28 Jul

Understanding Mortgage Rates

Mortgage Tips

Posted by: Yen (Frank) Feng

While not the only factor to consider when choosing a mortgage, interest rates continue to be one of the most prominent decision criteria for any mortgage product. Understanding how mortgage rates are determined and the differences between typical fixed-rate and variable-rate options can help you make the best decision to suit your needs.

HOW RATES ARE DETERMINED

Banks set the prime-lending rate (the rate they offer their best customers), which is influenced by the Bank of Canada’s overnight rate because it impacts their own borrowing. Approximately eight times per year, the Bank of Canada makes rate announcements that could affect your mortgage, as variable mortgage rates and lines of credit move in conjunction with the prime-lending rate. For fixed-rate mortgages, banks use Government of Canada bonds. In the bond market, interest rates can fluctuate more often and can provide clues about where fixed mortgage rates will go next.

To put it simply: a variable-rate is based on the current Prime Rate and can fluctuate depending on the markets. In contrast, a fixed-rate is typically tied to the world economy, whereas the variable rate is linked to the Canadian economy. When the economy is stable, variable rates will remain low to stimulate buying.

FIXED-RATE VS. VARIABLE-RATE

Fixed-Rate Mortgage

First-time homebuyers and experienced homebuyers typically love the stability of a fixed rate when entering the mortgage space.

The pros of this type of mortgage are that your payments don’t change throughout the term. However, if the Prime Rate drops, you won’t be able to take advantage of potential interest savings.

Variable-Rate Mortgage

As mentioned earlier, variable-rate mortgages are based on the Prime Rate in Canada. This means that the amount of interest you pay on your mortgage could go up or down, depending on the Prime Rate. When considering a variable-rate mortgage, some individuals will set standard payments (based on the same mortgage at a fixed rate). This means that, should the Prime Rate drop and interest rates lower, they would end up paying more to the principal as opposed to paying interest.

If the rates go up, they will simply pay more interest instead of directly reducing the principal loan.

Other variable-rate mortgage holders will allow their payments to decrease with Prime Rate decreases or increase should the rate go up. Depending on your income and financial stability, this could be a great option to take advantage of market fluctuations.

Want to learn more about rates or need mortgage advice? Contact your mortgage expert today!

22 Jul

The Real Deal about Transfers and Switches

Mortgage Tips

Posted by: Yen (Frank) Feng

Most people who are thinking about a transfer or switch want to take advantage of a lower interest rate or to get a new mortgage product with terms that better suits their needs.

Up for Renewal?

If your mortgage is approaching renewal and you are considering a transfer or switch to an another lender – great news! You won’t be charged a penalty. BUT you are still required to qualify at the current qualifying rate and need to consider potential costs around legal charges, appraisal fees and penalty fees (if applicable). In some cases, the lender will offer you the option to include these fees in your mortgage or even cover the costs for you.

Currently have a Collateral Charge Mortgage?

If you have a collateral charge mortgage (which combines property and other debts as security for the loan), these loans cannot be switched; they can only be registered or discharged. This means you would need to discharge the mortgage from your current lender (and pay any fees associated) before registering it with a new lender (and pay any fees associated).

Still locked into your Mortgage?

If you are considering a transfer or switch in the middle of your mortgage term, you will likely incur a penalty for breaking that mortgage. Typically, transfers and switches are done to take advantage of a lower interest rate (and lower monthly payments), but you want to be confident that the penalty doesn’t outweigh the potential savings before moving ahead.

Things to consider for a transfer or switch:

1. You may be required to pay fees associated with the transfer or switch, including possible admin and legal fees.

2. You will need to re-qualify under the qualifying rate to show that you can carry the mortgage with the new lender.

3. You will be required to submit documents that may include, but are not limited to, the following (depending on the lender):

  • Application and credit bureau
  • Verification of income and employment
  • Renewal or annual statement indicating mortgage number
  • Pre-Authorized Payment form accompanied by VOID cheque
  • Signed commitment
  • Confirmation of fire insurance is required
  • If your initial purchase down payment was below 20%, confirmation of valid CMHC, Sagen or Canada Guaranty insurance is required
  • Appraisal
  • Payout authorization form
  • Property tax bill

If your mortgage is currently up for renewal, consider reaching out to your Mortgage Expert. Not only can I advise you of any penalties or fees that may be associated with your desired transfer or switch, but I also have the knowledge and ability to shop the market for you to find the best options to meet your needs. 

19 Jul

Canadian Inflation Falls Within Bank of Canada’s Target Range

Economics Insights

Posted by: Yen (Frank) Feng

 

June inflation data released today by Statistics Canada showed that the Consumer Price Index (CPI) rose 2.8% year-over-year (y/y), slightly below expectations. This was the lowest CPI reading since February 2022.

The decline in inflation was mainly due to lower energy prices, which fell by 21.6% y/y. Without this decline, headline CPI inflation would have been 4.0%. The year-over-year decrease resulted from elevated prices in June 2022 amid higher global demand for crude oil as China, the largest importer of crude oil, eased some COVID-19 public health restrictions. In June 2023, consumers paid 1.9% more at the pump compared with May.

Food and shelter costs remained the two most significant contributors to inflation, rising by 9.1% y/y and 4.8% y/y, respectively. Food prices at stores have risen nearly 20% in the past two years, the most significant rise in over 40 years. Shelter inflation rose slightly from 4.7% y/y in May.

The largest contributors within the food component were meat (+6.9%), bakery products (+12.9%), dairy products (+7.4%) and other food preparations (+10.2%). Fresh fruit prices grew at a faster pace year over year in June (+10.4%) than in May (+5.7%), driven, in part, by a 30.0% month-over-month increase in the price of grapes.

Food purchased from restaurants continued to contribute to the headline CPI increase, albeit at a slower year-over-year pace in June (+6.6%) than in May (+6.8%).

Services inflation cooled to 4.2% y/y from 4.8% y/y in May. This was due to smaller increases in travel tours and cellular services.

The Bank of Canada’s target range for inflation is 1% to 3%. While June’s inflation reading was within the target range, it is still higher than the Bank would like. The Bank raised the overnight policy rate twice in the past two months to reduce the stickier elements of inflation.

There were signs of easing price pressures for consumer goods also. Durable goods inflation continued to cool to 0.8% y/y in June. Passenger vehicle prices rose slower in June (+2.4%) than in May (+3.2%). The year-over-year slowdown resulted from a base-year effect, with a 1.5% month-over-month increase in June 2022 replaced with a more minor 0.6% month-over-month increase in June 2023. This coincided with improved supply chains and inventories compared with a year ago. Household furniture and equipment was up only 0.1% y/y in June, down from a peak of 10.5% last June. 

The June inflation data provides some relief to consumers, but it is clear that food and shelter costs remain a major concern. The Bank of Canada will closely monitor inflation in the coming months to see if it is on track to return to its 2% target. There is another CPI report before the Bank meets again on September 6th.
 

The Bank of Canada’s underlying inflation measures cooled further in May. CPI-trim eased to 3.7%y/y in June from 3.8% y/y in May, and CPI-median registered 3.9% versus 4.0% y/y in May. The chart below shows the closely watched measure of underlying price pressures, the three-month moving average annualized of the core measures of CPI. They continue to be just under 4%.

Canadian inflation continued to make encouraging progress in June. However, the cooling in headline inflation benefits from sizeable base effects due to the favourable comparison to high energy prices last June. The Bank of Canada (BoC) is watching its preferred core measures, which continue to show glacial progress. 
 

Bottom Line

It takes time for the full effect of interest rate hikes to feed into the CPI. Mortgage interest costs will continue to rise as higher interest rates flow gradually through to household mortgage payments with a lag as contracts are renewed.

BoC Governor Macklem emphasized last week that the Bank has become worried about the persistence of underlying inflation pressures in the economy. The June inflation data likely provides some reassurance that things are moving in the right direction, but not fast enough for the Bank of Canada to let its guard down.

The BoC is facing a difficult balancing act. It needs to raise interest rates enough to bring inflation under control, but it also needs to be careful not to raise rates so high that it causes a recession. The next few months will be critical for the BoC as it assesses the risks of inflation and recession.

 

Source: Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres
14 Jul

There’s Always An Alternative

Mortgage Tips

Posted by: Yen (Frank) Feng

What is Alternative Lending?

The most common way to obtain a mortgage is through traditional banks or credit unions. It is common to experience discouragement and frustration when faced with mortgage financing rejections from these traditional institutions. However, if your mortgage situation does not align with these financing options, many alternative options are available to you. These alternatives provide more flexible lending guidelines that may better suit your specific needs. Here are the three types of alternative options:

1. Alt-A lenders: These include banks, trust companies, and monoline lenders. They are large institutional lenders regulated at both the provincial and federal levels. Alt-A lenders offer products with broader qualifying criteria, catering to consumers who require more flexibility to obtain a mortgage.

2. Mortgage Investment Companies (MICs): Similar to Alt-A lenders, MICs are organized under the Income Tax Act. They consist of incorporated lending companies formed by individual shareholder investors pooling their funds to provide mortgage loans. MICs follow individual qualifying criteria and generally offer even greater flexibility in lending guidelines.

3. Private lenders: Typically individual investors. Although sometimes specialized lending companies, these lenders provide funds for mortgages that carry a higher risk of default relative to a borrower’s situation. Private lenders are generally unregulated and tend to cater to individuals with a higher risk profile.

All of the above lender classifications price mortgages based on risk. The broader the qualifying criteria for a particular mortgage contract, the higher the risk assumed by the lender. Consequently, borrowers typically face higher costs in the form of increased interest rates.

Before considering an alternative mortgage, it is crucial to ask yourself the following questions:

  • What is currently preventing me from qualifying for a traditional “A” mortgage?
  • How long will it take to address this issue and qualify for a mortgage from a traditional lender?
  • How much do I need to improve my credit situation or score?
  • What is the amount of my available down payment?
  • Am I willing to wait until I can qualify for a regular mortgage, or do I need to secure a home quickly?
  • Can I sustain this mortgage considering the higher interest rate?
  • Can I switch to another lender in the future if the current lender does not renew the mortgage or if I can no longer afford this alternative option?

If you are ready to proceed with an alternative mortgage due to a weaker credit score or a desire to avoid waiting for qualification with a traditional lender, here are additional questions to consider when evaluating alternative mortgage products:

  • What is the interest rate? Are there any associated fees, and if so, are they paid from the loan proceeds, added to the loan balance, or paid separately?
  • What penalties are imposed for missed mortgage payments? How are these penalties calculated? What are the costs associated with terminating the mortgage agreement?
  • Is there a prepayment privilege? For example, can you make higher monthly mortgage payments without incurring penalties?
  • What is the cost of each monthly mortgage payment?
  • What options are available at the end of the mortgage term? Can you renew the mortgage, and if so, what are the associated costs?
  • What does the fine print entail?

When it comes to the alternative lending space, things can become complex. If you are considering an alternative lender, it is advisable to contact your DLC mortgage expert who can help you explore various mortgage products, review rates and terms, and ensure the best fit for your needs.

7 Jul

Strong Canadian Job Growth in June Will Not Please The Bank of Canada

Economics Insights

Posted by: Yen (Frank) Feng

 

Employment growth last month came in at a whopping 60,000 jobs, tripling expectations, and most of those net new jobs were for full-time workers. As our population grows, more people are available to fill job vacancies. Employment rose in wholesale and retail trade (+33,000), manufacturing (+27,000), health care and social assistance (+21,000) and transportation and warehousing (+10,000). Meanwhile, declines were recorded in construction (-14,000), educational services (-14,000) and agriculture (-6,000).

 
 

The unemployment rate rose 0.2 percentage points to 5.4% in June, following a similar increase (+0.2 percentage points) in May. The increase brought the rate to its highest level since February 2022 (when it was also 5.4%). There were 1.1 million people unemployed in June, an increase of 54,000 (+4.9%) in the month.

The population grew by 0.3%, the labour force rose by 0.5%, and employment increased by 0.3%. The participation rate increased by 0.2 percentage points to 65.7%.

Despite the successive increases in May and June, the unemployment rate in Canada remained below its pre-COVID-19 pandemic average of 5.7% recorded in the 12 months to February 2020.

 
 

One thing the Bank of Canada will be happy about is that wage inflation slowed to 4.2% on a year-over-year basis following four consecutive months of more than 5% wage growth. This is good news for the Bank, but not good enough given that wages are still rising at more than double the inflation target of 2.0%. 

 
 

Bottom Line

Traders are now betting that there is a 70% chance that the Bank of Canada will hike the policy rate by 25 basis points on July 12, taking the overnight rate to 5.0%. Given that many consumers are feeling the pinch of rising prices, and the June housing data appears to have softened, at least in the GTA, the Bank could surprise us again by remaining on the sidelines. After all, inflation fell to 3.4% in May, and the Business Outlook Survey softened broadly, particularly regarding hiring intentions. 

In contrast, the latest monthly GDP report showed an uptick in growth in May. Remembering that Q1 growth came in nearly one percentage point above the Bank’s forecast in the April Monetary Policy Report (MPR) and all six Canadian bank economists are forecasting a rate hike, the Bank might want to take out a bit more insurance that inflation will return to the 2% target next year. 

A fresh MPR will accompany next week’s policy announcement and press conference. It’s unclear which way the Bank will go, but the odds favour a rate hike.
Source: Dr. Sherry Cooper, Chief Economist, Dominion Lending Centres

 

7 Jul

What You Should Know About Mortgage Amortization

Mortgage Tips

Posted by: Yen (Frank) Feng

Your mortgage amortization period is the number of years it takes to pay off your mortgage. The amortization length affects how quickly you become mortgage-free and how much interest you pay. A longer period means more interest, while a shorter one means less interest but higher payments.

Typically lenders use a 25-year benchmark for mortgages. It is also the basis for standard mortgage calculators. However, you have other options. Amortization periods can be as short as 5 years or as long as 35 years.

If you go for a shorter amortization period, you’ll pay less interest over the mortgage’s life. You’ll also become mortgage-free faster and gain access to your home equity sooner. However, shorter periods mean higher monthly payments. If your income is irregular, you have a tight budget, or you’re a first-time homeowner, a shorter period may not be ideal as it ties up more cash flow in mortgage payments.

On the other hand, longer amortization periods have their advantages too. Smaller monthly mortgage payments make homeownership less overwhelming for first-time buyers and free up extra cash for other expenses. Additionally, opting for a longer period may help you buy your dream home sooner by utilizing standard mortgage payments. In some cases, you might even qualify for a slightly higher mortgage value compared to a shorter period, depending on your situation.

Your mortgage professional can assist you in selecting the best amortization period that suits your needs and ensures sufficient cash flow. It is worth noting that you’re not stuck with your chosen amortization schedule forever. You can adjust its length or make extra payments at a later date if you have pre-payment options.

It is recommended to re-evaluate your mortgage at renewal time, which occurs every 3, 5, or 10 years depending on your mortgage product. It is an excellent opportunity to review your amortization and payment schedules and make changes if needed.

If you have any questions or are ready to purchase a home, don’t hesitate to contact your mortgage professional for expert advice!