Ask the Expert
TOPIC #1: ASK THE EXPERT ABOUT MORTGAGES
I recently had the chance to chat with Tami Morrison who works in our in-house mortgage brokerage Dominion Lending Motivva Mortgages. She is very knowledgeable and enthusiastic and shares with us some great information and insights to help navigate the crazy housing market we are experiencing.
MB: The property market has been escalating at record speed. How is this impacting the mortgage market?
TM: I would describe the impact this rapidly moving market is having on the mortgage world is unpredictability and pressure. This is coming from clients putting in over asking offers with sometimes little to no pre-approval work with a Mortgage Agent. It is so important to have your financing in order before you offer so you have a fair estimate of how much money you can expect to receive from a lender. It is also important for clients to understand that if a property appraises at a lower value than it was purchased at, this will also affect how much of a mortgage a lender will be willing to give; putting the purchaser on the hook to pay the difference between the appraisal and purchase price.
MB: There has been talk of changes related to stress testing that could come into effect after June 1st. What are these proposed changes and when will we know if they are going to be implemented?
TM: Great question Melanie and very pertinent to not only buyers but anyone looking to refinance, switch or pull equity out of their home. Currently the stress test requires anyone looking to qualify for a mortgage to qualify for the higher of the benchmark rate (4.79) or the mortgage interest rate plus 2%. OSFI (Office of the Superintendent of Financial Institutions) is currently considering changing that qualification from the benchmark rate to a fixed floor of 5.25% that they will regularly review. This will in part add some stability to the qualifying rate as well as make sure the financial system in
MB: With mortgage rates currently being so low, what are the advantages of choosing a variable rate versus fixed rate mortgage right now?
TM: One of the main advantages to a variable rate mortgage is the rate itself. Variable rate is lower than the lowest 5 year fixed rate, often by 50 basis points (1/2 of a percent) and this alone can save people thousands depending on the size of their mortgage. With a variable rate mortgage if interest rates drop, the payment will stay the same, giving you the ability to pay more on principal and less interest thereby paying your mortgage down faster. Most variable rate mortgages also allow you to lock in (after 3 months of payments) if the rates begin to rise giving you some security and control. But just as there are benefits there are risks and this is something you always want to discuss with your mortgage agent. Take the time to consider and calculate your ability to handle an increase in interest rate if they can’t lock in on a rate when it starts to rise.
MB: Any predictions on how long before mortgage rates will increase?
TM: I wish I could put a solid prediction out there for everyone but as we’ve seen over the last 12 months life is anything but predictable! If you had asked me 24 months ago if I would have seen the rates this low right now my answer would have surely been NO. The Bank of Canada is standing by its expectation that there will be no rate hikes until early 2023 and I see no reason to doubt that currently. I think that right now with the rates as low as they are it is a great time to look into mortgage products to suit your needs, whether that’s pulling some equity out to complete that home reno, pay off some debt or get into the market with that first home purchase….rates have never been better.
MB: The low interest rates make it more tempting to lock in the rate for as long as possible. What do you suggest when deciding on a term length for a closed mortgage?
TM: This one is such a personal question and totally dependent on each client’s individual situation. I always suggest people need to take into account their short and long-term goals. Is this your forever home? Are you planning on starting a family and may need to move for more space? When you lock into a fixed rate product you need to consider the cost of the penalties for breaking that mortgage and how that can affect them financially. The longer the term left on the mortgage when you break it the larger the penalty will be. I think for a large part of the population that wants a fixed rate a 5-year term gets them that current low rate they want locked in and the flexibility to change life plans should they want to.
MB: The fixed rate for an uninsured mortgage is higher than the rate for an insured mortgage. Is it still a big cost savings to put at least 20% down payment, thereby avoiding the applicable mortgage default insurance?
TM: Yes you are going to save more money if you put 20% down and avoid the CMHC fee for default insurance. There are mortgage products that are in the category of insurable for clients with 20% down or higher and that meet all other qualifications. An insurable mortgage rate is less than your typical fixed conventional without the insurance premium of the insured.
MB: Can you clarify insured versus uninsured mortgages?
TM: There are different rates for different mortgage products and those products will fall into one of three categories depending on many variables. It will either be insured, insurable or conventional. Insured is a mortgage with less than 20% down payment so that the financial institutions are protected from a client defaulting. Conventional is a mortgage that has more than a 20% down payment but have factors that affect their insurability such as they may have a larger than 25 year amortization. Although the best rates do fall into the insured category, there is a very small difference between the variable rate for an insured vs a conventional mortgage (currently 10 basis points for some of our lenders).
MB: One last question: what is one of the most common mistakes homebuyers make when getting a mortgage?
TM: I believe the biggest mistake anyone shopping for a mortgage can make is concentrating solely on rate. There are so many more things that can affect you and cost you money such as the terms and conditions in the mortgage. As we’ve all experienced this year, life can change in the blink of an eye and you want to make sure you can financially handle the need or want to make a change to your mortgage product.
(POSTED MAY 5, 2021)
More mortgage questions? Please feel free to contact Tami:
Tami Morrison, Mortgage Agent
Dominion Lending Centres Motivva Mortgages
https://tamimorrison.ca/
Cell: 289-440-3111