Unimor Capital Corporation

Tag: homeowner

  • Fixed Rate vs Variable Rate Mortgages: Which Should You Choose?

    Fixed Rate vs Variable Rate Mortgages: Which Should You Choose?

    One of the biggest decisions you’ll face when getting a mortgage is whether to choose a fixed or variable rate mortgage. At the moment, it’s hard to go wrong with either one. After all, mortgage rates in Canada are at historic lows. But the type of mortgage rate you choose is something you should spend some time considering, as the best choice depends as much on your individual circumstances as it does on any economist’s interest rate outlook.

    What is a Variable Rate Mortgage?
    A variable-rate mortgage is a mortgage linked to the Bank of Canada Prime Lending Rate and fluctuates during the mortgage term. You can obtain an open or closed variable rate mortgage, but the most common term is a 5-year variable closed.

    For example, at the time of this writing, the Bank of Canada Prime rate is 2.45%. If a variable mortgage were priced at Prime -.90%, your interest rate would be 1.55%. If Prime were to increase by 0.25% to 2.70%, then your mortgage interest rate would rise accordingly to 1.80%. Even though variable mortgage rates fluctuate during the term, the monthly payment remains the same.

    What is a Fixed Mortgage Rate?
    A fixed mortgage rate stays fixed for the length of the mortgage term. It’s available in terms ranging from 6 months to 10 years, although the most popular term is a 5-year fixed rate. Unlike variable rates, which move with the Prime Lending Rate, fixed mortgage rates follow Canadian bond yields.

    Fixed rates are usually higher than variable rates, with the higher rate trade-off being cost certainty. Fixed-rate borrowers are willing to pay a premium to lock in their rate for a specific time period. Banks price fixed rates higher than variable rates because they present more risk to the mortgage lender due to the rate commitment made to the borrower.

    A History of Fixed vs. Variable Mortgage Rates
    If you look back at the past 20 years or so, variable mortgage rates have been consistently lower than fixed rates with only a couple of exceptions. This might make it seem like choosing a variable rate would be a no-brainer, but it’s not so clear-cut. At the moment, both types of mortgage rates are at historic lows, and the gap between them is very narrow. So, there are fewer savings to be had by going with a variable rate mortgage, while the risk of rising interest rates remains.

    Reasons to Choose a Fixed Mortgage Rate
    Here are three reasons why you might want to choose a fixed-rate mortgage:

    1. You expect interest rates to rise.
    While no one knows when the prime rate will rise and fall or by how much, the economy can provide signals that rates may be headed upwards or downwards. If you anticipate that mortgage rates may be on the way up and you can secure an attractive fixed-rate, all things being equal, it might be your best choice.

    2. You have limited budget flexibility.
    Perhaps you’re buying your first home, or your affordability has been stretched with the mortgage you’re taking on. If you lack the flexibility in your budget to handle a sudden increase in your mortgage payment, your best option is to choose the certainty of a fixed-rate mortgage.

    3. You are a risk-averse by nature.
    Regardless of your financial position, if you are risk-averse by nature and having a variable interest rate will cause you sleepless nights, it’s not worth the hassle. Go with the fixed-rate mortgage.

    Reasons to Choose a Variable Mortgage Rate
    Sometimes a fixed rate is the way to go. But here are four reasons why a variable mortgage might be the right choice:

    1. You expect interest rates to fall or remain flat.
    A variable-rate mortgage could be the best choice in a period of a stable or falling prime rate, even if it’s only slightly lower than the going fixed rate because the terms of a variable mortgage are generally more flexible than those of a fixed mortgage. (see #4)

    2. You have plenty of budget flexibility.
    The numbers don’t lie. Over the long term, you’ll be ahead of the game by choosing a variable rate. But there’s some risk involved. If your cash flow situation is good and you can withstand the potential of a sudden increase in your mortgage interest costs, a variable rate could be worth the risk.

    3. You are risk-tolerant by nature.
    If you are a person who can handle a fair amount of risk, then you probably have the fortitude to handle the potential ups and downs of a variable mortgage, all things being equal.

    4. You Plan to Sell Your House
    One of the biggest drawbacks of a fixed-term mortgage is the potential for astronomical penalties, should you decide or be forced to move in the middle of your mortgage term.

    Fixed-mortgages can be subject to something called an Interest Rate Differential charge or IRD. Variable mortgages are usually only subject to a more predictable 3-month interest penalty if the borrower breaks the mortgage early. So, if you think that you might move before the end of your mortgage term, the variable rate is probably a safer bet. You could opt for an open mortgage to avoid the penalty, but the interest rates will be far higher.

    How to Reduce Variable Rate Mortgage Risk
    If you opt for a variable rate, you are assuming some risk if interest rates rise suddenly in the middle of your term. Yes, there is the option of converting to a fixed rate, but that forces you to try and time the market, and that’s not likely to end in your favour.

    You can reduce the risk of a variable mortgage by increasing your monthly mortgage payment amount to match what you would be paying with a higher fixed rate. For example, let’s say you have a choice between a variable rate mortgage at 1.75% with a monthly payment of $1600 and a fixed-rate mortgage at 2.25% with a monthly payment of $1685.00.

    You could opt for the lower interest rate but increase your monthly payment to match the fixed-rate payment of $1685.00. This will increase the amount of money going towards your principal, increasing your interest savings, and providing you with a buffer should interest rates rise.

    The Bottom Line on Fixed vs. Variable Mortgage Rates
    There is no shortage of prognosticators ready to tell you that a fixed or variable rate is the best choice. They always seem to know what’s going to happen in the future. However, the truth is that no one knows exactly where interest rates are headed. There are far too many unknown variables that can alter the course of the economy. For example, how many rate forecasters saw COVID-19 coming at the outset of 2020.

    The bottom line is that choosing a fixed or variable rate has as much to do with your individual circumstances, such as your long-term plans, budget flexibility, and your personal risk tolerance level as it does with the cold hard numbers.

  • COVID-19: Should You Buy a Home Now, or Wait?

    COVID-19: Should You Buy a Home Now, or Wait?

    Housing markets across the country are changing swiftly—but with interest rates at historic lows, this might be a good time to buy.  Here are all the factors to consider.

    It almost goes without saying that COVID-19 has had a far-reaching impact on the Canadian economy and healthcare system in the first half of 2020. As expected, the spring housing market was much cooler than 2019, with the Canadian Real Estate Association (CREA) confirming that May 2020 recorded the lowest volume of sales in May since 1996.  Despite the significant drop in sales volume due to the pandemic, though, national home prices remained relatively stable.

    After a quiet April, market activity began to pick up in local housing markets across the country in May: more buyers resumed their home searches, and more sellers began to list their homes. With more home buyers and sellers hopping off the sidelines, housing competition is starting to heat up in many regions.  In Toronto and Vancouver—Canada’s largest markets—demand and supply were evenly matched in May, whereas in Southern Ontario markets like Ottawa and Hamilton-Burlington, buyers faced ever fiercer competition for available homes than last year.

    Given how swiftly conditions have changed and continue to evolve in housing markets across the country, prospective home buyers may be wondering: Is now a good time to jump into the market?  Perhaps.  With interest rates at historic lows, if you are able to buy and hold a home for the medium to long term, this might be a good time to buy.  Here are all the factors you should consider as you make your decision.

    Account for your finances and your lifestyle needs.

    For many Canadians, finances are just one part of the story, and the decision to buy a home often goes beyond the dollars and cents.  To put it simply, people need to make changes in their lives and move—regardless of whether there is a pandemic or not.  If you have done the math and are confident about your financial ability to carry a new home, this is a great opportunity to take advantage of low interest rates.

    Consider why you want to buy in the first place.

    Perhaps you’ve had a relationship or family change; a divorce or a baby on the way are common reasons people choose to move.  Alternatively, do you want to be closer to family, in a good school district, or have better transit access?  If you started planning a move before the pandemic, consider whether and how COVID-19 has altered these priorities.

    Once you’ve determined why you need to move, consider how your lifestyle needs may evolve.  After all, you will be living in the home you purchase for at least a few years, so you need to think about whether the home you buy is a fit for your needs both today and tomorrow.  If you can find what you want, in the location you desire, and are comfortable living there for at least five years, take the leap.

    Get local with market data.

    When you’ve made the decision to move forward with a home search, you’ll likely turn your attention to how the housing market is performing.  After all, buying a home is a major personal commitment, and also one of the biggest financial investments most people will make.  With everything going on, in addition to sales updates from national and local real estate boards, a number of Canada’s most established financial institutions, economists and housing corporations have attempted to predict the size and duration of the impact of COVID-19 on the housing sector.

    While high-level data from real estate boards and financial institutions can provide valuable perspective on how the housing market is performing at the macro-level, real estate is hyper-regional, and in many respects, local.  The type of property, the neighbourhood you’re interested in, and your budget will all play a role in the level of competition you’re likely to face and ultimately the price you can expect to pay.

    Working with a real estate agent you trust is one way to cut through the noise and understand how far your dollar will go in real estate based on your situation and your needs.  A good real estate agent acts as a trusted expert who can provide you with the facts, data and insights that are most relevant to your purchase decision, so you can make an informed choice that you are comfortable with now and in the future.

    Remember that real estate is a long-term decision.

    Finally, remember that real estate is a long-term investment.  If you are looking to make short term, speculative investments, this is a particularly risky time to do that in real estate.  Further, churning real estate has real costs that eat into any sale price, which include but aren’t limited to land transfer taxes, realtor professional fees and moving costs.

    Once you’ve carefully weighed your personal needs against your financial appetite and obligations and have also considered the context of the real estate market in your area, take the plunge if you’re confident that everything lines up.  If you can buy and hold for the long term, there are some great pockets of opportunity out there.

     

  • 6 Simple Rules of Decluttering

    6 Simple Rules of Decluttering

    When it comes to getting more organized, one of the key elements must be decluttering your life, home, and activity schedule.  However, the very idea of getting rid of personal possessions strikes fear into the hearts of many.  Do you feel this way?  As with any other process, it often helps to have some basic, simple to follow rules in place.  Consider these six rules of decluttering to help you take steps toward living a clutter-free life.

    1. Bring Less Home

    This is the most important rule to set before you even begin to purge items.  You need to determine and make a sincere effort to bring less stuff into your home.  There’s no point in putting forth the effort to declutter if you undo all your progress by buying more stuff.  Setting a mindset to shop with intention is the first step to clearing out the clutter for good. Remember, is this item you are about to purchase a need, or is it just a want?

    1. Document Your Nostalgia

    Nostalgia and memories are powerful emotions that can lead you to hold onto clutter. An effective compromise is to digitize your prized possessions.  You can scan the images of things like certificates or kids’ artwork into your computer and organize them into folders.  For three-dimensional pieces like trophies or prom dresses, take a photo of the item to add to your digital keepsakes.  Often, it’s the memory of the event attached to the item that holds the greatest nostalgia, not necessarily the physical item itself.

    1. Start Small & Simple

    One way to gain momentum in the declutter process is to start with the easy things.  Begin boxing up items that don’t hold much emotional attachment.  Doing so will lead to a sense of instant accomplishment and provide motivation for you to keep going.  Especially when the decision-making becomes tougher later.  This will be the motivation for cleaning the tougher areas of your home.  Start with doing a 15-minute session, as you clean an area, make your 3 piles: keep, give away or sell, garbage.  As you declutter, you can also ask yourself “why” you have kept this or that. This will help you in the future when you are tempted to bring other things home.  Remember the clutter didn’t appear overnight—so don’t beat yourself up over reversing the process.

    1. Lose the Duplicates

    Another relatively easy decluttering task involves getting rid of unnecessary duplicate items.  So, take a moment to go through your home and gather up all your duplicate articles of clothing, dish sets and books.  Then sort through them, keeping only your favorite colored piece or the one that is in the best condition.  You will free up space very quickly this way.  Remember, you don’t need to be a squirrel keeping piles of things everywhere.

    1. Ditch the Guilt

    An empowering decluttering strategy is to get rid of things you’ve been holding onto out of guilt.  It doesn’t matter how much you paid for that stylish coat if it’s not being used, and unwanted gifts are something else you should part with immediately.  The decision of whether to keep them is yours, so holding onto these items out of guilt is just weighing you down.

    1. Put Things in Their Place

    Another way to bring organization and order to your home is to make sure all your possessions have a designated place.  Once they have an assigned place, remember to always return them there.  Knowing where stuff belongs makes it easier to keep everything tidy and lowers the chance of clutter becoming a recurring problem.

    These 6 rules aren’t the definitive last word on clearing out the clutter in your life and home.  They also won’t remove all the difficulties from the process as you learn to part with items.  Hopefully, though, they will serve as guidelines to help you begin your own decluttering journey.

  • Homeowners Worried About Paying Down Debt as Rates Increase

    Homeowners Worried About Paying Down Debt as Rates Increase

    Younger homeowners have never experienced a significant rise in interest rates.  Many Canadian homeowners are worried about rising interest rates and how they will impact their budget, a new CBC Research survey finds.  Thanks to years of access to cheap money, household debt has ballooned in Canada.  Now that interest rates are rising, there are mounting concerns over how people will continue to pay down mountains of debt.

    Out of 1,000 Canadian homeowners surveyed online between October 5 -11, almost three-quarters of those with debt on their home, mainly mortgages, confessed they’re worried about rate hikes.  It won’t take much for most of them to feel the pinch: 58% of respondents said an increase of more than $100 in their monthly debt payments would force them to change their spending habits to make ends meet.

    Certified financial planner Shannon Lee Simmons says many people who come to her for help are in a similar predicament.  “I see that on a daily basis from clients who make relatively normal living wages, but everything is just budgeted to the dollar,” she said.

    “If you were to ask them, ‘Can you save $100 bucks a month?’ they might fail at that.”  Simmons says part of the problem is some homeowners have never experienced a significant rise in interest rates.  If you’re 40 right now and you bought your house at 30, you’ve pretty much had a decade of relatively low rates and that’s all you’ve experienced.

    Certified financial planner Shannon Lee Simmons says homeowners need to prepare for the true cost of rising interest rates.  Indeed, a 40-year-old would have been a toddler in 1981 when Canadian banks’ prime lending rate shot up above 20%. Conversely, since 2009, it has ranged between 3.70 and 5.75%.  Banks use the prime rate as a base to set their lending rates.  Failing to budget for heftier mortgage payments could lead to even more hardships, such as homeowners digging into their savings or turning to credit cards to make ends meet.

    The CBC survey findings come at a time when the Bank of Canada has already hiked the key interest rate four times since July 2017, from .50 to 1.50%.  The key rate influences the rate that banks charge for consumer loans and mortgages.  Many homeowners likely haven’t yet felt the full effects of the rate hikes because they’re still locked into a fixed mortgage, the most common type in Canada.  When their mortgage is up for renewal, ‘they might be in for a bit of a shock,” Simmons said.  The market expects another rate hike sometime in October, and some economists predict three more rate hikes in 2019.

    Bank of Canada governor Stephen Poloz says he believes Canada’s debt risk can be managed successfully.  Meanwhile, the amount of debt Canadian households owe has been on the rise for about three decades, totalling just over $2 trillion in August.  Mortgages make up close to three quarters of that debt.  For years, the Bank of Canada has expressed concern over rising household debt levels.  In 2011, Federal Finance Minister Jim Flaherty tried to temper borrowing habits with tighter mortgage rules.  They included lowering the maximum amortization period and requiring borrowers to qualify for a five-year, fixed-rate mortgage, even if they chose a variable mortgage with a lower rate. But interest rates remained low and Canadians continued to pile on debt.

     According to credit agency TransUnion, Canadians owed an average $260,547 in mortgage debt in the second quarter of 2018 — a 4.76% jump compared to the same period in 2017.  In the CBC survey, 36% of respondents said they had no debt on their home. 42% said they owed between $50,000 and just under $400,000 when combining both a mortgage and lines of credit.  Most respondents said they are very or somewhat comfortable with their current monthly payments.  However, as the survey shows, for many, that level of comfort diminishes when faced with the prospect of higher rates.

    And the impact could be more severe than some people think: When presented with a couple mortgage scenarios, less than a quarter of respondents were able to correctly estimate the added cost of a 2% interest rate hike.  Take, for example, a $400,000 mortgage with a 20-year amortization and a fixed five-year rate of 3.3%. With just a 2% rate increase, monthly payments would go up by about $400 a month.

    Simmons says many people find making the calculations daunting, but that homeowners need to understand the true cost of rising rates.  “Everyone is aware they’re going up, I just think that people aren’t necessarily prepared for how that impacts their daily life.”  It’s important to note that even with a projected rise in interest rates in 2019, they’ll still be relatively low compared to previous decades.  The Bank of Canada raises the country’s key interest rate to keep inflation in check, but governor Stephen Poloz, said in May that the bank will make rate decisions cautiously, considering the amount of debt households are still carrying.

  • What Does ‘Pre-Approval’ Mean?

    What Does ‘Pre-Approval’ Mean?

    Getting pre-approved by a lender makes it easier for buyers to find the home they want within their price range. However, it does not guarantee you’ll get the mortgage. It is simply a certificate saying that through a quick calculation of your finances, the lender has determined what you can afford.

    During the pre-approval, the lender will also fix the interest rate, which is usually good for between 60 and 90 days. If a better rate promotion occurs during the buyer’s fixed period, the buyer is usually eligible for that as well. It is likely the pre-approval will lead to a mortgage, but there have been situations when this has not been the case. The best way for buyers to ensure success is to understand what the lenders look for and to be prepared. Another way is for buyers to work with their mortgage broker, who can flag any potential challenges.

    A lender will determine a buyer’s debt load by calculating the Gross Debt Service (GDS) Ratio and Total Debt Service (TDS) Ratio. The GDS Ratio is the proposed housing costs, including mortgage payments, taxes, heating costs and 50% of condo fees, if applicable, and shouldn’t be more than 32% of the buyer’s gross monthly income. TDS calculations take into account all the buyer’s other debt obligations and shouldn’t be higher than 40%.

    Once a buyer has made a conditional offer on a home, the lender will gather all the documentation required to approve the mortgage, including a credit report. Other items a lender will need are a letter from an employer confirming the buyer’s salary, information about other sources of income, bank accounts, loans and other debts, proof of financial assets, sources of the down payment and deposit, and proof that the buyer has the funds for closing costs.

    Problems can crop up during the mortgage approval process. For example, the buyer’s credit score may be too low, the buyer might not have the right source for the deposit funds or the closing costs may not have been deposited in an account. The buyer’s GDS and TDS ratios might also be too high.