Mortgage Intelligence

Oshawa's Mortgage News Desk!


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Why Variable Rate drops are creating a surge in activity

This Spring we’re seeing lenders getting aggressive with their pricing for variable rate mortgages: a sign that lenders are fighting for market share, making it a great time to be shopping for a mortgage!

First a reminder of the difference between fixed vs variable.  Fixed rates are often well suited to first-time buyers or those who haven’t owned a home for long because they want to know with absolute certainty what their payment will be for a set number of years.  A variable mortgage has an interest rate that will move in conjunction with your lender’s Prime rate, which in turn tracks the Bank of Canada’s overnight rate, and will be expressed as “prime minus x percent.”  If the Bank of Canada raises or lowers its rate, then you’ll likely see that reflected in your mortgage payment.

Right now, lenders are shaving off those variable rate mortgage offers: creating some of the best rates we’ve seen in many months. Consider the advantages:

  1. Save big on interest. It’s true that your payments could go up if the Bank of Canada’s rate starts to move up. But it would have to go WAY up to wipe out the savings you’d get from some of the current deep “prime minus” variables being offered right now.
  2. Build a buffer. You can set up your payments at what they would be if you took the higher fixed rate, which helps you pay down your mortgage faster, and creates a financial buffer for you if rates rise later.
  3. Easier to get out. If your circumstances change and you need to get out of your mortgage – a situation that happens more frequently than people anticipate — you will appreciate the lower penalty to get out of a variable vs a fixed mortgage. You could save thousands!
  4. Lock in later. Most variables allow you to exercise an option to “lock in” a fixed rate at any time for the remaining portion of your mortgage term or longer.

We’ve even got clients breaking their existing mortgages to take advantage of this sudden crop of very low variable rates being offered right now.

However variable rates are not for everyone. But the possibility of big savings is out there right now, and it won’t last forever. Get in touch with the team at MiMortgage.ca at 1.866.452.1100 and we can review the numbers to see if it’s something you should be taking advantage of.

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What is the Qualifying Rate?

You’re probably aware that there have been many mortgage rule changes over the last several years, and you’re almost certainly affected whether you’re an existing homeowner or first-time buyer. These rules are designed to ensure a sable long-term housing market, and to make sure Canadians can handle their debt should rates begin to rise.

As a result of the rule changes, lenders must ensure that you can handle payments at a certain qualifying rate. That rate will vary depending if your mortgage is high ratio (less than 20% equity/downpayment), or conventional (more than 20% equity/downpayment). The qualifying rate will be higher than the rate of your actual mortgage: a situation that some may find frustrating. But rest assured that your actual payments will be based on the lower mortgage contract rate that we negotiate for you.

Qualifying Rate for High Ratio Mortgages

The Department of Finance introduced the qualifying rate for high ratio mortgages in 2010. The high-ratio qualifying rate is a 5-year rate published every week by the Bank of Canada. The Bank surveys the six major banks’ posted 5-year rates every Wednesday and uses a mode average of those rates to set the official benchmark rate. Your lender is required to use this rate to calculate debt service ratios when reviewing mortgage applications for all insured high-ratio mortgages.

Qualifying Rate for Conventional Mortgages

The Office of the Superintendent of Financial Institutions (OSFI) implemented a new “stress test” or qualifying rate for conventional mortgages that went into effect January 1, 2018.  This requires federally regulated lenders to qualify all new conventional mortgages at whichever rate is higher: the benchmark rate (described above), or your actual contracted mortgage rate plus 2%.  An interesting outcome is that this qualifying rate is often higher than the rate used when qualifying high-ratio mortgages where there is less equity or downpayment.

Why the difference? One reason is simply because these rules were implemented by two different government bodies.

While mortgages have become more complex, this doesn’t mean that Canadians can’t get into their dream homes, consolidate debt, take out equity, or buy a second property. It just means that if you have an upcoming new mortgage need, we should discuss your plans as early as possible. We have access to many lenders that aren’t federally regulated and strategies that you can employ to improve your credit and ensure you are in the best situation possible when you need financing. We are here to help you so please get in touch with the experts at MiMortgage.ca at any time.