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16 Aug

Ten things to know about the prime lending rate. Consumer’s Home Digest August 2017

General

Posted by: Anne Martin

Welcome to the August issue of my monthly newsletter !

This month’s edition offers ten things to know about the Prime lending rate and your mortgage, as well providing insight on exactly how to determine if your mortgage is truly portable.

Please let me know if you have any questions or feedback regarding anything outlined below.

Thanks again for your continued support and referrals!


Ten Things to Know About Prime & Your Mortgage

  1. Fixed-rate mortgage holders are not affected by Bank of Canada rate changes during their current term. Only those in either adjustable-rate or variable-rate mortgages need read on.
  2. On July 12 lenders increased variable-rate borrowing costs by 0.25% to match the Bank of Canada increase of the same amount on the same day.
  3. There are three more scheduled Bank of Canada meetings this year, and there remains doubt about any further increases this year. Few expect anything more than a 0.25% further increase.
  4. This was the first increase to Prime in nearly seven years, and it follows two 0.25% reductions in 2015.
  5. A 0.25% rate increase equals a payment increase of $13 per month per $100,000 of outstanding mortgage balance for those in an adjustable-rate mortgage. That means a $300,000 mortgage balance will see payments rise by $39 per month.
  6. Not all payments increase. Several lenders differentiate from an adjustable-rate product by offering what is called a ‘variable-rate’ mortgage and their clients will not have any payment change at all. Instead, the life of the mortgage is extended slightly. A letter in the mail from your lender should be arriving to confirm which camp you are in.
  7. There is no penalty or fee to convert to a fixed rate. Whether in an adjustable-rate mortgage or a variable-rate mortgage, you have the option of locking into a fixed-rate at any time without cost. The length of the term offered varies according to policy and remaining time to maturity, with some lenders allowing conversion to a three-year fixed from day one, but most ensuring they have you under contract for the full original term.
  8. Locking in can be very costly. The prepayment penalties differ significantly between variable- and fixed-rate products. Be careful about locking in. Aside from immediately increasing your payment even further, you stand to increase your potential prepayment penalty by up to 900%. Few think they will trigger a penalty, yet more than half of borrowers actually do.
  9. No surprises. Mortgage lenders failed to give us the full 0.25% decreases in 2015, instead only reducing rates by 0.15% both times. Counting on our short memories and lack of uproar, lenders chose to increase by the full 0.25% on July 12, rather than doing what would have been fair and only increasing 0.15%
  10. Future increases will depend largely on consistent economic good news. This is what drives interest-rate increases.

Stay tuned for next month’s newsletter as we weigh the likelihood of another 0.25% increase at the September Bank of Canada meeting.

Is My Mortgage Portable?

The question: ‘Is my mortgage portable?’

The answer most often given: ‘Yes.’

This answer is increasingly wrong.

In reality, you may qualify to move 80% or less of the current balance.

The proper question: ‘Do I need to re-qualify for my current mortgage to move to a new home?’

The proper answer: ‘Yes, your mortgage is portable, but only if you re-qualify under today’s new and more stringent guidelines.’

Who is the very best person to answer the portability question? Your mortgage broker.

They will answer this question accurately. And it can only be answered accurately with a complete and updated application, along with all supporting documents to confirm the maximum mortgage amount under current guidelines.

Calling the 1-800 number on your mortgage statement, or asking the teller while depositing cheques is far less likely to get you an accurate answer. Instead that tends to be the origin of the one word answer.

Call your mortgage broker as soon as you start thinking about moving.

Too many clients learn this lesson the hard way. They sell their existing property before speaking with their Mortgage Broker, and in some cases they also enter binding purchase agreements under the mistaken assumption they can just ‘port their mortgage.’

What is the problem?

Key Point – The Federal Government has created a dynamic in which there are two different qualifying rates used for approvals. One is for the initial purchase or refinance, and the other is for when it comes time to move to a new home.

So the qualifying rate used yesterday to get you into a five-year fixed rate mortgage on your current home is not the one being used to qualify you to move that same mortgage to a new home down the street, even just one day later.

Key Point – One day into your new five-year fixed mortgage you are now subject to a ‘stress test’. In a nutshell, the stress test effectively reduces your maximum mortgage amount by 20%. Meaning that you can only port 80% of the current balance to another property… just one day later.

So, what’s the fix?

The best fix – The government could add a simple sentence to their lending guidelines along the lines of ‘If a borrower qualified for their mortgage at the five-year contract rate at inception, then the borrower shall be allowed to re-qualify at the original contract rate when moving their mortgage to a new home.’

Currently this fix does not exist.

The current fix – You pay a penalty to break the current five-year fixed mortgage you have and then apply for a new five-year fixed mortgage. Which is as ridiculous as it sounds.

The penalty amount? Approximately 4.5% of balance, i.e., $14,000 on a $300,000 mortgage balance. Yes, you read that correctly.

This is entirely unreasonable. It is not a fix at all. If you bought with 5% down, and then a few months later were transferred to another province and had no choice but to move, this represents your entire down payment vanishing due to a simple oversight by the federal regulators

Did you know… Homeowner Tips
Paint Brush Tips:
The majority of wealthier Canadians mortgage their homes by choice. 67% of high net worth Canadians (those with $500,000 or more in investable assets) with a mortgage have the cash to pay off their home – in full – but don’t, according to a survey for Investors Group. Their reasons for holding on to their mortgage vary, including tax planning and income-generating rental properties. In Canada, mortgage interest on rental properties is tax deductible. When it comes to painting, many people will buy the big package of brushes for $7. But the bristles on these brushes may be coarse or could fall out. In addition, they can end up looking ratty after a while and the paint won’t spread evenly. The key is to buy a good quality brush and clean it properly as specified on the label. And if you have a big job and find yourself having to paint in intervals, you can wrap your wet brushes in kitchen wrap. Place the oil-based brushes in the freezer and the latex-based in the fridge. When the job has been completed, you can then clean them and put them away. In many cases a good brush will last for dozens of paint jobs.