, we are happy to crunch them for you.

Re-doing your mortgage is either an early renewal or a refinance, depending on whether you choose to add additional money to your mortgage or not. Before you make the decision either way, its important to do your homework and understand the process.

For a quick overview of what to think about, check out our blog Mortgage Renewal Homework.

Lenders are very competitive right now, and I’ve seen some interesting promo rates and packages.

One of the interesting packages I’ve seen is an “Interest Free for Three.” The lender covers the interest for the first three months of your mortgage to help free up cash flow during these uncertain times.

Here’s an example of how it works. With a $325,000 mortgage at a 2.24% five-year fixed rate and 25-year amortization, the regular payments would be: $1,415.82.

For the first 90 days of the new mortgage, the lender will cover the interest and you save the difference.

Interest portion paid by the lender:

  • Month One: $606.67
  • Month Two: $605.16
  • Month Three: $603.64

Total savings for you: $1,815.47 — For illustration purposes only, based on monthly payments. Rates are subject to change at any time without notice.

You keep these cost savings in your pocket to provide some relief during these times or use them to improve your financial situation later. For example, you could:

  • Use the savings to manage other debts that are less flexible
  • Use it toward other purchases instead of using credit
  • Apply the savings as a lump sum payment against your mortgage after the three months are up, save additional interest costs and reduce your amortization by an extra two months

The mortgage is priced .05 per cent higher than their regular product, but running the numbers shows that with the three months’ interest covered you actually save a bit as compared to the lower rate.

For first time home buyers starting out, this might be a great option. Moving into a new home comes with some unexpected expenses.

Re-doing your mortgage to a lower rate may mean cost savings and lower monthly payments. We’re happy to help you compare the numbers to see if this is the right decision for you.

Enjoy B.C. Day!


Private sales can cost more

I work with clients who are trying to buy or sell a home privately.

Sometimes this is because they feel it makes sense. For example, tenants are buying the home they are renting from their landlord. Other times, it is because they want to save money by not paying a commission to a realtor.

Sometimes the process goes smoothly. Sometimes, not so much.

Many people underestimate the work that realtors do behind the scenes.

One of my first experiences with clients purchasing privately was quite the eye opener. My client was buying a rural horse property from someone she knew socially.

They negotiated all of the terms amicably and she took the information to her lawyer.

The lawyer wrote up a purchase contract for her.

She initially approached a chartered bank and at the last minute, the bank declined her file.

She called me to see if I was able to help her. I took her application and said it looked like I would be able to find a lender.

The lawyer drew up documents to extend the offer.

The insurer required an appraisal. Due to the location of the property, it took over a week to get the appraisal done.

The lawyer drew up another extension document.

The appraised value of the property came in considerably lower than the agreed upon price.  The buyer and seller renegotiated the price and dates.

The lawyer drew up an amendment document.

You get the picture. By the time her sale completed, her legal bill was almost $5,000.

If they had a realtor involved on the listing side, my guess is the home would have been priced appropriately from the get-go.

If the buyer had retained a realtor to help negotiate on her behalf (some realtors will do this for a flat fee charged to the buyer), the realtor would have been able to help her navigate these extensions and amendments without charging her $300 per hour which is what she paid her lawyer.

Last summer I worked with a client in northern B.C. who bought a home privately from his landlord. He downloaded a sale agreement and a property disclosure statement form and completed both. He and his landlord both signed.

We had an approval from a lender and were ready to move forward with the purchase.

The seller took her copy to her lawyer. Her lawyer said she needed a contract drawn up by a lawyer and that the document that had would not be suitable. It took well over a month for the landlord’s lawyer to prepare the replacement purchase contract.

Meanwhile, my client had to push the closing date back twice while waiting for his copy of the new offer. I still am not clear as to why the original offer was deemed not to be suitable as I see many clients use the same document.

There was a great deal of stress for my client as he felt he was being strung along. He had missed out on other properties while he patiently tried to sort this issue out. I was very grateful once his mortgage was eventually finalized.

Most recently, I am working with a young couple who are buying a private listing. The insurer requested an appraisal in this case as well. The appraisal came in with a value $20,000 less than what they have agreed to pay.

Due to the conditions in their market they are likely going to move forward and pay the higher price.

This means that they have to come up with the additional $20,000 as lenders use the lower of the purchase price or the appraised value.

If they had a realtor representing them, they would have gone back to renegotiate the price. As it is, they are afraid of offending the sellers.

Realtors put in many hours behind the scenes that most clients are not aware of. They work hard to make the sale or purchase journey as smooth as possible for their clients. They explain to their clients what to expect step by step as they move through selling or buying a home.

They also make sure to protect their clients by adding terms and conditions to do exactly that.

Perhaps most importantly, they help remove emotions from the equation and help buyers and sellers come to a mutually acceptable agreement.

What's your best rate?

Often calls from new clients start with “I’m looking for help with a mortgage. What’s your best rate?”

I’m pretty sure that I frustrate some of those clients with my reply which is “It all depends.”

The short explanation is that the best rate for each client truly depends on their particular circumstances.

Prior to October 2016, this question could be met with a very simple answer. Generally speaking, we could find the best rate fairly easily. If the client was putting down less than 20 per cent, we could search out the best insured rate. If they were putting down more than 20 per cent, we could search for the best conventional rate.

In October 2016, several important changes were implemented that changed which mortgages are considered insurable and which mortgages are not.

Four of the main changes were:

  • Properties with a purchase price of over $1 million could no longer be insured
  • Mortgages with an amortization of more than 25 years could no longer be insured
  • Rental properties could no longer be insured
  • Refinances could no longer be insured

So how do these changes affect your interest rate?

These changes effectively created three different groups of interest rates:

  • Insured
  • Insurable 
  • Uninsurable

When you see interest rates advertised on TV or online, most often the insured rates are featured. These rates are the lowest of the three rate groups because you pay an insurance premium (this is added to the mortgage) so the lender will not suffer a loss if down the road the client defaults on their mortgage.

Insurable rates apply if you are putting down more than 20 per cent but meet the other criteria required to qualify for an insured mortgage: purchase price is under $1 million, your amortization is 25 years or less, and you are not buying a rental property. 

Because you do not have to pay an insurance premium, even though the rate is slightly higher, you pay less interest over the long haul and your mortgage balance is lower at renewal as you are not adding the insurance premium to the amount you borrow.

I’ve run the calculations many times to show clients that in this circumstance even though the rate is higher, it costs them less in the long run.

The third rate group applies if you are buying a rental property, refinancing, or needing an amortization longer than 25 years (you must have at least 20 per cent down for the longer amortization). The higher (perceived) risk to lenders is reflected by slightly higher interest rates.

To further complicate the best-rate conversation, there are intricacies within each of these rate categories.

For instance, if you are self-employed and we are using a specific stated income program, some lenders will increase the rate slightly.

If your application falls into the insurable group and you are putting 35 or more per cent down, some lenders use a sliding scale and reduce your rate slightly to reflect the amount of equity you have in your home.

If you are wanting to use a Purchase Plus Improvements mortgage to renovate your new home right away, some lenders do not offer this as an option.

Yet another twist is that many lenders offer a no-frills mortgage option which is usually priced .05 per cent lower than their other mortgages.

Several lenders offer cash-back mortgages. They will provide a lump sum up front for you and this is reflected in a slightly higher rate. It is crucial to know that for most of these products if you try to pay these mortgages back even one day before your renewal date they will require that the full cash-back amount be repaid.

This means that you are locked in for the full term or have to pay a hefty amount to break your mortgage.

From time to time lenders come out swinging with bargain basement interest rates. It is important to know that these rates often come with strings attached, or clauses that may cost you more in the long run.

The no-frills mortgages may be the right fit for you, but it is important that you understand what saving that .05 per cent might cost you in the long run. Some of these products come with a bona-fide sales clause or higher penalty if you need to pay the mortgage in full before the renewal date. Some are not portable to another property.

Future client service is a feature that it is hard to put a price on. One financial institution comes out every spring advertising the lowest of the low interest rates. They are notorious for missing closing dates, poor service after the mortgage has been advanced, and their penalties are significantly higher than other mortgage lenders. As well, from time to time they choose not to renew mortgages – not because of anything the client has done but because they are not actively in the mortgage business at the time.

There are online brokerages that offer low low rates as well. I’ve heard from several clients that the rate they were offered when their approval arrived was not what was initially discussed. 

If you are looking for a mortgage, the lowest rate is not always the best rate. It is important to do your homework upfront to understand your options.

Arguably more important is to work with someone that takes the time to understand your unique situation and treats you as a human being. If you are looking for help with a mortgage and wondering which rate group you fit into, we are happy to spend a few minutes helping you explore options.


Mortgages as (almost) usual

When I wrote my last column, we had just learned that Canada Mortgage and Housing Corporation (CMHC) had announced changes to their policies. In a nutshell, the three changes are:

  • Lowering debt service ratios used to qualify insured mortgages
  • Increasing the minimum credit score required
  • Eliminating the borrowed down payment program

These changes are significant because clients who put down less than 20 per cent when they purchase a home must qualify for default insurance, which is what CMHC provides.

There are two other companies that provide mortgage default insurance: Genworth and Canada Guaranty. Both Genworth and Canada Guaranty have announced that they would not be changing their policies at the current time. 

Since CMHC announced its policy changes, we have had bulletins from multiple lenders outlining how they will be handling new applications. Lenders have the ability to choose which company they use, so for the time being it is business as usual for clients that require slightly higher ratios.

I’ve had conversations about this rule change with most of my clients that are actively house shopping. I’ve also informally polled a few other brokers and friends as to their thoughts on tighter qualification guidelines.

My clients in northern B.C., for the most part, will be less impacted by a tightening of mortgage rules. On average, incomes are higher and home prices are proportionately lower.

In the Okanagan, I am glad that we still have Genworth and Canada Guaranty as options because I see more clients needing to purchase homes that put them at the top of their debt servicing.

This disparity has led to some rather thought-provoking conversations.

It’s all well and good to tell clients what the maximum mortgage amount they qualify for is. It's quite another to tell them what their actual mortgage payment will be at that price point.

When working with clients on a pre-qualification and rate hold, we discuss what their new payment will be. One of the tips I’ve shared is trying to tuck that amount away monthly into a savings account for four to six months to see if the higher shelter payment truly works for the clients.

Those conversations were often the springboard into discussions of how differently people handle their finances.

Some people will turn a nickle over half a dozen times before parting with it, while others are more about immediate gratification. I’ve seen clients who are making less income scratch and save to put together a down payment and seen others who make significant income unable to save what they need to buy a home.

The last few months have given us a glimpse into how we will make it through unexpected financial crises. 

In one of my columns I talked about how changing habits like buying daily coffees can really impact our savings accounts. As I am starting to slide back into old habits I can definitely see the change in my account.

How does this all tie together?

Smaller mortgages would (in theory) mean that people are better able to save and have adequate resources available to carry them through income interruptions. Smaller payments would (in theory) mean people could potentially tough it out a little longer than if responsible for larger payments.

From a professional perspective, I am glad that Genworth and Canada Guaranty have decided not to follow CMHC’s changes. I won’t be surprised to see them change down the road. 

In the meantime, while chatting with clients about their pre-qualification amounts I am also discussing the ratio changes and how those changes would directly impact them if for some reason we needed to use CMHC for their default insurance.

Being over-extended and feeling stressed about finances all the time is not a fun way to live. If you are thinking about buying a home (particularly if that home is a mobile / manufactured home) over the next few months, make sure you connect with your mortgage person to see if you may be impacted by the CMHC changes. 

On a more positive note, it feels like more people are out and about buying homes. Lenders have had a few months to adjust to new protocols for their employees.

Starting to feel like it is back to mortgages as usual.

More The Mortgage Gal articles

About the Author

Tracy Head and Laurie Baird help busy families find mortgage solutions. Together they have more than 45 years of experience in the mortgage industry.

With today’s increasingly complicated mortgage rules, Tracy and Laurie spend time getting to know the people they work with and help them to better understand the mortgage process. They support their clients before, during, and after their mortgage is in place.

Tracy and Laurie work closely with their clients, offering advice and options. With access to more than 40 different lenders, Tracy and Laurie are able to assist with residential, commercial, and reverse mortgages in order to match the needs of their clients with the right mortgage package.

They work closely with their clients to find the right fit, and are around to provide support for years down the road!

Contact them at 250-862-1806 or visit http://www.okanaganmortgages.com

Visit their blog at https://www.okanaganmortgages.com/blog


The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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