The Great Debate – Variable or Fixed Rate Mortgage?

Like “what came first, the chicken or the egg”, the debate on “variable vs fixed rate mortgage” will too, continue to withstand the test of time.

That’s because there are arguments to be made on both sides and “which one is better” depends entirely on the perspective of the individual and their specific circumstances. Having said that there are a few things we can look at to help everyone assess both options to help make the decision easier:

The “current spread”

Typically, the published variable rate mortgage offers tend to be lower than their fixed counterparts at any given time. You should probably take into consideration the spread between the two options because it may weigh into whether it’s worth choosing one over the other. For example, if the variable rate mortgage works out to be 1% less than the in-market fixed rate, you might find yourself leaning towards the variable option. On the other hand, if the variable rate is only 10 basis points less than the in-market fixed rate, you might not feel like it’s worth the potential fluctuations that come with the variable options. At the time of writing this piece, the spread between variable and fixed mortgages is very small.

Bank of Canada & Bond Yields

The mortgage prime rate (variable) is directly tied to the Bank of Canada’s key interest rate, while the 5-year fixed rates are tied to the 5-year government bond yields. Without getting too deep into the woods in each topic, it’s important to peek into the trends that exist for both… If the bank of Canada is holding a stable position on their monetary policy or they are communicating a “directional” message in terms of where they are heading concerning rates, you can then use this information in making your decision on the type of mortgage that is right for you. For example, at the time of writing this piece, the bank of Canada is concerned about high inflation, and they are communicating that they will counter this by increasing their rates until they can get inflation down to a modest level. If we unpack this message, we can certainly determine that variable rates will likely continue to go up, at least in the near term.

Affordability/Debt Servicing

One simple rule of thumb I like to communicate with our clients is that if your mortgage is at your maximum affordability, then fixed rates are the safe way to go. The idea is that if you’re at your debt servicing threshold, any further pressure on your cash flow by unfavorable fluctuations in the variable rate could cause you to be in a financial bind. On the other hand, if you happen to have a decent cushion in your debt servicing thresholds and cash flow is a non-issue, then you are more financially tolerant to any fluctuations that may come.

Peace of mind

At the end of the day, we are all built differently and sometimes it just boils down to “peace of mind”. You might find that everything discussed above will point you to variable-rate mortgages. but because you prefer stability, you are only comfortable with fixed-rate mortgages. If this best describes you, then that’s okay. At the end of the day, whether it’s fixed or variable mortgages, there is no wrong answer. The right choice depends on the person, their current circumstances, and the state of the market. You might find yourself bouncing between the two options over the lifetime of the mortgage because of how circumstances and people evolve in their lives, throughout time.

Still unsure? That’s okay, give us a call and we can talk it out with you. (905) 455-5005.

What is a Mortgage Trigger Rate?

A mortgage trigger rate has been a concept for quite some time, but not one that would trend often. More recently, due to increasing mortgage rates, inquiries are now growing.

 

What is a mortgage trigger rate?

A mortgage trigger rate is a rate at which the bank will need to restructure your mortgage payment. This happens (or ‘triggers’) when your mortgage payment becomes interest only, and no principal is being paid (or your mortgage payment is no longer enough to cover the interest due each month).

For example, your monthly mortgage payment is $2500. Prior to rates going up, $1800 of each payment was going to interest and $700 of each payment was going to principal. However, due to the many rate increases that have taken place since obtaining this mortgage, the interest on your mortgage is now $2550. This is where a mortgage trigger rate will apply, as your interest now exceeds your regular monthly mortgage payment. Your payment always needs to cover the interest due to the bank – otherwise, your mortgage will start growing as opposed to shrinking over time!

 

What is the ‘actual rate’ that will be considered my mortgage trigger rate?

This depends, as it will be different for everyone. Since rates fluctuate frequently, it depends entirely on what your mortgage rate is vs. what the prime interest rate is at the time of the trigger. Your mortgage rate won’t be the same as someone who took a mortgage 6 months prior to you… and vice versa. One way to calculator your trigger rate is:

(Mortgage Payment Amount X number of Payments per year / Balance owing on mortgage) X 100 = Trigger rate

 

Do mortgage trigger rates apply to all types of mortgages?

No. Mortgage trigger rates apply only to variable-rate mortgages – NOT fixed-rate mortgages.

 

Do mortgage trigger rates apply to all variable mortgages?

No. There are two types of variable-rate mortgages. Traditional variable rate mortgages have static payments. Rather than payments increasing as rates increase, payments will stay the same, and rather, the division of principal and interest will change accordingly. On an Adjustable-Rate Mortgage, however, payments will change with each rate change. Therefore, if you have an Adjustable-Rate Mortgage, you will not experience a mortgage trigger rate.

 

Can I prevent my mortgage from hitting the trigger rate?

­Yes. You can prevent hitting the mortgage trigger rate on your variable mortgage in 1 of 3 ways:

  1. Manually increase your payments so you are paying more than interest
  2. Pay a lump sum towards principal which will decrease how much of your payment is going to interest
  3. Convert your variable into a fixed rate

 

For more in-depth conversations on trigger rates, you can call us at (905) 455-5005.

Mortgage Broker vs. The Bank – Why the Mortgage Broker is winning in 2022

Mortgage broker, or bank? It’s the great debate. While we share a bias, there are stats to confirm that 55%-64% of respondents from different surveys agreed that they would be using a Mortgage Broker for their next mortgage transaction.

With growing popularity, the Mortgage Broker (or mortgage agent) delivers a level of service unmatched by the banks in the post-pandemic world. And why post-pandemic? What’s the correlation? While we can’t say for certain, we believe the big banks are focused merely on pushing volume while running low on workers. Perhaps good talent has moved on, or employee retention is low due to unrealistic work capacity.

Either way, Mortgage Brokers have risen to the occasion, and we are carrying out our duty to mortgage seekers as we always have in the past.

In the post-pandemic world, where processes are very different and more convenient, here is how we as mortgage brokers are beating the banks:

  • Apply online, from the comforts of home
  • Unbiased solutions (as we don’t work for the banks)
  • Options (we work with over 20 banks)
  • Multiple solutions presented
  • A dedicated mortgage professional – around the clock
  • We do this full time – this isn’t a side hustle or just one line of business. It’s our bread and butter!

True Story:

Obviously, as Mortgage Brokers, we work with big banks to arrange to finance for clients. Rather than you go from bank to bank, we act on your behalf so you can take it easy. Well, we recently funded a mortgage where our conditions were ‘broker complete’ 5.5 weeks before closing (that’s well ahead of schedule in case that wasn’t clear). Well, this major Bank (let’s call them ABC) did not sign off on conditions until 6 days before closing. This caused huge delays between the funding department and the lawyer receiving funds in a timely manner. Even with persistent follow-ups, this bank’s representatives were nonresponsive and unavailable.

Thankfully, with our representation, we took on the responsibility of communicating with all parties, reaching out to hire-ups, escalating between departments, etc. The purchase closed on time! Now, imagine having to do that by yourself without the representation of a mortgage broker. Sadly, many people are facing these nightmares with some of the big banks, which is a problem that is getting seemingly worse as time passes.

So why would you ever choose to work with the bank, over a mortgage broker, when mortgage brokers are available, responsive, and timely? For good representation, call us today (905) 455-5005.

B Lender Mortgage: What Are the Pros and Cons?

First, let’s understand the difference between “classes” of mortgages:

As mortgage professionals, we refer to the 3 major tiers of lending as; A lender mortgage (or ‘A’ bank mortgage), B lender mortgage, and private lender mortgage. If this terminology sounds familiar, it’s because, over time, these terms have become quite mainstream, even beyond industry professionals. Over many years, the Mortgage landscape has transformed beyond the typical ‘A’ (“bank only”) lending solutions to include alternative options. These alternative mortgage financing solutions appeal to those homeowners that often require more flexible consideration to fulfill their mortgage financing needs, be it a purchase, a refinance or equity take out.

In simple terms:

A lender mortgage (or Bank mortgage): Refers to any mortgage funded through traditional lending sources (i.e. major banks or tier-A broker channel banks) – What comes to mind might be – ‘stricter approval guidelines’ and ‘best mortgage rates.’

B lender mortgage: Refers to any mortgage funded through non-traditional banks/lending sources, but still governed by B-20 guidelines (i.e. Trust companies, tier B banks, monoline institutions & credit unions) – What comes to mind might be – Common sense lending approach with much more flexibility in affordability and types of income used. Rates are reasonably priced in consideration of the flexibility that is offered.

 

Private lender mortgage: Refers to mortgages funded through sources not governed by B-20 (i.e. Mortgage Investment Corporation (MIC), numbered company/registered corporation, or individual lenders) – Private lenders are primarily interested in the equity available to secure their mortgage, and less interested in the qualification used by regulated banks. Rates are considerably higher but offer the greatest level of flexibility with the least amount of “red tape”. Private mortgage solutions can save when in a bind as they can become the path of least resistance with a very quick funding turnaround.

 

Pros and Cons of a ‘B lender mortgage’:

The benefits and “things to consider” can vary from the perspective of one client, so to keep things simple, we’ll limit the pros and cons of a B lender mortgage to 3 major points for each.

Pros:

  • A ‘B lender mortgage’ offers a clear solution for clients who need mortgage financing but do not qualify through traditional banks for reasons such as nature of income, high debt servicing ratios (affordability), previous mortgage arrears, poor/blemished credit, past bankruptcies or consumer proposals, non-traditional down payment sources, etc.
  • A “B lender mortgage” is typically funded on 1-to-3-year terms (rather than 5-year terms) offering the borrower future flexibility to improve their circumstances and easily transition back to traditional lending sources, without hefty penalties.
  • B lender mortgages are less stringent on qualification guidelines and allow much more leniency on; debt servicing ratios (thus allowing higher mortgage affordability), less than perfect credit scores, non-conforming sources of income (ex. Business-for-self, commission, bonus, part-time or contract employees) and varying down payment sources.

Cons:

  • It’s no secret that a B lender mortgage comes with a higher price tag in 2 ways: Interest rate and mortgage closing costs. Given that these options are often short-mid term solutions, that serve an immediate mortgage financing need, the trade-off can be considered “worth it”.
  • A ‘B lender mortgage’ often requires a property appraisal for all mortgages (regardless of purchase or refinance) whereas A lender mortgages do not (or at least do not 50-60% of the time). We wouldn’t refer to this explicitly as a con… but it is an added cost of closing. It’s worth mentioning that the cost of an appraisal is often towered by every other cost associated with closing on a home. As a bonus, Homeowners like to get reassured that the home they are buying is actually worth what they were willing to pay. (Note: Since home prices have grown so much in such a short period, we find that A lender mortgages are requiring appraisals more often than in previous years – making this less of a con than it once was).
  • A ‘B lender mortgage requires a minimum down payment of 20%. For refinances, this often isn’t a hurdle for borrowers. However, for purchases, it can easily affect buyers drastically if the buyers planned only for the minimum down payment requirements of 5%, 10%, or even 15%. Considering that average home prices in major cities across the province are approaching “uninsurable” territory…a 20% down payment might be necessary across all tiers sooner than later. This too makes this point less of a con than in the years prior.

 

You might have noticed that, unlike “A” lenders who advertise their insured mortgage rates, B lenders do not typically publish their mortgage rates to the public, and this is primarily done for the following reason: B lender mortgages take a tailored approach to your application. They consider unique situations surrounding the borrower’s circumstances to provide the most reasonable mortgage that they can offer.

If you’re worried about getting the best B lender mortgage rates – don’t worry – we’re incentivized to get you the best mortgage rates with the most reputable B lenders in the space.  We’ve been working with these lenders long enough to know exactly how they price your application, so let’s chat and we’ll walk through your options together – (905) 455-5005.

 

Should I choose a fixed or variable rate mortgage?

This is a never-ending debate and in my opinion, one that will continue forever. Which mortgage option should I go with, fixed or variable rate mortgage? Let’s get right to it:

 

Fixed Mortgage:

  • Interest rate & payment remains the same throughout the term
  • Penalty to break mortgage can greater than 3 months interest
  • Starting rate is typically higher than a variable rate

 

Variable Rate:

  • Interest rate can fluctuate throughout the term, causing principal and interest payments to adjust
  • Penalty to break mortgage is typically 3 months interest (max)
  • Starting rate is typically lower than a fixed rate

 

The answer to which one you should choose comes down to your circumstances, which may differ from somebody else’s. For example, if you plan on living in your home for the entire term of the mortgage and do not react well to payment fluctuations, then the fixed mortgage rate would be better for you. At the end of the day, it’s not all about dollars and cents because if it causes you distress to be in a variable mortgage, one that may cause you to pay more interest, then I’m sure you’d agree that peace of mind priceless.

 

However, if you are adaptable to change and are tolerant to the risk of rising rates, along with the initial spread between the variable rate and the fixed rate, then you may be more suited to take the variable option. For example, if the variable rate is Prime-1% = 1.85% and the fixed rates are 3.5%, then the variable rate would need to rise by 1.65% to reach this “breakeven” point during the term of the mortgage. If you believe this is unlikely or at least would not exceed the fixed rate over this period, then you would benefit from the variable rate. Of course, nobody has a crystal ball and can predict what will happen in the end, but the variable requires you to assess your financial and personal tolerance to these likely changes throughout the mortgage term.

 

In recent months, we’ve seen an uptick in people opting for Variable rate mortgages, but not necessarily from a risk assessment standpoint. The decision to go with the variable rate has been heavily determined by the rate “just being the lowest right now”. It seems many people that are behaving this way are doing so with a short-sighted approach in their decision-making process. Time will tell where things go from here but choosing between variable and fixed rates based on today alone, could end up being a costly decision. Although we’ve been used to this low-rate environment for the last decade or more, it doesn’t guarantee that this will continue moving forward…

 

If you would like to discuss your situation on this topic or would like further guidance on the different mortgage types, feel free to reach out today – at  905.455.5006

What is a Monoline Lender?

A monoline lender is one that only deals in one (mono) type of lending, which in this case is Mortgages. These lenders often do not have Branches you can visit, you can’t open up a chequing account, investment accounts, or sign up for a credit card. They just do mortgages and often offer rates that are better than your bank…

 

Due to their focused attention to mortgages, no physical locations, and dependence on mortgage brokers for clientele, their overhead costs are so low that they can afford to beat the banks. Most homeowners that seek mortgages from mortgage brokers often land at non-banking institutions because they offer better products than the banks.

 

In some cases, homeowners may not have even heard of some of these monoline lenders and often feel a misplaced sense of uncertainty with dealing with monoline lenders. They feel that there is some sort of risk that may exist because they don’t see branches in their community or know of anyone else in their circle that has a mortgage with these lenders. But they’re often surprised to learn that they are no more/less risky than their banks and many of these monoline lenders have hundreds of millions, if not billions of dollars in mortgages at any given time. They are also regulated by financial oversight administrations to ensure that the borrowers are protected. Here are a few more benefits to highlight:

  • Only deal in mortgages so you’ll never be haggled to get more products from them
  • They pass on their costs savings from the lack of storefronts, employees, etc.
  • Flexible approval guidelines – consider an application with some “grey areas”
  • Quicker turn around than banks
  • Access your account details online with dedicated customer service support by phone/email

 

I get it, our default setting is set to the bank we deal with, and we feel safe if they’re one of the 5 major banks we’ve known all our lives. But the truth is, those institutions know your default setting and they bank on (no pun intended) this notion to gain your business when the reality is that there are better lending options that exist….

 

Let’s recalibrate together, give us a call   905.455.5006

How to get out of a mortgage?

We never know where life will take us and although we do our best to plan out our lives, we often get it wrong. What happens if you thought you were going to live in your home for the next 5 years, but a year later you accepted a job offer in a different province? What happens if you need to break your mortgage for another reason, is that even possible? Here are a few more reasons you might need to do this:

 

  • Need a bigger home (sell your existing home)
  • Change ownership of your home (title refinance)
  • Try to get a better rate
  • Consolidate your debts
  • Equity take out
  • Payoff your mortgage

 

More often than not, you may come across one reason or another to break your mortgage for the reasons noted above or perhaps others. Luckily most mortgages do allow you to break your mortgage but there are some things you should consider before venturing down this path. Here are some things to consider:

 

  • Is your mortgage Open vs Closed?
    • Open mortgages have no penalties and Closed mortgages do have penalties
  • How are you breaking your mortgage?
    • Some mortgages have a “bonafide sales” clause which only allows for the repayment of the mortgage in the case of a sale. In other words, if you are trying to refinance, this may not be possible under the terms of your mortgage
  • How much are the potential penalties?
  • What are the legal fees?
  • Are there any other costs or restrictions

 

Because your mortgage may have specific terms and conditions, it’s always best to get in contact with your existing mortgage lender (mortgagee) to inform them of your intentions and to learn about any potential consequences of breaking your mortgage. It is also advisable to read through your original mortgage commitment to refresh your understanding of what it would mean to break your mortgage.

 

Once you have all of your facts, you would then decide if you still intended to proceed with breaking your mortgage to achieve a higher purpose/goal. In other words, is it still worth it for you, does it make sense? Sometimes you may want to switch mortgage lenders because the rates across the street are better than what you currently have but once you learn that it is going to cost you $5,000.00 (just an example), all of a sudden any savings you would get from the better rate, are wiped off the table when you tally up everything…

 

If you would like to learn more about this topic or would like to discuss your situation specifically, give us a shout at  905.455.5006

How the Blind Bid is Hurting the Canadian Housing Market?

When we are saying “hurting” the housing market, it’s not what you might think. We are using this phrase to describe how this tactic is contributing to the cause of making housing less and less affordable, especially in today’s “hot” housing market. I would also like to mention that many other things are contributing to this problem, but we’ll stick to blind bidding for now…

 

What is a blind bid?

A blind bidding structure is when a home listing is published with a specific, future offer acceptance date. In other words, any offers you would like to make on the property would need to be held until the desired date. When the day finally comes to make the offer, you as a buyer must “go in” with your best offer. You will not know how many other potentials buyers are also interested in making an offer and you will also not be pervy to know what other will be offering on the property. Essentially, you’re trying to place the lowest possible high offer, that will outbid the competition but not by too much. After all, you don’t want to overpay if you don’t have to. In either case, you’ll never know if you did…

 

In my opinion, this tactic is designed to favor the seller and hurt buyers because it creates a Fomo (fear of missing out) response from the potential buyers. It’s supposed to elicit a response that would cause the buyer to perhaps overspend on a home because “others are probably” looking to do the same…More often than not, it works and the buyers are the ones that ultimately suffer…

 

The truth is, this style of listing can cause housing prices to increase rapidly in a short period, at a rate that is not sustainable over a long period. Ironically, this tactic also works best in a hot housing market because the “Fomo Response” is validated by this vicious cycle of Houses constantly selling over asking, prices continuing to rise, and buyers who lost out on previous bids, willing to throw everything and the kitchen sink in their future offers.

 

Blind bidding is a practice that should be banned from the real estate market for its obvious lopsided benefit to sellers at the expense of the buyers. Transparency is always the fair ground on which both buyers and sellers should meet.

 

Whatever you decide to do with your real estate purchase, don’t forget that even your blind offer needs to be in your realm of affordability. In the end, most homeowners make their purchases with some form of mortgage financing and so, it’s always best to consult your mortgage broker to ensure you are well equipped to stand behind your offer. Otherwise, you’re just pulling a “Joey” with your Bid (Friends reference) ….

Give us a call – at – 905.455.5006

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