FIXED RATES OUTWEIGHING VARIABLE

We are currently in a very unique situation when it comes to 5-year fixed and 5-year variable interest rates. For the first time in almost a decade, the lowest 5-year fixed interest rate is more than 0.30% lower than the lowest available variable interest rate for new mortgages. For some, their current variable rate is 0.80% higher than what a new 5-year fixed interest rate could be.

Why is this important?

Variable mortgage penalties are only equivalent to 3 month’s interest. On a $400,000 mortgage with a net variable rate of 3.10%, the penalty would only be $3,100 ($775 per $100,000 of mortgage debt).

What are the savings to switching to a lower rate?

The following is an excerpt from an email we have sent several clients recently. The numbers have been adjusted from their originals to protect clients.

$2,152.76 current monthly payment
$437,857.16 current outstanding balance
4 years and 0 months remaining on term and 24 years and 0 months remaining on amortization

$3,800 approximate penalty to break mortgage including discharge fee (legal fees and appraisal covered)

$2,061.88 new monthly payment on 5-year fixed rate
$437,857.16 new outstanding balance
4 years and 0 months remaining on term and 24 years and 0 months remaining on amortization

$90.88 savings per payment

Interest paid with current lender for remainder of term: $50,847.29
Principal paid with current lender for remainder of term: $52,485.19
Remaining balance at end of term: $385,371.97

Interest paid with new rate for remainder of term: $44,025.53
Principal paid with new rate for remainder of term: $54,944.71
Remaining balance at end of term with new rate: $382,912.45

For $3,800, this client has the potential to save almost $6,800 in interest, save $90.88 a month, while at the same time owing less on their total balance at the end of their term.

Now, this might not be for everyone. Variable, as you know, can go up and down. Locking into a 5-year fixed rate also takes away your ability to get out of your mortgage for only 3 months interest penalty compared to staying in a variable rate. For some people, maintaining the variable for an opportunity of having that rate drop below current 5-year fixed rates is worth waiting too.

There is no right or wrong decision. It is how you want your monthly payments structured and how much risk you want to allow for, both in rate variances and potential penalties.

To find out what kind of savings you could see with moving your variable rate into a fixed rate, please, contact a Dominion Lending Centres mortgage professional today.

–RYAN OAKE

When You Might Need an Alternative Lender Mortgage

The majority of homeowners are blissfully unaware of alternative mortgages. They presume everyone is entitled to sub-3% mortgage interest rates, with no fees of any kind.

But there is a growing, significant percentage of borrowers who need a different type of mortgage financing solution. Sometimes there is no choice, which is why the alternative lending market (B-lenders) is so important to the overall health of the mortgage industry and, indeed, our economy.

Could this happen to you? Who would you turn to if your bank turned you down for a mortgage? How would you know if you are being given the straight goods, or being sold a bunch of baloney?

If your primary financial institution (bank, credit union, trust company) refuses you a mortgage, you need to source a mortgage broker who can explore alternative financing options for you—hopefully with a B-lender solution. And if that doesn’t work out, then there are many potential private mortgage lenders too.

Most mortgage brokers are very comfortable working with A-lenders like banks, credit unions and monoline lenders, such as MCAP and First National. And, in recent years, a growing number have expanded their businesses to provide alternative and private lending solutions. Be sure to select a professional who is experienced with these types of specialized products when you are in the market for a non-traditional mortgage.

Mortgage brokers have access to a fair number of alternative mortgage lenders (B-lenders) who offer excellent solutions above and beyond the traditional branch-based lenders, including:

• Expanded debt-service ratios—some alternative lenders will allow GDS and TDS ratios as high as 50%, and are not constrained by 35/42 or 39/44 ratios, as traditional lenders usually are. In fact, if the loan-to-value ratio is low, they can get really creative. (For example, Haventree Bank may consider up to 60/60 debt service ratios when the LTV is under 65%, under their non-conforming product).
• Tolerant of damaged credit histories—they will reserve their lowest rates for those with high credit scores (720 and above, sometimes less) but at the same time may entertain your mortgage application with a score as low as 500 or even lower.
• Receptive to forms of income that traditional lenders cannot consider, such as Air BnB income, commission income, tips and contributory income from spouses not even on title. And most are more relaxed in their approach to self-employed borrowers.

Suppose for you the door is closed to banks and all A-lenders. How did you get here? Reasons typically include one or more of the following:

• Cannot pass the mortgage stress test: inability to meet maximum debt-service ratios.
• Low credit scores: could be too many late payments, balances too high on credit facilities, collections and liens, or even a consumer proposal or bankruptcy.
• Non-traditional income: could be commissioned or rely on tips and work in a cash-based business. May even be irregular part-time income. Or perhaps you rent out rooms in your home, or have Air BnB income, foster care income, disability income, child tax benefits, etc. Do you buy, renovate and sell houses, and the capital gains are your only income? You could even own “too many properties.” (Yes, that can be a thing!)
• Self-employed: you could be a business owner with lots of expense deductions and low reported taxable income. Or maybe you have been self-employed only a short time—fewer than the two years A-lenders prefer to see.

How long will it take to graduate back to A-lending?

The length of time you remain in an alternative lending product will vary based on your unique situation; most alternative mortgages are offered as one- or two-year terms. There are some lenders who offer three- and even five-year terms, but this is much rarer.

There are some borrowers who remain in this space for the long haul. It is unlikely they will ever qualify for a mortgage with an A-lender because of credit and/or income issues and that’s ok. They are grateful there is a reasonable cost alternative.

What added costs come with alternative mortgages?

Interest rate

Your interest rate will be a bit higher than those offered by an A-lender. These days, they mostly range from 3.99% to 5.99%. I don’t have the stats, but it feels like a large percentage of these are in the narrower range of 4.24% to 5.24%.

And the lowest rates are typically for a one-year term, with the two-year term coming in a touch higher.

Here are some sample payments to illustrate the impact of different mortgage rates. The difference is not as much as people expect.

• $300,000 at 2.99% with a 30-year amortization = monthly payments of $1,260
• $300,000 at 3.99% with a 30-year amortization = monthly payments of $1,425
• $300,000 at 4.99% with a 30-year amortization = monthly payments of $1,600

Lender fees

Most of the time, your lender will charge a one-time fee of 1% of the loan amount.

Brokerage fees

With mortgages arranged with A-lenders, your mortgage broker is paid by the lender at no extra cost to you. This is less the case with alternative mortgages, mainly because the shorter the mortgage term, the less the compensation, yet the workload is at least the same and often more intense.

Therefore, when sourcing an alternative mortgage for you, your mortgage broker will often charge a brokerage fee. They should be upfront about this exact charge early on in the process. The amount varies from broker to broker and from loan to loan. Factors brokers consider are:

• The complexity and level of effort they anticipate is involved to fund your mortgage.
• The size of your mortgage. The smaller your mortgage, the larger the fee may seem as a percentage of the loan amount, and the larger the mortgage, potentially the smaller the fee may seem as a percentage of the loan amount.

If you are buying a property, lender and brokerage fees come from your pocket. If you are refinancing, they are deducted from the mortgage advance, if there is enough equity to do so.

All fees and costs must be disclosed properly to you according to your provincial regulator’s rules. Lender and broker fees are paid on your funding date.

Other fees

As with most mortgages, you can expect to pay for an appraisal, solicitor and title insurance.

Some lenders charge annual administration or “maintenance” fees of a few hundred dollars, and they typically charge a renewal fee if you accept one of their renewal offers. There is not a one-size-fits-all formula applied when calculating renewal fees.

Monthly property tax administration fees can also be charged (less than $5 per month).

Alternative lenders are a safe route

In the Q1 broker lender market share figures, alternative lenders Home Trust Company and Equitable Bank together held more than 13% of broker market share.

Alternative lenders are not to be feared or disparaged. They serve a very useful role in the mortgage industry and are a terrific midpoint between a bank-issued mortgage and a private lender solution.

When a mortgage borrower does not even fit into the world of alternative lenders, your mortgage broker will need to source a private mortgage solution for you. I will explore this option in future articles.

–ROSS TAYLOR

The Latest in Mortgage News: iA Exits the Residential Mortgage Market

After nearly 50 years of providing residential mortgages to Canadians, Industrial Alliance Financial Group announced its exit from the space this month.

“This is a result of our decision to focus on investments in key sectors for the Group,” iA spokesperson Pierre Picard told CMT. “We will focus exclusively on commercial mortgages. Residential mortgages operations will be phased out gradually.”

The deadline for brokers to submit new applications already passed on Sept. 6, while all documents for deals still in the pipeline must be submitted no later than Oct. 18. Loan applications not completed by then will be cancelled.

Picard confirmed that “clients will have access to customer service until their mortgage matures.”

He added that the decision to leave the residential mortgage space had nothing to do with the stricter regulatory environment following the implementation of Guideline B-20 and its mortgage stress test.

A source familiar with iA’s residential mortgage business said the move came as a surprise, given the business was reportedly still profitable, and also since the company had invested heavily in a new mortgage underwriting platform that launched earlier this year.

iA was at one time one of the most aggressive lenders in the broker channel rates-wise, particularly with its “No Frills” mortgage. However, brokers say the rates became far less competitive over the last year and a half.

The company was also known to be a very niche lender, rarely breaking above 1% of market share.

Aging Canadians Driving Reverse Mortgage Growth

Reverse mortgage growth is soaring in Canada, having jumped another 26%—or $778.9 million—since last summer, according to data from the Office of the Superintendent of Financial Institutions (OSFI).

Total outstanding reverse mortgage debt climbed to $3.74 billion as of June, up 0.6% from May. While reverse mortgages still represent less than 1% of the $1.2 trillion residential mortgages issued by chartered banks, their pace of growth is much higher.

Equitable Bank, one of two lenders offering reverse mortgages in Canada, has seen applications spike, the company’s CEO, Andrew Moor, told BNN Bloomberg this week.

“We’ve only been in this market for 18 months, but applications are jumping,” having tripled in the past year, he said. “Canadians are getting older and there is an opportunity there.”

HELOC Debt at an All-Time High

Outstanding HELOC balances have now topped $300 billion as of June, according to data from OSFI.

The balance reached $302.2 billion, a 0.35% increase from May and a 5.37% jump from a year earlier.

At the same time, HELOC servicing costs are soaring for certain homeowners, particularly those living in Toronto and Vancouver, according to first-quarter data from the Canada Mortgage and Housing Corporation (CMHC).

It found homeowners in Toronto are paying 14.5% more each month ($593) in HELOC payments compared to the previous year. Those in Vancouver have seen their payments increase 12.3% to $667 a month—more than three times the rise in mortgage servicing costs, which rose 4.85% to $1,881 a month.

Data released earlier this year from the Financial Consumer Agency of Canada pegged the average HELOC balance at approximately $65,000, while one quarter have a balance of more than $150,000. The Agency also sounded the alarm over the fact that more than a quarter of HELOC-holders (27%) are paying the minimum interest amount each month.

–STEVE HUEBL

Ottawa Leads Canadian Cities in Rising Home Prices: CREA

–DANIELLE KUBES

–DR. SHERRY COOPER

HELPING FAMILIES ONE AT A TIME

Every once in a while you get to help people out and make a real difference in their lives. Recently a couple was referred to me who wanted to renew their mortgage. The bank that they had been dealing with for over 20 years had offered them a 5 year fixed rate that was more than 1% higher than the going rate.

First I told them to accept the lender’s option for a 6 month open mortgage. While it had an interest rate twice as high as they usually pay, it’s open and we could switch them as soon as everything was done. I have had other lenders who automatically put people into a fixed rate 6 month mortgage if they did not hear back from the clients before the mortgage expired.

I was able to beat this rate without any difficulty, but I was wondering why they were offered such a high rate. On closer examination of their credit reports, I saw that in the three years since they had purchased their home, they had built up their credit card and line of credit debt up over $50,000. As a result, the debt ratios didn’t work with any lenders. Their lender knew this and decided to take advantage of the client and charge them a premium to renew.

What the bank was not counting on was a mortgage broker who doesn’t give up. Over the years, our brokerage has developed relationships with a variety of lenders. One of those lenders, a credit union, arranges RRSP loans for us. They were running a loan special with an interest rate of 4.95% for loans up to $50,000. I sent a copy of our application over to the credit union with my clients’ permission and they were able to consolidate $50,000 of the debt and lower the monthly payments by $500. In addition, they would be paying off all this debt in 5 years. Under the old 19% rate, it would take them 10-plus years to pay their credit cards.

Now I was able to arrange a loan and lower their payments by over $200 a month. As this took time to arrange the consolidation loan and then the mortgage switch approval, rates dropped again by another .10 basis points. I was able to get the mortgage rate lowered again saving the clients another $1080 over 60 months which paid for the higher interest rate they had for 2 months.
Now I have saved my clients $43,000 over the next 5 years. That was a good day. If you want to look at options for lowering your mortgage and credit debts be sure to speak to your local Dominion Lending Centres mortgage professional.

–DAVID COOKE

FIRST TIME HOME BUYERS INCENTIVE PROGRAM

The new First Time Home Buyer Incentive program from CMHC (Canadian Mortgage and Housing Corporation) was officially released on September 2. This program was met with mixed reactions across the mortgage industry, but we wanted to take a minute to give you the facts regarding the program. Below are the key points you need to know, and as always if you do have any further questions please reach out to us.

What is it?
Eligible homeowners are able to apply for a 5% or 10% shared equity mortgage with the Government of Canada.  A shared equity mortgage is where the government shares in the upside and downside of the property value. The Incentive enables first-time homebuyers to reduce their monthly mortgage payment without increasing their down payment. The Incentive is not interest bearing and does not require ongoing repayments.
Through the First-Time Home Buyer Incentive, the Government of Canada will offer:
• 5% for a first-time buyer’s purchase of a re-sale home
• 5% or 10% for a first-time buyer’s purchase of a new construction

It’s important to understand that with this program, the government will then OWN 5-10% of the equity of your home (pending on how much was contributed to the down payment).

Who is eligible?
First, you must be a First Time Home Buyer. This incentive is only offered to those who are purchasing their first home. Second, you need to have the minimum down payment to be eligible. The minimum down payment is 5% of the purchase price of the property, and this must come from your own resources. The Federal Government will not give you 5% to put towards/cover the entire down payment. Third, your maximum qualifying income is no more than $120,000. Lastly, your total borrowing is limited to 4 times the qualifying income.

There are restrictions on the type of property you can purchase. The below are the eligible properties:
o New construction (5-10% incentive)
o Re-sale home (5% incentive)
o New and resale mobile/manufactured homes (5% incentive)

Residential properties include single family homes, semi-detached homes, duplexes, triplex, fourplex, townhouses, condominium units. The property must be located in Canada and must be suitable and available for full-time, year-round occupancy.

How Does Repayment Work?

You can repay back the incentive in full at any time without a pre-payment penalty or you can repay the incentive after 25 years or if the property is sold, whichever happens first. The repayment of the incentive is based on the property’s fair market value:
o You are given a 5% incentive of the home’s purchase price of $200,000 or $10,000. If your home value increases to $300,000 your payback would be 5% of the current value or %15,000
o You are given a 10% incentive of the home’s purchase price of $200,000 or $20,000 and your home value decreases to $150,000, your payback amount would be 10% of the current value or $15,000.

If you are interested in this program or have further questions, we encourage you to reach out to your Dominion Lending Centres mortgage broker. This is a brand-new program and more details are coming out each day. We also are working to better understand the implications of this type of shared equity mortgage and will keep you updated on any news or updates we receive.

–GEOFF LEE

Canadians Not Deterred By Homeownership Obstacles

Those dreaming of homeownership face a long list of obstacles: high prices, low supply and ever-changing mortgage rules and qualification requirements, to name a few.

But that hasn’t shaken Canadians’ desire to have a place to call their own, according to the latest consumer survey from Mortgage Professionals Canada.

For those who already own a home, 90% are happy with their purchase, while those considering homeownership see positive long-term financial benefits.

An overwhelming 76% of Canadians believe they’d be financially better off as a homeowner vs. just 8% who feel they would be better off renting.

But the findings acknowledge the path to homeownership isn’t always an easy one. Out of a list of six major decisions, homebuying ranks as the second-most stressful (behind moving to another city).

“Buying a home is complicated and challenging and stressful. Yet we still buy homes. We do it because we believe that it will make us better off than if we rent,” says the report’s author, Mortgage Professionals Canada Chief Economist Will Dunning.

“In most situations, owning a home provides a positive (and tax-free) ‘rate of return’ on the owner’s investment of equity, and that rate of return rises over time.”

Paul Taylor, President and CEO of MPC, says the association has learned much about the resilience of the Canadian homebuyer through its past surveys. “We’ve learned that Canadians are generally very prudent and considerate with their financial decisions.”

Here are some of the key findings from Dunning’s latest survey:

Consumer Sentiment

• While Canadians agree (6.52 out of 10) with the following statement, “interest rates have meant that a lot of Canadians became homeowners over the past few years who probably should not be homeowners,” the level of agreement has fallen from the long-term average of 6.93.
• They also continue to agree that “real estate in Canada is a good long-term investment” (7.16) and that mortgages are “good debt” (6.99).
• Concerning the current economic outlook for the next 12 months, the survey found Canadians are mildly optimistic (6.07), slightly above the neutral score of 5.5.

The B-20 stress test

• Only half of Canadians are aware of the stress test requirements
  • While this isn’t necessarily alarming, given that most people aren’t imminently buying a house and don’t need to be familiar with the rules, Dunning noted, “this limited awareness is also present among people who expect to buy a home during the coming year: there is a risk that some buyers could have unexpected difficulty in obtaining the financing they need.”
• Respondents agreed (6.84 out of 10) that the stress tests will “ensure that homebuyers will still be able to afford their homes if interest rates rise by a large amount in the future.”
• However, those surveyed also agree (6.62 out of 10) that the stress tests “will result in more people having to turn to more expensive mortgage options from lenders.”

The First-Time Home Buyer Incentive

• Canadians are in “moderate agreement” that the new First-Time Home Buyer Incentive (FTHBI), which launched on September 2, will “make it easier for Canadians to afford a home.”
• However, among existing homeowners, most say they would not have used the program when they bought their first home.
• Most respondents also said they would not be willing to give up equity in their home.
• Dunning expects the program will result in less than 5,000 incremental first-time purchases per year.

30-Year Amortizations

• The idea of raising the maximum amortization period to 30 years (which was reduced to 25 years in 2012) has a certain degree of support among Canadians.
• Respondents agreed (6.71 out of 10) that bringing back 30-year amortizations would “allow homeowners to control their payments in the critical early stages of their mortgage.”
• There was also a feeling that it would “result in more Canadians being worse off overall at the end of their mortgage” (6.15 out of 10) and would “result in more Canadians purchasing homes that they can’t afford”(6.72 out of 10).
• Compared to the FTHBI, 44% favoured a return to 30-year amortizations vs. 27% who preferred the FTHBI.

–STEVE HUEBL

CANADIAN JOBS SURGE FOLLOWING A THREE-MONTH SLOWDOWN

The Bank of Canada’s reticence to signal coming rate cuts has been vindicated by the rebounding jobs report released today for August. Following a strong posting for real GDP growth in the second quarter, Canadian job growth surprised on the upside with a gain of 81,100 in August. The August job gains were one of the best months on record in August, a surprising show of strength by a labour market that has relentlessly powered the country’s expansion. Over the past year, employment increased 471,000–up 2.5%–the most since 2003. Full-time employment rose +306,000 or +2.5% over the past year, while part-time work increased +165,000 or +4.8%. Over the same period, hours worked rose by 1.2%.

Last month’s job gains were mostly in part-time work. The unemployment rate remained at 5.7% as discouraged workers returned to the labour market, helping to mitigate the fear of worker shortages. The bulk of the employment increase last month was in Ontario and Quebec, where the jobless rate fell to 4.7% in Quebec and 5.6% in Ontario (see table below). The Quebec economy and housing markets have been on a roll this year.

The number of private-sector employees increased in August, more than offsetting the decline in July.

There were more people employed in finance, insurance, real estate, rental and leasing; educational services; and in professional, scientific and technical services. In contrast, employment declined in business, building and other support services.

The rebound in the housing market in most provinces since the end of the first quarter boosted the finance, insurance, real estate, rental and leasing sector, bringing the year-over-year (y/y) gain to 3.9%. The increase in August was in Quebec and Ontario. Construction employment increased by 8.4% y/y in Quebec and 4.3% in Ontario. Housing-related jobs in the service sector (finance, insurance, real estate, rental and leasing) posted y/y gains of 5.5% in Ontario and 2.7% in Quebec.

In direct contrast, the BC housing market’s slowdown took its toll. Construction jobs fell y/y by -0.3%, although housing-related service sector jobs rose a still-strong 4.5% y/y.

Wage gains slowed but remained strong. Hourly pay was up 3.7% in August from a year earlier. While that’s down from 4.5% in July, it’s still well above average in recent years. Permanent worker pay slowed to an annual pace of 3.8%.

Bottom Line: Overall, today’s jobs numbers will leave the BoC comfortable with the neutral stance it took this week. Markets seem to agree, with the Canadian dollar strengthening further this morning.

US Jobs Report Disappoints

In contrast, business hiring stumbled in August in the US, likely confirming expectations for a second straight Federal Reserve interest-rate cut when they meet again September 17-18. The jobless rate held steady at 3.7%, and wage growth ticked lower but held above 3%.

Although the unemployment rate held steady at multi-decade lows, the headline employment gain of 130,000 was disappointing. Private payrolls rose 96,000, a three-month low, after a downwardly revised 131,000 advance the prior month, according to a Labor Department report Friday that trailed the median estimate of economists for a 150,000 gain. Total nonfarm payrolls climbed a below-forecast 130,000, which was boosted by 25,000 temporary government workers to prepare for the 2020 Census count.

Fears abound that economic growth in the US is slowing under the weight of escalating international trade tensions and the slowdown in the global economy. Calls may grow for the Fed to cut interest rates this month by a half-point instead of a quarter-point.
The US manufacturing sector is showing clear signs of struggling, and the White House continues to pressure the Fed about the need for even more aggressive interest rate cuts. As well, the payroll figures showed weakness in several sectors. Manufacturing added an anemic 3,000 jobs, and retailers cut positions for a seventh straight month and education and health services hired the fewest people since February.

–DR. SHERRY COOPER

4 WAYS TO MAKE THE MORTGAGE PROCESS SMOOTHER

Mortgages are complicated—we get it! But there are steps that you as a homebuyer can take to make the process a much smoother one (plus let you walk away with the sharpest rate!)

1. Use a Broker
This should be the first step you take when getting a mortgage! Enlisting a trusted broker to work with you can help you secure the sharpest rate and the right mortgage product too! This is one of the biggest (if not the biggest) purchase you will make in your lifetime. Working with a professional will make all the difference.

2. Budget, Budget, and Budget Some More
Budgets aren’t the most glamorous element of homebuying but they are a necessity. Why? Because often you will have overlooked costs that can make or break you getting into your home. A few things to consider:
• Property transfer taxes
• Legal fees
• Home inspection/appraisal fees
• Down payment (this is kind of a big one)
• Mortgage insurance
And the costs don’t stop once you own the home.

3. Understand the Importance of the Down-Payment
Many home-buyers focus on just simply putting money aside for the down payment. While this is crucial, there are other considerations.
• How big of a down payment can you make? You must meet the federally mandated minimum down payment: 5% for all mortgages up to $500,000, and 10% on any portion above $500,000 up to $999,999.99 (CMHC-insured mortgage loans are only available on properties valued under $1 million). But the size of the down payment will also reduce the interest you pay out over the life of your mortgage and reduce the size of the CMHC mortgage premium too.
• Take advantage of the Home Buyer’s Plan to withdraw up to $25,000 tax free from their Registered Retirement Savings Plan (RRSP). This can help to supplement your down payment as long as you understand the rules for paying it back.
• Leave plenty of time to transfer the funds from whichever source you are pulling them from. You will also need to leave adequate time for a certified or cashier’s cheque to be produced before the closing

4. Don’t Become Hyper Focused On the Rate
Yes, the rate is important, but don’t be hasty and jump into a mortgage purely based on the rate. Consider other areas such as the terms, the penalty to break, the amortization, and all other factors before signing on the dotted line. Your broker can help you to understand the ins and outs of a mortgage.

Considering these four things can help you be more prepared when beginning the mortgage process. Remember, a Dominion Lending Centres mortgage broker will help you and guide you through each of these things to ensure you are getting the best mortgage possible and with minimal stress too!

–GEOFF LEE