Dealing with rising mortgage rates

Rising mortgage rates

The mortgage world is not too much much fun lately.

This week, I tried to unsubscribe from all of the rate increase notification bulletins. Turns out that doesn’t stop rates from moving.

As you can imagine, I have a fair number of conversations every day around the impact of the changing interest rates, what is potentially coming with rates and how we can best manage each client’s situation.

As I write this column, many lenders are offering clients five-year fixed rates of 5% or more.

A year ago we were able to place five-year fixed rates at about 1.65%. That’s quite a difference.

Clients who are out house-hunting, and clients whose mortgages are coming up for renewal, are very concerned about affordability.

If you bought a home since mortgage legislation changed in 2016, you would have had to qualify under the stress test. That means (depending on when you actually bought) you were qualified to carry a mortgage based on a rate of anywhere from 4.64 per cent to 5.25 per cent. In theory then, you should be able to carry a higher payment if you have to renew at 5%.

People’s situations change over a five-year term. Ideally your wage has increased and your debts have not. The reality, in many cases, is couples move into a home, then start a family, or buy a new vehicle, or, as Covid showed us, employment changes.

I don’t have a crystal ball that is particularly accurate. There are many economists and experts sharing their thoughts on what is to come with respect to interest rates and the state of our economy.

The economist I follow most closely said earlier this week he feels rates will be bumpy for the next few months then start to trend downwards.

If you have chosen a variable rate mortgage and are now panicking, it’s important to do the math. It is definitely a bit unsettling to hear all of the doom and gloom, but it is key to focus on the reasons as to why you chose your variable rate in the beginning.

Many clients don’t realize they do not have to chose a five-year fixed term. It is the standard offer from most banks and what many clients are most comfortable with. However, you can choose a shorter term if you want the stability of a fixed rate but don’t want to be locked in for too long.

The bottom line is there are ways to navigate through this interest rate environment that may help to put your mind at ease.

Freeing up monthly cash flow by refinancing your home is one option. Even with mortgage rates being a little higher, improving your cash flow by paying off credit cards that are charging higher interest rates may help you sleep better.

Either way, often a call to your mortgage person is the best way to start. See what his or her thoughts are for your particular situation.

A quick call may be all you need to put your mind at ease.

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


Understanding mortgage purchase contracts

Mortgage purchase contracts

Last week, I came across a clause in a purchase contract that caused me some angst.

My client is in the midst of buying a pre-build. The clause is itemized on the contract as “cost escalation adjustment.” Exactly as this sounds, it is a clause that allows the builder to increase the cost beyond the amount agreed to in the original purchase contract.

Shortening it up, part of the clause reads as follows:

“The builder and the purchaser agree that if, at or prior to the excavation date, the aggregate construction prices have increased by an amount greater than four per cent (4%), than the construction prices, as of the date of this agreement, as determined in the builder’s sole discretion, then the builder may either:

• Commence construction, whereby the purchaser’s price of land and residential unit (as described in clause No. 5 herein) and accordingly the apportionment of price to construction (as specified in clause No. 20 herein) shall increase by an amount not to exceed the price increase cap;

• Renegotiate the terms of this agreement with the purchaser in good faith; or

• Cancel this agreement”

This paragraph is about one-quarter of the whole cost escalation adjustment clause. It goes on to explain the various points during the build where the developer has the ability to increase the price of the home or cancel the agreement altogether.

So a few big things here:

• This clause is a perfect example of why it is so important that you read and understand the entire contract you are signing.

• This clause highlights why it is essential that you have your legal representative review your purchase contract before removing all of your subjects and making your purchase a firm agreement.

• This clause means you would not to write an offer anywhere near the top of your maximum mortgage amount to allow for any potential increases in price

Why does this even matter? From the mortgage perspective, often my clients write offers at the absolute top of their price point. I’d rather they didn’t but in our market finding a more affordable home isn’t always an option.

Sometimes clients are stretching just to get their minimum down payment together. Facing a significant price increase will likely mean they will need to come up with more of a down payment.

As an example, I’m working with a young couple in northern B.C. who have written an offer on a new home that is set to be completed in August. This clause is not in their agreement but if it had been, they might find themselves looking for a different home if they couldn’t find additional down-payment money.

They are at the absolute top end of what they qualify for in terms of a mortgage. Their purchase price is $740,000. If the cost of their build increased by even three per cent, they would need to come up with an additional $22,200 because they do not qualify for a higher mortgage amount.

As well, changing the price point might have other, more expensive implications.

In B.C., for new builds up to $750,000, buyers are exempt from paying the Property Transfer Tax. In this same example, if the price of the home increased to $762,200 they would also be liable for paying the Property Transfer Tax. In their case it would be $13,244.

Now they would be scrambling to come up with an additional $35,444. For many clients this is not something they can pull out of a hat.

It’s a complex issue because builders are facing crazy increases in costs and lengthy delays.

I’m working on two files right now where clients have sold their pre-build contracts (called an assignment) because the sellers’ circumstances have changed and they want to walk away from their agreements.

If you are considering purchasing a pre-build, I encourage you to read and understand the entire contract before signing. Make sure your legal representative reviews it for you and with you so you are clear on what you are signing. Doing your due diligence may save some serious heartache down the road.

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

The changing mortgage landscape

Mortgage changes, helpers

The last few weeks have been interesting in the mortgage world.

With prime increasing we have seen upward movement for fixed rates which means reduced borrowing power for many clients. I touched on this in my last column.

When I sat down to write this, I thought I was going to focus on how the rising rates are impacting our real estate market, and talk about a few of the perspectives that I heard while I was in Vancouver for meetings last week.

After a call this morning, I decided to change gears a little, but it does tie back in to one of the impacts of rising interest rates.

Since the introduction of the (mortgage) stress test, I have seen a shift in how clients qualify to buy their homes. More and more often I am seeing either mom or dad co-signing on mortgage applications, or mom and dad gifting family members significant money to use for their down payments.

I am also encountering situations where domestic partners are moving forward with home purchases together very early (in my opinion) in their relationships because neither can qualify on their own.

Often in the early stages of a relationship we tend to see only the great and rosy aspects of our partners. Money does funny things to some people though.

Last fall I worked with a lovely couple in northern Alberta. She came into their relationship with her home owned free and clear and a significant investment portfolio. He came into the relationship with minimal savings because he had just been through a horrific divorce.

They earned almost the exact same salaries. They were also comfortable having the tough discussions around finances and different scenarios that might happen down the road.

They decided that a pre-nup would protect them both. They visited a lawyer and had the agreement drawn up and signed before they bought a house together.

More recently I worked with a man whose wife of 30 years passed away. Two years later he met a wonderful woman and they married. He added her name to the title of his home right away as he knew deep down she would never do anything shady.

He came to me (married about three years at this point) needing to refinance his home as she decided she wanted out and was coming after him for money.

They had no agreement in place. I’ve referred him to a lawyer to look at what his rights are.

Why am I sharing these examples? Money brings out both the best and the worst of people. If you are considering entering into a purchase with a relatively new partner or asking parents to co-sign, please seek legal advice as to your rights and obligations with respect to other parties on your contract

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


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.

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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