Latest on mortgage pre-qualification changes

Preparing for a mortgage

If you have a rate hold or mortgage pre-approval in place, it is important you reach out to your mortgage person to double-check your numbers.

For the first time in a while, we are at a place where rising interest rates may change what you have been pre-qualified to borrow.

By way of context: In October 2016, the government introduced the stress test used for qualifying mortgage borrowers. Prior to this, what you could afford was based on your contract rate (the actual rate you would be paying on your mortgage). Since the stress test was introduced, the amount you are qualified to borrow is based on the greater of the Bank of Canada Benchmark rate (currently 5.25 per cent) or your contract rate plus two per cent.

For the last few years, five-year, fixed-rate mortgages have been trending anywhere from 1.59 per cent to 2.99 per cent, which means your qualification would have been based on the benchmark rate. The benchmark rate moved between 4.64 percent and 5.25 per cent.

Over the last few weeks, five-year, fixed-rate mortgages have crept up to over four per cent with many lenders. This means that if you opt for a fixed-rate term you would be qualified on your contract rate plus two per cent.

Lets do the math.

These calculations assume your family income is $90,000 and you are looking at buying a condo with property taxes of $2,200 annually and strata fees of $350 monthly. This scenario also assumes you have no other debts. I used $20,000 for your down payment.

As an example, the TD website is offering five year mortgages at 4.09 per cent. This means to qualify we would be using 6.09%.

At the qualifying rate of 6.09% you would be looking at a maximum purchase price of $385,000.

Back to the TD website. They are offering variable rate mortgages at 2.7 per cent. If you chose this variable rate mortgage you would be qualified based on the Benchmark rate of 5.25 per cent.

Based on the benchmark rate your purchase price increases to $415,000 (you would have to increase your down payment to $20,750).

In some housing markets the $30,000 difference in price point can meant the difference between a townhouse and a condo.

The conversation of choosing fixed versus variable is a whole other column. If you have chosen a variable or adjustable rate mortgage, remember that reasons that you chose this over a fixed rate. Now isn’t the time to panic and lock in to a fixed rate. Do the math and see how the recent rate increases actually affect your monthly payment and interest cost over the long term.

Either way, if you are out actively house shopping based on calculations from even a few weeks ago, I encourage you to reach out to your mortgage person to double check your numbers before you write an offer.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.


Crunching the numbers for fixed and variable mortgages

Fixed versus variable

The age-old debate of fixed versus variable mortgage rates has really heated up recently with the 0.5% increase in the prime rate.

I am a variable fan myself, for several reasons. One of the most important reasons is the flexibility variable rates afford. If I want to pay my mortgage in full, I am looking at a three-month interest penalty, end of story. I can work with that.

I talk to clients who are in fixed rate mortgages who are looking at penalties of $12,000 or $17,000 because they have to sell and will not be replacing their current mortgage. That hurts.

Over the last few weeks I have run calculations for clients to show them the differences between choosing variable and fixed rates.

We often get hung up on the percentage rate, as opposed to considering all of the implications of going with one rate or the other.

Here are some things to think about:

• What is the difference in monthly payment?

• How much will my payment change when prime changes?

• How much interest am I paying?

• What would my penalty be if I were to break my mortgage?

The Government of Canada has a great tool for running calculations. I ran three scenarios to consider, using the same mortgage amount and amortization but changing the interest rate.

Presuming a mortgage balance of $400,000 and an amortization of 25 years, here are the numbers for a five-year term:

Scenario 1 – Fixed rate at 3.99 per cent:

Monthly payment: $2,101.91

Principal paid: $51,845.03

Interest paid: $74,269.77

Balance at five years: $348,154.97

Scenario 2 – Variable rate at 2.2 per cent

Monthly payment: $1732.66

Principal paid: $63,515.91

Interest paid: $40,443.54

Balance at five years: $336,484.09

Comparing these two scenarios, at the end of five years you will have paid $22,155.35 more in mortgage payments had you chosen the fixed rate option. Your mortgage balance would be $11,670.88 higher and you would have paid $33,826.23 more in interest.

This is the cost of choosing the security of a fixed rate. This doesn’t even factor in the potential difference in penalty if for some reason you had to break your mortgage early.

But, as for that security, what if rates go through the roof? Then what?

I ran another set of numbers.

Let’s assume that prime increases by a full 1%. What happens then?

The challenge in running this scenario is that historically prime doesn’t increase a full 1% at a time. This happens gradually. So full disclosure, these numbers are just to give you an idea of the cost.

Scenario Three – Variable rate at 3.2 per cent

Monthly payment: $1934.27

Principal paid: $56,797.91

Interest paid: $59,258.19

Balance at five years: $343,202.09

Comparing scenarios one and three, at the end of five years, you will have paid $10,058.70 more in mortgage payments had you chosen the fixed rate option. Your mortgage balance would be $4,952.88 higher and you would have paid $15,011.58 more in interest.

When prime changes by 0.25%, with these figures your payment would increase by $49.26 monthly.

If you choose the fixed rate option, you are guaranteed your payment will be $369.25 higher monthly as compared to the starting variable rate of 2.2 per cent. It will take almost eight rate increases for you to be at the break even point. And because historically those rate increases don’t all happen at once, it would take much longer before you were backwards with your interest cost.

Realizing this is a lot of numbers to throw at you, and that every situation is unique, I just wanted you think a bit about how your rate choice will affect your mortgage.

What I suggest for my clients who are choosing variable rate terms is this. Look at what the fixed rate payment would be and consider that amount to be your regular monthly payment. Put that amount aside monthly into the account your mortgage payment comes out of.

Don’t touch the extra funds that accumulate in the account. This way when prime increases you won’t feel like you are taking a hit. You are used to making a higher payment and as a bonus you already have a buffer in place.

If, at the end of your term you have a nest egg built up, apply it as a principal payment to further reduce your mortgage balance. It’s a win-win.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

Importance of life and disability coverage as part of mortgage insurance

Life and disability coverage

In my last column, I talked about buying home insurance as part of the home buying process.

Another conversation I have with clients as part of their mortgage application is around life and disability insurance protection for their mortgage. We have to offer the coverage. It is optional for clients to purchase.

Many clients choose to waive the coverage because they feel they are well covered with programs at work. For some people, this is the case. For others, not as much. I think most people truly don’t understand how much they are covered for, and how long the coverage lasts. It's not a big deal unless you are hurt badly enough to need the disability (payments), or worse, something horrible happens and one of the mortgage holders passes away.

I’ve had conversations with spouses who were left behind without adequate insurance in place. It's heartbreaking. I’ve also had conversations with clients who were injured on the job and are battling with Worksafe B.C. for coverage.

What really made me start thinking about the importance of this was a conversation with one of my favorite people a few days ago. He had a rather unfortunate, unplanned sudden stop on a ski hill. It was the last run of the day on the last ski day before a tropical holiday that was booked for months earlier.

After a four-hour surgery to rebuild his leg, three days in the hospital to try to get his pain under control, it's looking like about five months off of work for the healing and rehab and he is already bored looking at his walls.

He works as a first class power engineer, so he makes big money. He has always been careful with his income, so he has a decent nest egg to get him through. He always figured his disability coverage at work would have been more than adequate to live on if anything happened.

He has discovered after a relatively short time his disability coverage will drop to 2/3 of his salary (in another two weeks). That, in itself, would still be OK, but at the beginning of each year his deductions for EI, CPP, and Income Tax are almost half his cheque. Year to date, his income was already on the low side of what he’s used to.

His expenses are up a bit as he is having to take taxis to all of his appointments (no driving for a while) and he has to rely on take-out (food) as he can’t stand for long to cook. He has a dog sitter who come in to help as he has trouble getting up and down the stairs still.

These don’t seem like big things but they are starting to add up.

Of course, he declined the life and disability insurance when he bought his home. He is young and fit and well covered at work.

Had he opted to buy the disability coverage, he would have had a 60-day waiting period and then the coverage would kick in to cover his mortgage payment and property tax payments. The coverage would also make an extra payment after he went back to work to provide a buffer while he waited for his first full paycheque.

Life hands us curve balls. No one likes to consider the ugly “what ifs” while they are in the throes of buying a home. Carefully considering what your financial picture will look like if one or the other of you is unable to work is important.

Not all policies are created equal, so it is important to consider your options.

Our firm offers Mortgage Protection Plan through Manulife. The coverage is portable from lender to lender in the event that you switch your mortgage and can be ported from one home to the next. Some policies only cover the home and mortgage from the time you first purchase your home, so if you make any changes you have to requalify based on your current age.

The first 60 days of coverage are free which gives you time to research your options while still having coverage in place.

I was not a huge supporter of life and disability coverage until about five years ago when one of my clients had a horrible accident the day after he signed his insurance application. He was lucky in that he survived the crash, and very grateful that he had opted to purchase the coverage.

He was off work for over a year. Although there was help through ICBC, it was a long haul for the family. This coverage saved their bacon.

The pros and cons of various types of coverage is a long conversation. I am not an insurance professional so often direct my clients to speak to their financial planners to research the best coverage for their situation.

The best type of coverage is truly some coverage. Any coverage. Have something in place to protect you and your family in case something unexpected jumps out at you on the ski hill.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.


The importance of home insurance when buying a new home

Insuring purchase success

Two columns ago, I mentioned I am working on a package of information that goes a little deeper into the actual steps involved and timelines to consider once you have an accepted offer on a home.

I’ve had a few people reach out with suggestions as to information I should include.

This week I had a great call with Kaitlyn Anutooshkin, a personal insurance advisor with Hub International. She reached out after reading my earlier column and shared lining up your home insurance during a purchase is something people should know a bit more about.

Confirming that the home you are buying is insurable is one of the key things you need to take care of before you remove your final subjects and go firm on your purchase.

Homebuyers insurance - why is this important?

One of the lender requirements at the time of closing is that you have appropriate home insurance in place. They are lending hundreds of thousands of dollars based on the home you are buying so they want to make sure that if anything happens the home will be repaired or rebuilt.

Not all homes are considered insurable. Some may be considered high-risk due to area. As an example, some homes are built on flood plains, so most companies will not cover them. In our area, forest fires are a huge concern. Buying a home and home insurance while there are active fires nearby can be very challenging, if not impossible.

When your realtor confirms you have an accepted offer, they will advise you to purchase home insurance. This seems pretty straightforward.

Most people will do a Google search to see where to buy home insurance. There are insurance brokers locally, and there are multiple companies that offer home insurance online.

We are all busy, so the thought of being able to buy your insurance online in a few minutes may be tempting. I can’t stress enough the importance of connecting with a professional who will make sure you are properly covered.

I have had experience dealing with two home insurance claims recently; one of my own and one with my significant other. Through both of these claims I’ve learned more about home insurance than I wanted and I will say in both cases I was so grateful that we had the appropriate coverages in place.

Not only were we well covered, we had a human point of contact who was able to help us with the initial steps of our claims. Based on my overall experience with toll-free customer service numbers I can’t imagine how frustrating that might have been as we worked through our claims.

So where do you start? I suggest you talk to family or friends who own homes to see which company they work with.

When you go to the insurance company, they will ask you questions about the construction of the home you are buying. Take the one-page MLS listing with you. A great deal of the information that they insurers need will be included on that sheet.

As well, they will ask about (not an all-inclusive list):

• The age of the roof, and what type of roof it is (ie: shingles, tar and gravel, etc)

• The age of the hot water tank

• Protection details – nearest fire department

• Is there a security system?

• The type of electrical, plumbing, and heat sources in the home

• The intended occupancy of the house (your primary residence, a rental, is there a rental suite in the home?)

• Will you be conducting any type of business in the home?

• If you are buying a strata property, you will need to know what the strata’s insurance deductible is

There will very likely be some back and forth with your realtor and the seller trying to gather all of the information you need. Depending on how available everyone is this could take two or three days so don’t leave this to the day of subject removal.

At my last renewal my insurance advisor asked if I was ok with the company checking my credit. There was a slight discount available if my credit was clean.

I’ve had clients ask me about doing this. My insurance company told me this is done as a “soft hit,” which means it should not affect your credit score.

Once your personal insurance advisor has all of the information they need they will shop several insurance providers to find the right coverage for you. Some companies will require payment in full upfront while others offer the option of monthly payments. They will provide you with confirmation of insurability. Essentially this is a letter that includes your name and the address of the property that you are buying. Most companies will attach a quote so you know what you will be expected to pay.

If you are more than 30 days out from your closing date, you won’t be able to buy the coverage and it is important to know that the cost is subject to change. It is a wise idea to deal with this as soon as you hit the 30-day mark—one less thing to deal with close to your move date.

During the summer, if a fire starts nearby you may not be able to buy coverage. I always advise my clients to buy their insurance as soon as they can so their purchase can still move forward.

Buying a home is so exciting and so stressful all at the same time. The better prepared you are the smoother the process will go.

Home insurance is one piece of the puzzle that may not seem all that glamourous but making sure you have the proper coverages in place can make all the difference down the road.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.

More The Mortgage Gal articles

About the Author

Tracy Head and Laurie Baird help busy families find mortgage solutions. Together they have more than 45 years of experience in the mortgage industry.

With today’s increasingly complicated mortgage rules, Tracy and Laurie spend time getting to know the people they work with and help them to better understand the mortgage process. They support their clients before, during, and after their mortgage is in place.

Tracy and Laurie work closely with their clients, offering advice and options. With access to more than 40 different lenders, Tracy and Laurie are able to assist with residential, commercial, and reverse mortgages in order to match the needs of their clients with the right mortgage package.

They work closely with their clients to find the right fit, and are around to provide support for years down the road!

Contact them at 250-862-1806 or visit www.okanaganmortgages.com

Visit their blog at www.okanaganmortgages.com/blog


The views expressed are strictly those of the author and not necessarily those of Castanet. Castanet does not warrant the contents.

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