We all do it. Even I fall guilty to it at times. It’s really a part of Human Nature…and really what fun is life without it?

What exactly are we talking about? Dreaming. We make grand plans and lay them out with the utmost care. We write them out, daydream about them, and (hopefully) we make them come true! There is nothing wrong with doing this…not a single thing! However, as many of you know, rarely do the dreams and plans we lay out stay on course as we would like them to.

This holds true many times for mortgage clients. We find that many times, what they initially come to us with when they are being pre-approved, rarely is the same less than 3 years later (There’s a reason 6 out of 10 Canadians break their 5-year term mortgage early).

Recently, we had just this happen with one of our clients. A young, working professional couple, found themselves in a difficult situation when one of them was injured and went on long-term disability leave.

Their income took a significant drop due to this and their cash flow was of course, negatively impacted. They relied (as many people do) on credit cards and at one point also took out a line of credit. They were able to make minimum payments each month on their loans and debts, but the problem sat with the interest rates. They kept getting higher and the debt they carried wasn’t being reduced.

Basically, life had handed them some lemons.

At this point, they felt they were left with one option: seek private funding. The problem with this was fear of losing their home if they approached their lender. The interest rate quoted by the private lender was less than that on their credit cards, but still higher than what was reasonable. The couple felt that seeking to obtain a second mortgage would be the best-case scenario. However, with a rate of 10% plus a lender fee of up to 6% of the loan amount and a 1 year term with renewal fee of 1% for total amount borrowed, this was not at all ideal!

This is where we stepped in and decided to make some lemonade! Here is how the story played out once they came to see us:

1. We were able to use the income received from disability and refinanced their existing mortgage
2. We consolidated the credit card and line of credit debt at a rate of 2.35% in doing so we reduced their current monthly payments by $1500 with an annual savings of $18,000! Or $90,000 over five years!

Here is a brief number summary to give you the full recap:

Value of the Home: $525,000

Requested Mortgage Amount: $420,000

Loan to Value: 80%

Income Documentation:

1. Letter of employment and pay stub
2. Letter from insurance company detailing disability payments and confirmation of deposit into current bank account.

Credit Score: 746 & 676

Total Debt Service Ratios: 41%

Mortgage Solution: All debts were paid with proceeds from their 5-year variable-rate mortgage with a 30-year amortization. The annual savings was MORE THAN $18,000!

 We helped this couple get back on track and allowed them to keep on dreaming! We understand that life rarely will stay on course and go just as you picture it, but there is often a creative solution that can help you get back on track. If life has handed you a few lemons and you aren’t sure where to start, visit a Dominion Lending Centres Mortgage Broker—they can make some of the best lemonade!

Written by Geoff Lee

Fixed Interest Rates

This is usually the more popular choice for clients when it comes to deciding on which type of interest rate they want.

There are many reasons why, but the most unsurprising answer is always safety. With a fixed interest rate, you know exactly what you are paying every month and you know that the amount of interest being charged for the term of your mortgage will not increase and it will not decrease.

Fixed interest rates can be taken on 1-year, 2-year, 3-year, 5-year, as well as 7 and 10-year terms. Please note, term is not meant to be confused with amortization. When you have a 5-year term but a 25-year amortization- the term is when your mortgage is up for renewal, but it will still take you the 25 years to pay off the entire debt.

The biggest knock on fixed interest rates when it comes to mortgages, especially 5-year terms, is the potential penalty. If you want to break your mortgage and pay it out, switch lenders, take advantage of a lower rate, or anything like this and your term is not over, there will be a penalty. With a 5-year term a fixed rate penalty can be anywhere from $1,000- $20,000 or more.

It all depends on the lender’s current rates, what yours currently is, the length of time remaining on your term, and the balance outstanding. The formula used is called an IRD (interest rate differential) and the penalty owed will either be the amount this formula produces or three month’s interest- which ever is greater.

Fixed interest rates, especially 5-year terms can be the most favourable. They are safe, competitive interest rates that you will not need to worry about changing for the term of your mortgage. However, if you do not have your mortgage for the entire term, it could hurt you.

Variable Rate Interest

The Bank of Canada sets what they call a target overnight rate and that interest rate influences the prime rate a lender offers consumers. A variable rate, is either the lender’s prime lending rate plus or minus another number.

For example, let us say someone has a variable interest rate of prime minus 0.70. If their lender’s prime lending rate is 5.00% in this example, they have an effective interest rate of 4.30%. However, if for example the prime rate changed to 6.00%, the same person’s interest rate would now be 5.30%. Written on a mortgage, these interest rates would look like P-0.7.

Variable interest rates are usually only available on 5-year terms with some lenders offering the possibility of taking a 3-year variable interest rate.

When it comes to penalties, variable interest rates are almost always calculated using 3-months interest, NOT the IRD formula used to calculate the penalty on a fixed term mortgage. This ends up being significantly less expensive as breaking a 5-year term mortgage at a fixed rate of 3.49% with a balance of $500,000 will cost approximately $15,000. That is if you use the current progression of interest rates and broke it at the beginning of year 3. A variable interest rate of Prime Minus 0.5% with prime rate at 3.45% will only cost $3,800. That is a difference of $11,200.

You can expect to pay this kind of amount for the safety of a fixed rate mortgage over 5-years if you break it early.

Which one is best?

It completely depends on the person. Your loan’s term (length of time before it either expires or is up for renewal) can be anywhere from a year to 5 years, or longer. A first-time home buyer typically has a mortgage term of 5 years. Within those 5 years, the prime rate could move up or down, but you won’t know by how much or when until it happens.

Recently, variable rates have been lower than fixed rates, however, they run the risk of changing. With fixed interest rates, you know exactly what your payments will be and what it will cost you every month regardless of a lender’s prime rate changing.

If you go to the site www.tradingeconomics.com/canada/bank-lending-rate you can see the 10-year history of lender’s prime lending rate. Because lenders usually change their prime lending rate together to match one another (except for TD), this graph is a good representation.

As you can see, from 2008 to 2018, the interest rate has dropped from 5.75% to 2.25% all the way back up to 3.45%.

Canada has had this prime lending rate since 1960, and in that time it has seen an all-time high of 22.75% (1981) and all-time low of 2.25% (2010) (tradingeconomics.com). Whether you want the risk of variable or the stability of a fixed rate is up to you, but allow this information to be the basis of your decision based on your own personal needs. If you have any questions, don’t hesitate to contact a Dominion Lending Centres mortgage broker.

Written by Ryan Oake

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.

Written by David Cooke

When I started working as a broker in 2005, the mortgage industry and the financial industry in general weren’t very eco-friendly. Let’s face it. When someone buys a home, there’s a paper trail. Starting with the mortgage pre-approval which can run four pages,  the Offer to Purchase, which is another 12 pages, income documents, notices of assessment, appraisal, and MLS listing condo documentation to add to the pile of paper. Often you would end up with a stack of paper 50-60 pages high. I needed a copy, the lender needed a copy and then my broker needed to keep a copy on file for seven years. I found that I was going to Staples and buying a case of 5,000 sheets of paper every year. I recall going to my broker’s office and seeing the admin assistant struggling to find a place to put another big box of files as the storage room was full.
What a difference a few years makes. Lenders started to accept documents in PDF format, saving us from faxing them, while brokers and lenders started to use secure servers to store the documents and the paper pile dropped for me from 5,000 sheets a year to less than 500. With photo scanning apps on phones, I expect that the paperwork will continue to shrink.
However, there are other signs of greening in the financial sector. Products like CMHC’s Purchase plus Improvements allow us to encourage our clients to change their windows and doors for more energy efficient ones, adding insulation and putting the renovations into their mortgage. In addition, if the repairs result in an Ener-guide reading of more than 82, or if they buy a new Built Green Canada home, they can qualify for a 15% rebate in their mortgage default insurance premiums.
We may not be building windmills or using solar power, but the Mortgage Industry has definitely become greener in the past decade. If you have any questions, contact a Dominion Lending Centres mortgage professional near you.

Written by David Cooke

Your credit score is a big factor when you apply for a mortgage. It can dictate how good your interest rate will be and the type of mortgage you qualify for.

Mortgage Professionals are experienced helping clients with a wide range of credit scores so we can find you a mortgage product even if your credit is far from perfect.

The good news about your credit score is that it can be improved:

• Stop looking for more credit. If you’re frequently seeking credit that can affect your score as can the size of the balances you carry. Every time you apply for credit there is a hard credit check. It is particularly important that you not apply for a credit card in the six months leading up to your mortgage application. These credit checks may stay on your file for up to three years.
• If your credit card is maxed out all the time, that’s going to hurt your credit score. Make some small monthly regular payments to reduce your balance and start using your debit card more. It’s important that you try to keep your balance under 30% or even 20% of your credit limit.
• It’s also important to make your credit payments on time. People are often surprised that not paying their cell phone bill can hurt their credit score in the same way as not making their mortgage payment.
• You should use your credit cards at least every few months. That’s so its use is reported to credit reporting agencies. As long as you pay the balance off quickly you won’t pay any interest.
• You may wish to consider special credit cards used to rebuild credit. You simply make a deposit on the card and you get a credit limit for the value of that deposit. They are easy to get because the credit card company isn’t taking any risks.

Contact a Dominion Lending Centres Mortgage Professional if you have any questions.

Written by Tracy Valko

Fake(ish) News: ‘Mortgage Rates Went Up Last Week

Real News: On April 27th TD increased their ‘posted rate’.

What’s a posted rate?

It’s the list price, the MSRP — you know that price that nobody actually pays…’rack rates’.

Posted is not Prime, Prime is not Posted – there is no connection between Posted and Prime.

So, what’s it mean to you?

Not much if you are in an existing mortgage. It’s really only relevant in two situations: you are either trying to qualify for a new mortgage (that just got a bit trickier) or you are breaking a fixed-rate mortgage early (as 60% of Canadians do) and well, you will now face an even larger prepayment penalty – interesting how the banks control that.

The unaffected: Variable-rate mortgage holders. There is no change to variable rates, and no change to variable rate product rock-bottom prepayment penalties.

Onward.

If you have any questions, contact a Dominion Lending Centres mortgage professional near you.

Written by:  Dustan Woodhouse

When you purchase your home, there are 6 additional costs to account for. They include:

• Home Fire and Flood Insurance
• Title Insurance
• Legal Fees
• Adjustments
• Land Transfer Tax
• GST

Here’s an overview of what you can expect.

Home and Fire Insurance. Mortgage lenders will require a certificate of fire insurance to be in place by the time you take possession of your home. The amount required is generally at least the amount of the mortgage or the replacement cost of the home. This cost can vary on the property size and extras being insured, as well as the insurance company and the municipality. Home insurance can vary anywhere from $400 per year for condos to $2,000 for large homes.

Title Insurance. This is a one-time fee of about $150 and it protects you against any issues, defects or fraud on your title. Your lawyer or notary helps you purchase this.

Legal Fees. Thirdly, you are required to pay legal fees. Your lawyer or notary will charge you anywhere from $700 to $1,000 to help with your purchase. There are also fees to register your title with the municipalities. All told, you’re looking at around $1,000 to 1,300, after tax.

Adjustments. An adjustment is a cost to you to pay the seller back for prepaying any property tax or condo fees on your behalf. Simply put, if you take possession in the middle of a month, the seller has already paid for the whole month and you must pay the seller back for what they’re not using.

Land transfer tax. Land transfer tax, or property transfer tax (PTT) as it’s known as in British Columbia, is a fee that is charged to you by the province. First-time home buyers are exempt from this fee if they are purchasing a property under $500,000. All home buyers are exempt if they are purchasing a new property under $750,000.

In British Columbia, the PTT is 1% on the first $200,000 of purchase and 2% thereafter. However, if the property being purchased is over $2,000,000, then it is 3% on any value over $2,000,000.

GST. GST is only paid on new construction purchases. GST is 5% on the purchase price. However, there is a partial GST rebate on properties under $450,000.

Please don’t hesitate to contact a Dominion Lending Centres mortgage professional for your home financing and mortgage needs.

Land Transfer Tax
GST
Here’s an overview of what you can expect.

Home and Fire Insurance. Mortgage lenders will require a certificate of fire insurance to be in place by the time you take possession of your home. The amount required is generally at least the amount of the mortgage or the replacement cost of the home. This cost can vary on the property size and extras being insured, as well as the insurance company and the municipality. Home insurance can vary anywhere from $400 per year for condos to $2,000 for large homes.

Title Insurance. This is a one-time fee of about $150 and it protects you against any issues, defects or fraud on your title. Your lawyer or notary helps you purchase this.

Legal Fees. Thirdly, you are required to pay legal fees. Your lawyer or notary will charge you anywhere from $700 to $1,000 to help with your purchase. There are also fees to register your title with the municipalities. All told, you’re looking at around $1,000 to 1,300, after tax.

Adjustments. An adjustment is a cost to you to pay the seller back for prepaying any property tax or condo fees on your behalf. Simply put, if you take possession in the middle of a month, the seller has already paid for the whole month and you must pay the seller back for what they’re not using.

Land transfer tax. Land transfer tax, or property transfer tax (PTT) as it’s known as in British Columbia, is a fee that is charged to you by the province. First-time home buyers are exempt from this fee if they are purchasing a property under $500,000. All home buyers are exempt if they are purchasing a new property under $750,000.

In British Columbia, the PTT is 1% on the first $200,000 of purchase and 2% thereafter. However, if the property being purchased is over $2,000,000, then it is 3% on any value over $2,000,000.

GST. GST is only paid on new construction purchases. GST is 5% on the purchase price. However, there is a partial GST rebate on properties under $450,000.

Please don’t hesitate to contact a Dominion Lending Centres mortgage professional for your home financing and mortgage needs.

Written by: Eitan Pinsky

TD Bank has increased it’s posted rates and RBC did the same on Monday. This increase, from 5.14% to 5.59% at TD, is the “biggest move in years.” The change came because of the bond yields increasing. We do expect every other lender to follow suit.

But, actual interest rates have not changed… so what exactly is going on?

The banks have specifically increased something called the “posted” rate.

A “posted” rate is used for three purposes:

• Fools clients into thinking rates are higher than they are by being displayed in the “Rates” section of a bank’s website.
• A ~5% decrease in affordability for many borrowers. The posted rate is the benchmark rate that lenders use for qualifying a mortgage (a bank’s “stress test”).
• It is used to calculate the bank’s mortgage penalty.

First, let’s address the clients who renew their mortgages when the banks send out renewal letters…

Did you know that 80% of homeowners renew with their current mortgage lender? Did you also know that the Bank of Canada published a study that says:

“Lenders have improved their ability to price discriminate… offering discount rates to different sets of consumers, based on their willingness to pay.”

Lenders know that at renewal, most clients do not shop around as they did when they obtained their initial mortgage, and are therefore less likely to offer their best rate to current borrowers.

So, this higher rate is for people who don’t know better. Please remember that the banks are not there for your client. A recent CBC article shows that the banks are there to make money first and provide advice second.

Second, for qualification, the lenders go by their “posted rate” to qualify a mortgage. If a client gets a variable at 3%, the lender is required to qualify them at the higher rate of posted/benchmark and 2% above their contract rate (in this case, 3%). However, with lenders increasing their posted rates, the client will have to be approved at 5.59% instead of 5.14%. This will affect home buyers and decrease affordability by about 5%.

Third, banks use the posted rate for their penalty calculations. The higher the posted rate, the higher someone’s potential penalty is when they pay out their mortgage. This increase in the posted rate will increase people’s penalties quite substantially for Bank Interest Rate Differential (IRD) penalties. This is definitely not in the clients’ best interests. A borrower could do much better by going with a variable rate penalty or a monoline IRD penalty.

BONUS: OK, so we now know that the Posted Rates have increased. What we don’t know is why…

The first reason for a lender to increase their rates would be when the bond yields increase. We have seen a slight increase but not that much, and definitely not enough to warrant such a high increase in a bank’s posted rate. Generally, when the bond market changes, the discounted rates will change. Discounted rates are the rates that clients actually see when they get their mortgages.

One sentiment is that TD and RBC are trying to warn people to lock in now so they can make more money and have greater “spreads” between the bond yields and mortgage rates.

If I had a crystal ball, or if I was a portfolio manager, I may have more info for you here… Alas, this is all I can say on this matter. If you have any questions, contact a Dominion Lending Centres mortgage professional who can help.

Written by Eitan Pinsky