Unimor Capital Corporation

Tag: CMHC

  • How to Find the Best Mortgage

    How to Find the Best Mortgage

    When shopping for a mortgage, it’s important to do your research. A mortgage is, after all, the biggest financial commitment most Canadians will ever make. So it’s no surprise that one of the first things prospective homebuyers do is to shop around for the best mortgage rate they can find. And while getting a great rate is important, if that’s your only focus, it could end up costing you.

    Beyond the Rate – What to Look for in a Mortgage?
    With so many banks and financial institutions vying for your business, mortgages these days come with a variety of options. In a way, shopping for a mortgage is like shopping for a new car. But you would never base your car buying decision on one single factor, would you? The same goes for your mortgage. Let’s take a look at some of the things you should look for in a mortgage, and why they’re important.

    The Difference Between Mortgage Term & Amortization
    Both the term and amortization of a mortgage refer to a period of time. The amortization of a mortgage represents the entire repayment period of the mortgage. In other words, the number of years before your mortgage will be paid in full. In Canada, the standard amortization period for most mortgages is 25 years, in fact, 25 years is the maximum amortization for any mortgage that is insured by the Canada Mortgage and Housing Corporation (CMHC). Conventional mortgages (non-CMHC) can often be stretched over 30 years.

    Conventional vs Insured Mortgages (CMHC)
    Whether your mortgage will be conventional or CMHC insured depends on the amount you have available for a down payment. To qualify for a conventional mortgage, you’ll need to provide at least 20% of the purchase price as a down payment. That can be difficult for many new homeowners, especially in expensive markets like Toronto, or Vancouver, which is why CMHC enables borrowers to obtain an insured mortgage with as little as 5% down.

    The impact of CMHC premiums on the overall cost of a mortgage can be significant and should be considered when deciding how much mortgage you can afford. To illustrate the difference between conventional and CMHC, let’s assume the purchase of a $300,000 home:

    Conventional Mortgage (20% down payment)
    Purchase Price $300,000 – Down Payment $60,000 = Total Mortgage Amount $240,000

    CMHC Insured Mortgage (5% down payment, with 4% CMHC)
    Purchase Price $300,000 – Down Payment $15,000 + CMHC $11,400 = Total Mortgage Amount $296,400

    In the first scenario, assuming a 25-year amortization, monthly payments, and an interest rate of 2.87%, your total cost to pay off the mortgage would be $335,952. Using the same criteria, the CMHC mortgage would cost over $414,000, a difference of almost $80,000. Of course, interest rates will change over the years, and there are other incidental costs not included here, such as the PST on the CMHC premium, but this gives you an idea of why getting the best interest rate shouldn’t be the only consideration when shopping for a mortgage.

    Fixed Rate vs Variable Rate
    One decision you’ll need to make is whether to go with a fixed or variable mortgage. With a fixed mortgage, the bank is guaranteeing you an interest rate that won’t change for the length of the term you choose. For example, if you went with a 5-year mortgage term, at a rate of 2.99%, you’d have the security knowing that your rate won’t change for the next 60 months. You have a peace of mind knowing that your mortgage payment amount also, won’t change.

    With a variable rate, you’re choosing a floating rate that is tied to a benchmark rate, usually the Bank of Canada prime rate, or your bank’s prime rate, which may differ slightly. While fixed rates offer safety, and cost certainty, variable rates offer their own advantages. With a variable rate, you stand to benefit in a falling rate environment. If the Bank of Canada reduces the prime rate, your mortgage rate will drop accordingly. Not only that but if fixed rates drop, you usually have the option of switching into a lower fixed rate at any time. With a fixed rate, it’s much more difficult to get out of your existing term without paying a large penalty. The risk with a variable rate mortgage is that if rates increase sharply, you could find yourself in the precarious situation of having to increase your mortgage payment in order to keep up with the contractual amortization.

    Open vs Closed Mortgage
    Most borrowers will choose a closed mortgage, regardless of whether they’re going with a fixed or variable interest rate. The reason is simple: closed mortgage rates are lower. An open mortgage, on the other hand, is just as it sounds. The borrower has the option of breaking the term, or paying the mortgage in full, without incurring a penalty (in some cases, you may see an administration fee associated with breaking an open mortgage).

    There are situations where it may be worth going with an open mortgage, even at a higher interest rate. For example, if you were planning to payout your mortgage in full in the near future, you would avoid the costly penalties associated with a closed mortgage. Potential scenarios would be if you were expecting a large inheritance, or if you were selling your home, with no intention of buying another one, or you were planning to rent a house or apartment instead.

    Understanding Your Mortgage Prepayment Options
    This is one that not a lot of people think about when shopping for a mortgage. Even if you go with a closed mortgage, most financial institutions will allow you to pay the mortgage down ahead of schedule, by providing the borrower with various prepayment options.

    However, not all mortgages are created equal. In other words, the prepayment flexibility can vary greatly between mortgage providers. Some banks or credit unions will allow you make lump sum payments of 10% of the original mortgage amount each calendar year, others will allow 15%.

    To use another example, both CIBC and TD Bank will allow you to increase your regular monthly principal and interest rates by double (100%) without any penalties, while other institutions will only allow you to increase your payment by 10-20%. If you have a lot of budget flexibility and plan to pay down your mortgage more quickly, the difference in policy could save you thousands. When shopping for a mortgage, make sure you understand the prepayment options that are offered.

    Dealing with the Bank or a Mortgage Broker?
    One of the decisions you’ll need to make when you begin your search for a mortgage is whether to go directly through your bank or deal with a mortgage broker. For years now, mortgage brokers have been a popular option, and represent a perfectly valid solution. A mortgage broker offers some key advantages. For starters, they deal with dozens of financial institutions, so they really are a great place to go, to source out the best mortgage rate.

    If you’re not considered a strong borrower, perhaps your credit history isn’t great, a mortgage broker can find a financial institution that will be willing to take on your application. Generally speaking, Canada’s big six banks tend to be the most conservative when it comes to mortgage lending, so it can be tough to meet their criteria if your credit is less than stellar, or your employment situation is not standard. This is where a broker can add value.

     

  • How to Get Around Canada’s New Mortgage Rules

    How to Get Around Canada’s New Mortgage Rules

    The tighter lending rules that came into force July 1st are making it harder for some Canadians to buy homes, but mortgage professionals say there’s no reason to panic. The Canada Mortgage and Housing Corporation (CMHC) announced plans in early June to reduce borrowing limits, demand higher credit scores and restrict down payments for anyone who needs default insurance from the agency. That kind of insurance is mandatory for ‘high-ratio’ buyers putting less than 20% down on a home. While the change is scary, buyers still have ways to shape up in the eyes of the CMHC — or dodge the agency entirely.

    Evan Siddall, President & CEO of CMHC, explains the changes are meant to steady the economy in the age of COVID-19 by controlling debt and protecting lenders from people who pose a high risk of defaulting. While the rules will sting for some people trying to crack their way into the real estate market, they could be a boon for others. By reducing the number of buyers, the crown corporation hopes to quell demand and balance out home prices.

    “COVID-19 has exposed long-standing vulnerabilities in our financial markets, and we must act now to protect the economic futures of Canadians,” Siddall explained in a statement. These actions will protect homebuyers, reduce government and taxpayer risk, and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth.

    What are the new rules?
    First, homebuyers seeking a high-ratio mortgage are no longer able to submit a down payment with money borrowed from credit cards, unsecured personal loans, or lines of credit. Only ‘traditional sources’ of cash, such as savings, equity from the sale of a house or financial support from relatives, will fly.

    Second, the minimum credit score to qualify has jumped from 600 to 680. If you don’t know your credit score, you can check it for free online. If it’s too low, you’ll have to take steps to improve it.

    Third, borrowers are now capped at spending 35% (GDS) of their gross income on housing. That includes the mortgage itself, property taxes and utilities. They’re also only able to spend up to 42% (TDS) of their gross income, taking into account all of their other loans and credit.

    Before, buyers could spend up to 39% of their gross income and borrow up to 44%. That means potential buyers saw their purchasing power cut by up to 12%. For example, someone with a $100,000 income buying a single-family home could have qualified for a $490,000 mortgage with 5% down before July 1st. Now, their limit has dropped to $435,000.

    What should homebuyers do?
    It’s important to recognize that, if you’re not a risky borrower in the eyes of the CMHC, these changes may not affect you at all.
    “They are impacting a subset of borrowers who need mortgage insurance,” says Toronto-based broker Sean Cooper, author of the book Burn Your Mortgage. Even those homebuyers, he says, “still have options.”

    You see, the government doesn’t care whether it insures your mortgage. It just needs to know your mortgage is insured. Homebuyers excluded by these changes should look around for a lender that also works with Genworth or Canada Guaranty, the country’s two private-sector providers of mortgage default insurance. Those companies have decided not to tighten their restrictions.

    “They are usually lockstep with the CMHC, so this is definitely out of the ordinary,” says Cooper. So even if the CMHC thinks you’re a bad bet, you’ll still find a range of lenders that want your business.

    Is anyone else affected?
    The other good news is that the new lending rules don’t impact homeowners who want to take advantage of today’s historically low rates.

    “As of right now, the rules haven’t changed for refinancing,” says Cooper. “The fact that Genworth and Canada Guaranty didn’t match the CMHC’s changes makes me think that there’s less likelihood of more changes in the future.”

    Today’s rock-bottom rates are predicted to last for at least 12 to 18 months, until the economy starts to stabilize from COVID-19 crisis. That means there’s no better time to see how much you can save on interest and your monthly mortgage payments. The opportunity to hold on to more cash is especially welcome while the country’s financial outlook remains uncertain.

  • Canada’s Climbing Debt-to-Income Ratio: What You Need to Know

    Canada’s Climbing Debt-to-Income Ratio: What You Need to Know

    Here we break down what the debt-to-income ratio means—for the nation’s financial health, and for yours. The latest headlines tell a now-familiar story: Canadian household’s debt loads have increased once again, with the debt-to-income ratio hitting 176.9% in June 2020. But what is this ratio, why is it rising, and—most importantly—do you need to worry about it?

    What is the debt-to-income ratio?

    First things first. The debt-to-income ratio is a measure of how much debt a household is carrying, relative to its disposable income—that is, the money you have available to spend or save, after taxes and other non-discretionary expenses, such as EI and CPP contributions, are made.

    A ratio of 176.9% means that, across all Canadian households, we collectively owe almost $1.77 for every dollar of disposable income we have. That’s very close to the all-time high of 178% in late 2017.

    How did we get here?

    There are two overarching reasons why we’ve ended up with our current level of collective debt.

    Debt is cheap.
    The basic laws of economics tell us that when prices fall, demand increases.  Here’s why that’s important for the debt-to-income ratio: what really matters is not the total amount borrowed, but the cost to service that debt over time—that’s the debt-service ratio.  The lower the interest rate, the cheaper it is to borrow money and service that debt, and thus the more debt a household can afford to carry.

    Over time, the debt-service ratio has remained pretty constant even as the household debt-to-income ratio has risen.  In 1980, for example, the ratio of household debt to personal disposable income was just 66%, or $0.66 owed for every dollar of disposable income.  Back then, however, the bank rate—the minimum rate of interest that the Bank of Canada charges on one-day loans to financial institutions, now superseded by the target interest rate—was 12.89%, compared to just 0.25% today.

    In practical terms, $100 borrowed for a year at 1980 rates would cost nearly 20 times as much as it would to borrow today.  This astonishing drop in interest rates accounts for why the debt-service ratio has remained relatively steady over time, fluctuating between about 12% and 15% from 1990 to the first quarter of 2020, and falling from 14.81% in the last quarter of 2019 to 14.67% in the first quarter of 2020.

    Our relationship to debt has changed.
    Over time, we’ve become more and more accepting of borrowing as a normal part of household finances. When the ability to borrow became available as a tool to “bring forward” our household spending, lots of us decided to do so. And as the cost of borrowing progressively dropped, we ramped up our debt.

    This behaviour is consistent with what financial economists call consumption smoothing, or the idea that we can maximize happiness by spreading our resources over our lifetimes to achieve the highest possible total standard of living. From this point of view, in the words of former Bank of Canada Governor Steven Poloz, “Simply put, debt is a tool that allows people to smooth out their spending throughout their life.”

    Does the debt-to-income ratio matter?

    The general consensus is that excessive levels of debt make households financially vulnerable.  Economic shocks are sudden and unpredictable changes in the variables that affect the overall economy, such as an unforeseen rise or fall in the cost of commodities, an unexpected shift in consumer spending, or a housing or stock market crash.

    At the individual level, however, you’re likely more concerned that too much household debt might mean you can’t make your mortgage, student loan or car payments if something unexpected happens—such as normal fluctuations in interest rates, or the loss of your job.  (These are personal financial shocks, compared to the economy-wide macroeconomic shocks of falling commodity or housing prices.)  Research into Canadians’ debt shows that younger people, those with household income of at least $100,000, and those with mortgages have more debt than older Canadians, non-homeowners, and those with lower incomes.

    The use of debt is also correlated with optimism about our financial futures.  People who expect their financial situation to improve over time are much more likely to have more debt: a Statistics Canada study shows that peoples’ expectations about their financial situation are strongly correlated with both their levels of indebtedness and their debt-to-income ratio.  Even the most optimistic households, however, are still subject to borrowing rules set by lenders, such as the new mortgage insurance rules for the Canadian Mortgage and Housing Corporation, which will go into effect on July 1, 2020.

    What do I need to know about the debt-to-income ratio to plan my financial life?

    Here are two ways to think about whether the debt-to-income headlines affect you.

    The average might not apply to you.
    The debt-to-income figure represents an average for all Canadian households, including those who have little or no debt—meaning it must also include some very highly indebted Canadians.  In fact, research from the Bank of Canada shows that the number of highly indebted Canadians —those with a debt-to-income greater than 350%—doubled from 2005 to 2014, from about 4% to 8% of all households.  So a rising average amount of debt may not capture individual household changes, including yours.

    Your individual circumstances matter.
    The more debt you have, the more vulnerable you are to “shocks” that can impact your ability to repay it.  At the same time, however, your age, income, appetite for debt and expectations about your financial future will all combine to impact your approach to borrowing.

    If you want to maximize your financial peace of mind and protect yourself from the risk of being unable to meet your debt obligations over time, you could minimize borrowing while prioritizing paying back any existing debt.  A personal debt management plan, which maps out how you’re going to repay what you owe over time, will allow you to see past headlines to understand debt as one tool in your financial toolbox.