22 Jan

How Mortgage Rates Are Determined

General

Posted by: Maria Solverson

Chances are you’ve heard of the two most common mortgage product types: fixed and variable (sometimes called adjustable).

But did you know that interest rates for each type are determined by different factors?

While both fixed and variable mortgage rates are impacted by a consumer’s financial health, they are also affected by two distinct large-scale economic factors. These factors include activity by the Bank of Canada and by the Government of Canada. Here’s how it works.

What determines variable mortgage rates?

Variable mortgage rates are short-term interest rates that fluctuate in tandem with a lender’s prime rate. Prime rates are most influenced by the Bank of Canada’s “overnight” rate, also called its “policy interest rate.”

The overnight rate is the interest rate at which major financial institutions borrow and lend one-day (or “overnight”) funds among themselves. They settle their accounts at the end of each business day based on this rate. Eight times a year, the Bank of Canada – or BoC – influences short-term interest rates (like variable mortgage rates and lines of credit) by raising or lowering the target for the overnight rate. This is how the BoC carries out its monetary policy in an effort to keep the economy stable.

When the BoC increases the overnight rate, it becomes more expensive for banks to borrow money. As a result, their prime rate goes up to cover the added costs. When the BoC lowers the overnight rate, banks typically follow suit and lower their prime rate, passing the discount down to their customers. While each lender sets its own prime rate, there is usually consistency across the “big six” banks.

Key takeaway: The overnight rate set by the Bank of Canada is the biggest factor that determines whether interest rates on variable mortgages will go up or down. When the overnight rate increases, variable mortgage rates can be expected to increase as well.

What determines fixed mortgage rates?

Fixed mortgage rates largely depend on Government of Canada (GoC) bond yields. The relationship between fixed mortgage rates and GoC bond yields isn’t firm, but it is positive: meaning that when GoC bond yields go up, fixed mortgage rates tend to go up as well. Why? It’s a matter of risk, supply, and demand.

Because they are guaranteed to be repaid, GoC bonds are considered an ultra low-risk long-term investment product. In comparison, mortgages carry a higher risk (after all, there is a chance that the return on investment could be reduced if a borrower defaults or repays the loan early). Pricing fixed mortgage rates slightly higher than GoC bond yields serves to attract investors by compensating for this higher risk.

At its most basic, when the economy is judged to be weak, safer investments like GoC bonds become more popular. This demand drives GoC bond prices up, which creates lower yields and lowers fixed mortgage rates in response. When the economy is considered strong, investors feel comfortable taking on more risk, and bond demand falls, causing yields to increase and fixed mortgage rates to go up to compete. Factors that influence whether the economy is weak or strong include inflation, employment rates, and consumer spending.

Key takeaway: The performance of Government of Canada bond yields gauges whether fixed mortgage rates will go up or down. The relationship between bond yields and fixed rates is largely positive – when yields go up or down, so do rates.

How does personal financial health factor in?

While Government of Canada bond yields and the Bank of Canada overnight rate are broad indicators of how fixed and variable mortgage rates will behave at a macro level, it’s important to remember that there are micro factors at work too.

The interest rate that is finally offered from a lender to a consumer is also determined by factors unique to each transaction, such as the property type and its value, the down payment, credit scores, employment, the bank’s balance sheet, the bank’s mortgage products, and more. The only homebuyer who will receive the prime rate is a “prime” customer – someone deemed creditworthy based on all the factors above. For this reason, it’s essential to talk to a mortgage advisor who can review your financial health, advocate on your behalf, and find the best rate and best terms for your unique situation.

Key takeaway: Whether your mortgage is fixed or variable, your financial health will ultimately determine your interest rate. For the best advice, speak to a mortgage advisor.

What’s next for mortgage rates in Canada?

While different factors determine the interest rates for different mortgage types, broadly speaking all interest rates follow fluctuations in Canada’s economic performance. With the third vaccine rollout underway and our economy performing better than many analysts anticipated, we can expect long-term (fixed mortgage) interest rates to rise incrementally as demand for bonds falls and investors take more risks. Until the Bank of Canada deems the economy stable enough to lift the overnight rate, we can expect short-term (variable mortgage) interest rates to remain low. The overnight rate has remained at 0.25 per cent since March 2020.

The Bank of Canada’s next interest rate announcement is set for January 26, 2022.

30 Nov

Til Debt Do Us Part: Mortgage Advice for Divorce

Mortgage Tips

Posted by: Maria Solverson

When couples divorce, they not only divide assets—they also divide debts. Usually, a couple’s biggest shared debt is the mortgage on the family home.

Couples going through a separation or divorce have a few options when it comes to dealing with a mortgage.

Sell the Home

Selling your home is the most straightforward option from a financial standpoint.

In this case, you both agree to end the mortgage contract and sell your house. If you are selling before the end of your mortgage contract, your lender may charge a payout penalty. Other possible charges include realtor and legal fees.

You will pay off the remainder of the mortgage loan to your lender upon sale and split any leftover equity in your home. You can split this equity 50/50 or however your separation agreement outlines.

One Partner Keeps the Home

Refinancing is required when both partners agree that one of them will keep the home. You can refinance in two ways: without or with access to home equity.

Buyout with no access to home equity

The partner leaving will request a “release of covenant” from their lender and the partner staying will assume the mortgage. Importantly, the partner who stays must re-qualify to carry the mortgage on their own. This option might result in a legal expense and a lender processing fee; it will not generate any cash from the home’s equity because the mortgage is fully assumed by the partner staying in the home.

Buyout with access to home equity

Alternatively, the partner who remains in the house can refinance up to 95% of the appraised value of the home. This will change the size of the mortgage and generate some cash that can be used for settling affairs directly related to the divorce (note: access to this equity cannot be used to pay off personal debts). Because the partner staying in the home will become the sole owner, they will need to qualify for the new mortgage on their own.

No matter how you refinance, your lender will request proof of your ability to make mortgage payments. Proof might include:

  • a separation agreement
  • the amount of any child support payments
  • the amount of any spousal support payments
  • an offer to purchase the home
  • a home appraisal

If you do not qualify for the mortgage on your own, you can have someone else act as a joint borrower or guarantor. However, these are both big undertakings. Make sure you and the person you involve (such as a parent, close friend, or other family member) understand what is assumed when co-signing or guaranteeing a loan.

Lastly, remember: take the name of the partner leaving off both the mortgage and the land title. This must be done to legally release someone from the mortgage.

Both Partners Keep the Home

Former spouses can agree to remain joint property owners, but this is rare and carries some risk.

If you both remain responsible for mortgage payments post-divorce (whether you are renting the property to a tenant, or your ex-partner continues to live there), your ability to qualify for another mortgage, a loan, or a credit application will be impacted. You may have a harder time qualifying down the line.

It is best to consider selling or refinancing if there are no benefits that outweigh this risk.

No Matter What, Keep Your Credit Score Up!

No matter which option makes sense for you, it’s critical to keep your credit score up throughout the process. Continue to make your payments on time and in full as much as you can—especially on joint-payments.

Attempting to spite your former spouse by not making payments on joint bills or loans will only come back to bite you, as it impacts your credit score too! While this may be an extremely difficult time, do not do anything to sacrifice your financial future. You will need the highest credit score possible to move on to the next phase of your life with as many financial options available to you as possible.

I know how challenging divorce is and I am here to make this part of it easier for you. If you are heading towards separation or divorce, please contact me anytime for mortgage advice.

12 Oct

Pros and Cons of Condos with Post-Tension Cables

Mortgage Tips

Posted by: Maria Solverson

Condos are built using various construction methods, and each have their benefits and limitations. One method you might come across while condo shopping is post-tension.

This low-cost technique for reinforcing concrete works by placing prestressed steel cables in plastic sleeves within concrete. The cables are pulled tight (tensioned) to add strength.

If you’re questioning whether a condo with post-tension cables is right for you, here are key pros and cons to help you make an informed decision.

Pros

Versatile design – Because fewer supports are required, post-tension cables allow for condo buildings to have more versatile designs.

Size – Fewer supports also make longer spans possible, which can mean larger units.

Cons

Maintenance costs – Post-tension cables run the risk of deterioration and corrosion, which can lead to costly repairs.

Insurance requirements – Because expensive maintenance is more likely, many lenders will require you to have mortgage insurance in place, regardless of whether you will have a conventional mortgage (at least 20% down payment, which does not typically require mortgage insurance) or not (less than 20% down, which always requires mortgage insurance).

Reduced mortgage insurance and lender options – Only a select few mortgage insurers provide coverage on a condo with post-tension cables. This will limit you to holding a mortgage with the lenders that these insurers work with. Some lenders will not consider financing units with post-tension cables.

Mortgage Insurance Options

As of this writing, the only insurers who will consider a building with post-tension include the Canadian Mortgage Housing Corporation (CMHC) and Canada Guaranty.

CMHC will insure a mortgage for buildings built between 1970 and 1985, and Canada Guaranty will only provide mortgage insurance for buildings built in 2001 or later.

Both companies will require documentation in order to provide you with mortgage insurance. Documentation is requested on a case-by-case basis. Documents might include:

  • Engineer reports on the building
  • Records of building maintenance work

Key Takeaways

  • Some lenders will not finance units in buildings with post-tension. Those who do provide financing are very likely to require mortgage insurance regardless of your down payment’s size.
  • If you need mortgage insurance on a condo with post-tension cables, you will be limited to using CMHC or Canada Guaranty.
  • You will also be limited to holding a mortgage with the lenders that these insurers work with.
  • You will be required to submit documentation about the building to your insurer.

Working With a Condo Document Specialist

Deciding whether to purchase a condo with post-tension cables will come down to your property priorities, your financial capacity, your risk tolerance, and the building itself.

For example, you might consider a building with post-tension because it’s in an incredible location or has value-adding amenities like underground parking.

But you might avoid such buildings because of potential repair and maintenance expenses or the limited insurers and lenders you can work with. Keep in mind that all properties carry risks for repairs and maintenance—like roofing, HVAC, and plumbing—that can be just as expensive. Some risk in this area is unavoidable.

To best know what you can expect in terms of maintenance costs, work with a condo document specialist.

They will provide you with insight into the building’s management, bylaws, financial health and more by reviewing documents such as:

  • The minutes from condo board and annual general meetings for comments related to post-tension concrete.
  • The building’s audited financial statements, operating budget and reserve fund study, which will include details about repairs, funding, and maintenance needs.
  • A Post-Tension Cable Report that includes an engineer’s feedback on the building’s condition.

If you find a condo you love in a building with post-tension, contact me to confirm your mortgage options and insurance policies.

6 Jun

Steps to Getting Pre-Approved for a Mortgage

General

Posted by: Maria Solverson

Getting pre-approved for a mortgage should always start with a phone call to your Mortgage Specialist. Knowing what you are pre-approved for will help your realtor narrow down your search on your new property and make sure it fits within your budget. It will also help speed up the approval process because your broker will have all the paperwork on file.
Calling us first will give you confidence when you do find that place that feels like home; you are in a position to write an offer.
Mortgage qualification process is different than being pre-approved. Some banks pre-approvals are just rate holds and not document qualified approvals. A 60-second application shouldn’t make you feel comfortable about placing an offer to purchase on your home. I have seen clients declined at the time of purchase because they weren’t fully qualified.
The pre-approval process is a rate hold anywhere from 90 to 120 days. Many lenders have higher rates for pre-approvals, but when an offer is written, you are given the rate drop at that time. Having a pre-approval in place protects you in an increasing rate environment.
For the qualification process, your mortgage specialist will ask for your income documents. Having the following will help give an accurate picture of your financing.

When meeting with your mortgage specialist, it is a good idea to have the following handy:
1) Employment Letters
2) Two current pay stubs
3) 2017 & 2016 T4’s
4) 2017 & 2016 Notice of Assessments
5) Down payment confirmation
6) Mortgage statements (if you currently own)
7) Property Tax statements (if you currently own)
8) Lease Agreements (if you currently own)
9) 2017 & 2016 T1 Generals (if self employed)
10) 2017 & 2016 Company Financials (if self-employed)

Feel free to call me anytime to discuss your financing. I will give an honest opinion of what options you have.