As of November 1st, 2012, the Bank of Canada 5 year bench mark rate is being used to qualify mortgage applications where the interest term is variable and/or less than 5 years in length.
For both new home purchases, and debt consolidations, and mortgage refinancings, this is having and will continue to have an impact on many Canadians looking for mortgage financing.
How The B20 Rate Is Set
Before we get into the direct impact, let’s define what the B20 rate is.
Every Wednesday the Bank of Canada sets the bench market rate which is derived from an average of the posted 5 year fixed mortgage rates of the major banks.
The newly calculated B20 rate on Wednesday is then released to the public on the following Monday, and then put into use by mortgage lenders until a new rate is calculated.
At the present time, the B20 rate is approximately 5.25% even though the actual borrowing rate to secure 5 year fixed terms right now is more than 2 percentage points less.
Impact Of B20 Going Forward.
The B of C bench mark rate now needs to be utilized when calculating an applicants ability to debt service on any variable term or any fixed term under 5 years.
Because the B20 is considerably higher than the actual rates available in the market place, many consumers are not able to meet the debt servicing requirements attached to “A” mortgage offerings or the only “A” offering they can qualify for is a 5 year rate, pushing the market place more and more towards longer term fixed rate mortgages.
Coupled with the recent changes to loan to value ratios where the maximum allowable mortgage from a federally regulated lender is 80%, the B20 rate makes qualifying for a mortgage refinance to consolidate debt much more difficult to achieve.
This will impact home purchases as well as home purchasers are more likely to adjust their sights on properties they can afford under the new rules.
With mortgage refinancing, its a bit of a different story.
In a refinance mortgage for debt consolidation scenario, the debt already exists and the mortgage holder is trying to bring down the cost of overall debt and term it out over a longer period of time. So with less refinancing options available, cash flow stress will be harder to alleviate.
For anyone looking for variable rate mortgage, the spread between the current market rates for variable and the B20 rate is about 2.5%, or almost double current variable mortgage rates which are mostly at prime minus 0.20%, or 2.80%. So to qualify for that variable rate, you have to be able to show debt servicing ability for the B20 rate which in many cases will be impossible to do.
The Long And The Short Of It
The better mortgage rates are now harder to qualify for.
On the flip side, if you can’t qualify for a specific “A” mortgage rate right now, there are several very good sub prime offerings on the market that can work in the interim.
The key right now for all mortgage holders or prospective home buyers is to really understand your financial and credit profile to see what you can qualify for, and if you can’t qualify for a mortgage with a bank or institutional lender then its going to be important to build a plan to get yourself into “Finance-able Position” to lower your rate in the near future.
The new rules are not likely going away any time soon, so there is going to be a period of adjustment.
Even if you don’t need a new mortgage today, you would still be well served to gain an understanding of the new rules and see how your current level of debt, cash flow, and credit stack up against them.
One of the best ways to do this is to work with an experienced mortgage broker who can not only help you understand the changes in the mortgage qualifying process, but also calculate the numbers for different scenarios so you have a solid plan of attack moving forward for whatever your future mortgage needs may be.
At the beginning of October, our mortgage business launched a new Dominion Lending Franchise here in Toronto.
Operationally, we have the same location at 1935 Leslie Street here in Toronto, and all contact information remains the same, so for any of our existing and future clients, its all business as usual with our mortgage business.
As you may or may not know, Dominion Lending is the fastest growing mortgage company in Canada and many of the initiatives they are and will pursue going forward are very congruent with our own.
Let’s face it, the mortgage industry is continually changing and to stay not only on top of all the rule changes occurring on a monthly basis, but to also be on top of the state of the art technology for delivering information, products, and services to our customer, made Dominion a clear choice for our business.
From a mortgage product point of view, Dominion now gives us access to even more lenders as well as an expanded network of mortgage specialists and originators that can provide greater assistance in certain situations.
This provides our customers with even more choice when it comes to making a mortgage decision which will greatly contribute to achieving optimal mortgage financing results, whether we’re talking about residential, commercial, or industrial real estate properties.
The information systems, reports, and multi media presentations provide a great library of information that is designed to help borrowers to better understand the different programs and products available so that an informed decision can be reached that much faster.
And lets face it, as we all rapidly move forward into the information age with websites, social media, Youtube, Facebook, and the like, we also recognize that we have to be able to provide content to out customers in a manner than you most refer. This is another area where Dominion provides value to use as they continually make substantial investments in their information and information delivery systems.
As franchise owners, we will also have access to credit card programs and other financial products that get developed and set up by Dominion. More products and services provide greater value to our customers which is one main reasons why we made the decision to become part of the Dominion Lending Team.
There is more going on than I an elaborate on today. But I will be following up in the future to comment on more specific developments as they occur.
In the mean time, I invite you to give us a call or send me an email with any questions or comments you may have.
We welcome the opportunity to discuss this new business arrangement with our customers and also value any comments or feedback you are willing to provide.
That’s about it for today other than to say we are very excited about this new relationship and all the value it can help bring to our customers.
If you’re looking to refinance for a lower rate and/or to gain some additional funds, an exact prepayment calculation can be obtained from your mortgage provider at any time.
But if you’re in need of a new mortgage, it can be difficult to determine what the future prepayment penalty calculation will be for any given situation.
By law, mortgage lenders must clearly outline the detailed calculation related to prepayment penalties associated to any of their mortgage products.
That being said, lending sources have never made this an easy to understand process even though all the information required is technically “all there” for you to digest.
And having to crunch out the math on perhaps a number of future prepayment scenarios you may have in mind can not only be time consuming, but also easy to do incorrectly.
So with more and more complaints about the complexity of the math and the understanding of each lender’s criteria, many of the main mortgage sources in Canada now provide mortgage prepayment calculators for anyone to use free of charge.
The article itself goes on to explain that after inputting similar scenarios into all the different calculators, that no two penalties ended up being the same.
This would clearly speak to the need for this type of online tool and judging by the ease of use and non use of some of the calculators, the tools need to also continually be improving.
Now, whether you’re doing some online research to refinance, you can at least get an initial feel as to what the prepayment penalty could be in a mortgage you are leaving as well as how the prepayment penalty would work for a new mortgage for different scenarios in the future.
Statistics clearly show us that consumers and business owners are going online more and more for mortgage related information and for this particular type of inquiry, these tools are a step in the right direction.
That being said, they also point out that there are vast differences in prepayment penalty calculations, and while the calculators mentioned in the article provide you with some data to work with, they are clearly unofficial with respect to any exact prepayment penalty you may incur now or in the future from any of the named lenders.
so while these resources are good for some online research, they don’t replace the need to be working with an experienced mortgage broker who can work through all the calculations and comparisons with you.
If you’d like to discuss prepayment penalties for a mortgage you now have, or for a future mortgage, I suggest that you give me a call and we’ll make sure you get all your questions answered right away.
With the most recent mortgage rule changes coming into effect during July, there remains to be seen how all the provincially regulated credit unions will adjust to the new world of lower risk mortgage financing prescribed by the federal government.
First of all, credit unions are very well established and financially prudent lending organizations, so I don’t see any type of land rush so to speak to gain market share from banks and trust companies that fall under federal banking regulations.
But in certain situations and for certain borrowers with strong profiles, credit unions may be able to provide what the banks cannot.
For instance, banks are going to be providing HELOC’s or home equity lines of credit at a maximum of 65% loan to value down from 80%. While some credit unions will adjust to stay right in step with the main line lenders, there are still those that are offering HELOC’s from 65% to 80% loan to value.
Once again, not everyone may be able to qualify for this and its unclear if the opportunity to secure a higher HELOC through a credit union will continue, but for now it certainly can be an option for some that may gain credit unions some business and borrowers a higher borrowing amount at preferred rates.
The same may also be true for self employed individuals in terms of the manner in which they need to be able to support their earnings, and for still others that are looking to secure a variable rate or a term rate less than 5 years who have to use the 5 year fixed rate to qualify where some credit unions are still using the three year rate.
There is also a strong possibility that credit unions will soon be allowed to operate outside of their current provincial boundaries which could provide program offerings to you in the future that are not currently provided by credit unions in your area, assuming you even have regional or local credit union services available to you.
In the near term, as mortgage holders scramble a bit to get their home financing to fit into the newly minted mortgage regs, there is no doubt going to be more individuals checking out what their local credit union has to offer.
And in cases where strong borrowers are caught by mortgage rules that are inflexible, there may be some very strong options here to consider.
If you’re looking for a bank alternative for a specific financing requirement, I suggest that you give me a call and we’ll go through your situation together and discuss all the relevant options that may be available to you.
Last week, the Federal Government was back at it with new changes to Canadian mortgage requirements that are scheduled to come into effect by July 9, 2012.
This will mark the third major or significant change to mortgage regulations since 2008 with the last changes occurring just last year in 2011.
This time around, the focus is on reducing the amortization period from 30 years down to 25 years on government insured mortgages as well as reducing the amount that you can borrow against your home equity from 85% down to 80%.
There are estimates out in the market that in 2011, 40% of new mortgages were amortized over 30 years so this type of reduction to the available amortization period is going to likely have a significant impact on the market.
The main reasons given for these new rule changes are the increasing levels of household debt and the overheating of housing prices in certain markets, most specifically in Toronto.
Staying on the insured mortgage theme, the rules governing Canada Mortgage And Housing Corporation or CMHC, were also tightened whereby a borrowers total mortgage payments, or gross debt servicing ratio, cannot exceed 39% of total gross income. And total debt payments, or total debt servicing as a percentage of gross income, cannot be higher than 44%.
Mortgage insurance will no longer be available on mortgage requirements for homes greater than $1,000,000, which means that for higher value properties, the buyers are going to have to come up with a down payment of at least 20% to be considered for mortgage financing.
In the long run, these changes will see mortgages paid off faster and consumers saving on interest costs.
But in the short term there is going to need to be considerable movement away from non mortgage debt otherwise its going to be difficult for individuals to qualify for the lower cost forms of financing and mortgage insurance products.
With the rule changes coming into effect in just a few weeks from now, its going to be important to clearly understand how any of these changes may impact your own mortgage situation or one that you are considering entering into.
For more information on these changes and to get expert assistance in working through different potential mortgage scenarios, I recommend that you give me a call so we can go through your situation together and get all your questions answered right away.
And while that may sound like an either or type of scenario, there are several variations to consider.
First of a, a residential home mortgage can be fully open or partially open.
A fully open mortgage provides you to repay all or part of the mortgage at any time during the interest term without any prepayment penalty being applied.
A partially open mortgage provides the borrower with the right to pay off the loan at any time in full with a penalty of either three month’s interest, or interest differential, which ever is the greater.
Many times people assume that a fixed interest term mortgage is a closed mortgage, which may or may not be the case.
By definition, a true closed mortgage does not allow any prepayment of the mortgage during the interest term, except in cases where an arms length sale takes place.
A closed mortgage can provide other prepayment options such as increasing the periodic payment or making lump sum payments, but not full repayment during the term.
The confusion around closed mortgage options has a lot to do with how lenders describe their mortgage products with some stating that their mortgage is closed when it actually has a prepayment option, while others are truly closed mortgages in description and function.
A truly “closed” mortgage with no prepayment options is also not very common in the market place, but it still is offered by different lenders.
Some may offer it as a full stripped down options benefit to provide the lowest rate while at the other end of the spectrum, a sub prime lender may provide it as their standard offering on three and five year interest terms.
The point here is that its very important to understand the prepayment options on different mortgage offerings so that you end up with a product that meets all your requirements and does not provide an unexpected surprise in the months and years to come when you want to partially or fully prepay the principal outstanding.
The best approach for understanding the differences among an open, partially open, and closed mortgage products in the market, is to work with an experienced mortgage broker who can answer all your questions and provide proper explanation of the terms and conditions provided by a given lender or lenders.
Unlike a standard mortgage that results in a charge being placed on the property title, a collateral mortgage is actually a promissory note with a lien registered against the property.
In the past, collateral mortgages in the mortgage financing world were mostly used with secured lines of credit, but now there is a greater interest in using them with conventional mortgage lending.
The reason for this is two fold. First, because normal regulatory limitations on loan to value do not apply, a mortgage lender can register a lien for an amount greater than the property value, at a rate higher than current market rates. This allows the lender to be able to provide additional advances as well as increases to rate during the life of the mortgage without having to pay out the existing mortgage or re-register mortgage security.
So on the one hand, the collateral mortgage provides borrowers with potentially easier access to future borrowings at lower mortgage placement costs. On the other hand, the collateral mortgage also serves as a barrier to the lender to get a second mortgage from a different lender as the collateral charge will not provide any security value to another lender, regardless of the amount of money owing on the original mortgage.
As a mortgage tool, the collateral mortgage and be a great fit for a borrower, provided they understand how it works and the benefits it does offer are things that the borrower thinks they may be able to take advantage of in the future.
That being said, a lack of full understanding of how the collateral mortgage will function can cause problems down the road, especially if the borrower is not able to qualify with their existing lender for incremental borrowing at a time when funds are required.
But even if incremental funds cannot be secured, the borrower can still take advantage of the prepayment options provided in their collateral mortgage, refinance with another mortgage lender and discharge the collateral mortgage in the process. This will incur incremental legal costs and in most cases a collateral mortgage cannot be relocated to another lender so a new mortgage will need to be underwritten and charged on title.
The best course of action to find out more about a collateral mortgage or a specific mortgage program that may or may not have a collateral mortgage charge associated with it is to work with an experienced mortgage broker who can serve as an independent adviser to you for no cost in most cases.
By November, 2012, all mortgage lenders governed by the department of finance are going to have to provide more clear and concise mortgage prepayment penalty information which will need to include how the calculation will be made, calculation sheets for borrowers to utilize, where to find the different inputs into a calculation, and even how to prepay the mortgage without incurring a prepayment penalty.
This move has been promised for the last two years by the department of finance and now its finally coming into practice.
While greater transparency is welcomed by all mortgage holders, some would argue that the finance department has not gone far enough and in fact should require all mortgage lenders to follow a completely standardized prepayment penalty policy and calculation.
The argument against this is that each lender has a different set of costs they are trying to protect themselves against, and forced to follow a single prepayment policy, there could end up being higher rates in the market place and a reduction in the number of different mortgage programs that exist in the market today, which effectively is a reduction of choice to the consumer.
And while a standardized prepayment policy and payment is not likely to be legislated any time soon, the implementation of more transparent prepayment language is definitely a step in the right direction and will provide consumers not only with better tools to avoid prepayment penalties, but to also make better decisions with respect to selecting a mortgage in the first place as prepayment penalty is typically one of the least focused on an understood aspects of a mortgage contract.
But even with greater disclosure, potential prepayment calculations can still be difficult to understand fully. Which is why its always good to work with an experienced mortgage broker who can help you compare and fully understand the potential prepayment penalty that you could be facing with different mortgage options you are considering.
There can at times be a trade off between rate and prepayment in order to meet your preferred mortgage repayment strategy, so its definitely a good idea to go through the exercise of fully understanding this item before signing up for any mortgage program.
If you would like to better understand your prepayment options for a mortgage you have right now, or for a mortgage you are looking to get in place, I suggest that you give me a call so we can work through the lender’s prepayment policy and calculation together and help you determine which course of action makes the most sense for your situation.
Added to that the news last week that the Bank of Canada will not change the overnight lending rate which has been sitting at 1% for the last 16 consecutive months (new record), and all near term indications are that rates are going to stay where they are, or perhaps even go lower in the short term.
The advertising of the 2.99% mortgage rate has taken the market by storm with lenders, brokers, and consumers getting caught up in a major mortgage product offering a still lower rate than we’ve gotten used to over the last number of years.
But while the rate is exceptional, the overall mortgage product does come with its limitations.
First of all, this is a closed mortgage with an annual prepayment option of 10% when the industry average is 20% per year.
This mortgage product has other stripped out features that are common in most other BMO residential mortgage products.
But lower rates, mean lower risk, so its not uncommon, and even expected that the lowest rate offerings on the market are going to have mortgage feature trade offs to consider.
That being said, if you can work with the 5 year term as written, then this is an excellent rate which is going to be in place for a full 5 years, regardless of what happens in the mortgage market place during that same time period.
In keeping with the cost benefit argument, we also currently have at our disposal a 2.99% mortgage rate product for a term of 4 years where many of the aforementioned standard mortgage features are not stripped out of the product.
So for those of you who are looking at a great rate and all the bells and whistles, this is a great product to consider for a new home purchase or a mortgage refinancing scenario.
Even though the market place is blessed with a large cross section of mortgage products, each lender is trying to differentiate themselves in the market to some degree, so its important to be able to understand not only the selling features of any given mortgage product, but also how they will be applied in real time once you have a mortgage in place.
Therefore, we always strongly advise that you work with an experienced mortgage broker who can go through the mortgage programs most relevant to your requirements, and take the time to help you clearly understand the trade offs from one product to another as well as how each product may impact you projected financial planning.
If you’re interested in learning more about these lower interest rate mortgages on the market, I suggest that you give me a call so we can quickly go through your requirements and discuss mortgage programs that are the best fit for your needs.
With regular news reports on the high levels of consumer debt in Canada, there has even been some talk about further tightening of mortgage regulations.
While its hard to imagine further changes to mortgage rules at this point, it is somewhat surprising to read news reports that make claims that Canadian consumer debt is higher than American or British consumer debt levels.
Of course we have to take all these reports with a grain of salt as virtually all are done through some sort of survey for which the related accuracy or inaccuracy can be roundly debated.
Regardless of which country’s debt load per capita is higher, the fact remains that the average Canadian is carrying a high debt load and is having trouble getting it paid down.
Reducing debt load is all about paying down the principal loan or debt amount outstanding.
Being that most people are not likely going to be able to suddenly increase the amount of money they make each and every month, the debt reduction exercise has to turn to putting more of the available dollars towards principal reduction.
This is primarily done in two ways.
The first most obvious way is to reduce discretionary spending and put those dollars against debt balances outstanding.
The second most potentially impactful way to reduce debt is through reducing the cost of capital on the debt that is outstanding.
The keys to reducing the cost of capital on debt is to access cheaper forms of capital by leveraging assets that can be pledged for security and your personal credit score.
This is where mortgage financing comes into a play in a major fashion for those that have equity in real estate.
Consumer debt is in many cases unsecured debt which not only tends to provide higher and higher interest rates over time, but also has a negative impact on your credit score when you are utilizing a high percentage of available credit.
And most of the debt or credit that impacts your credit report is unsecured and/or revolving forms of credit, not mortgage credit.
So when you are able to pay down the sources of credit through mortgage financing or mortgage refinancing, you can potentially access cheaper capital through mortgage financing and have your credit score improve through lower credit utilization of the sources of credit that are tracked by the credit bureaus. This will in turn lead to lower cost secured and unsecured consumer debt.
As I stated at the outset, a lower overall cost of capital allows more of your monthly cash to be available for debt pay down.
While this is not going to be a solution for everyone with high consumer debt, for those that have equity in real estate, there is no time like the present to see if you can devise a debt reduction strategy through greater leverage of mortgage financing.
The best way to determine what options are available to you and how to go about taking advantage of them is to work directly with a Toronto Mortgage Broker who has the experience and lender sources required to make this approach work.
The collateral charge mortgage has made a lot of news lately in terms of how it will impact borrowers and borrower movement from one mortgage lender to another.
If you’re not completely up to speed on the topic, lets walk through a simple example.
If you have a $300,000 property and accept mortgage financing for $150,000, the mortgage lender will register a collateral mortgage for the full property value or $300,000.
From the lender’s point of view, the borrower can now refinance and/or take on secondary mortgage products from the lender without incurring any legal costs.
From the borrower’s point of view, the collateral charge pretty much eliminates the ability to get second mortgage financing or home equity lines of credit from any other lender than your first mortgage provider.
For a more in depth discussion on the topic, here’s a link to a recent article on the ING collateral mortgage move …. http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2011/12/ing-direct-goes-collateral.html
ING appears to be banking on the fact that is going to be better for the majority of its customers and that’s why its making the move. One can also argue that it may further increase borrower retention as well as provide a spring board or ING’s much anticipated HELOC program launch which would work well with a collateral mortgage for existing clients.
In the article linked to above, there is also the debate as to how the competitive landscape will now change among mortgage lenders.
With a collateral mortgage, once a term is up, it will be interesting to see how the competitive offerings change with respect to paying switchover fees to grab customers. Right now, there aren’t many lenders that offer it, but that could change in the near future as well.
This week there was an interesting development among two of the big 5 banks in Canada where Royal Bank and Scotia Bank went from advertising their variable mortgage rate at a discount to the prime rate, to posting rates at a slight premium to prime.
This further tightens up the spread between variable mortgage rares and fixed rates, further fueling the debate over whether to be going fixed or variable now and in the near future.
You can find a more detailed discussion on this topic at the following link … http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2011/12/variable-discounts-turn-to-premiums.html
Over the past number of months, there has been a lot of discussion on forums and different publications on the fact that banks are making considerably more margin on long term fixed rates as compared to the now paper thin margins on the variable rates.
Variable rate pricing issues aside, there would appear to be less profit making opportunities for banks in the capital markets as the world continues to try and pull out of the financial malaise we ourselves in.
And with the ongoing pressure to keep profits up, perhaps pushing consumers more towards the long term fixed mortgage rates is a strategic move on the part of banks to replace revenues down in other areas.
Regardless of whether the change in pricing is driven strictly by increases in costs or an attempt to flip the average mortgage portfolio more towards fixed from variable, the market rates have changed and once again consumers must consider whether they are better off with a variable rate or a fixed rate mortgage, and at what point is the difference in the two worth the risk, especially for home owners on a tight budget.
It will be interesting to see how the other major banks react in the weeks ahead as well as the other major mortgage providers.
If you have rate options available to you, the current trends should be worth paying attention to.
The article provides some basic statistical information on the target market for reverse mortgages to provide some insight as to the average borrower profile for those that sign up for reverse mortgage financing.
Here is the link to the article… http://www.canadianmortgagetrends.com/canadian_mortgage_trends/2011/11/reverse-mortgage-facts.html
In addition to the article itself, there is also an interesting discussion from readers underneath with some differing options on reverse mortgage products.
As the discussion goes, on a direct comparison with other strategies that seniors or retired individuals can pursue to fund their retirement, a reverse mortgage product is not likely the best potential choice they can make.
But other choices like selling your home and investing, or taking out a home equity line of credit, take a certain level of knowledge, execution, and administration that not all individuals possess or have the confidence in being able to complete.
The reverse mortgage is an option and it certainly has a market for this “done for you” mortgage product.
One of the key take aways from the discussion is that individuals considering reverse mortgages consider consulting with their own family members before making a final decision, but that of course is always going to be up to the individual.
If you’d like to get more information on reverse mortgages, give me a call and I’ll make sure you get all your questions answered right away.
In a recent article in the Globe and Mail, one of the writers for the Globe provided a first hand account of a consumers experience working with a mortgage broker.
The person in question was a first time home buyer, so had never gone through the process of acquire a mortgage previously.
But the article points out the benefits of using a mortgage broker for refinancing or renews as well in order to get market representative rates and terms and fit your requirements.
Here’s a link to the article. http://www.theglobeandmail.com/globe-investor/personal-finance/home-cents/why-use-a-mortgage-broker/article2232577/?utm_medium=Feeds%3A%20RSS%2FAtom&utm_source=Report%20On%20Business&utm_content=2232577
While as a mortgage broker I am obviously a believer of the value we provide to our customers, but its always good to have someone else making the case for what we do and provide consumers with a third party account of the benefits of using a mortgage broker in the first place.
If you are in need of a mortgage for any residential or commercial need, I suggest that you give me a call and we’ll go over your requirements together and discuss different options that are available to you in the market.
The standard charge agree outlines the rights and responsibilities of the borrower during the time the mortgage is outstanding.
Failure to comply with all the listed requirements can put the mortgage into default, allowing the lender to exercise their rights which are also outlined in the document.
Once the mortgage contract is signed by the borrower, the borrower agrees to and promises to uphold each of obligations or covenants that are outlined in the mortgage contract.
Here are a list of the basic mortgage covenants that are likely to appear in the standard charge terms that a borrower will need to sign to receive mortgage funding.
Failure to comply with any and all of these covenants will result in the lender considering the borrower to be in default at which time the lender can exercise its rights which have been agreed to by the borrower when the mortgage contract was signed.
The lender also has a number of covenants that they must agree to as well.
While the above borrower and lender covenants are going to be standard in just about any mortgage, the important thing to understand is your obligations as a borrower and the rights of the lender that you are agreeing to on signing.
You may not be able to alter any of these covenants or requirements, but you do need to understand them and comply with them in order to avoid the lender taking action against you in a situation of covenant default.