Mortgages.ca

blog, Home Ownership

How To Pay Down Your Mortgage Faster

Paying down your mortgage will not only lower your debt, but it will also reduce the amount of money you spend on interest.

Happy Couple Saving Money

By: Scott Nazareth
Mortgage Broker

Your mortgage is one of the biggest and longest-running debts you pay. Your monthly payments can consume a big chunk of your earnings, reducing your cash flow. Paying down your mortgage will not only lower your debt, but it will also reduce the amount of money you spend on interest.

You can pay off your mortgage fast with lower interest rate loans and short amortization terms. Amortizations can range from thirty to thirty-five years. Many homeowners opt for longer time frames to lower their regular payments, but those increase the total amount of interest paid over the life of the mortgage contract. If a short timeline is not financially viable, here are some ways you can pay off a mortgage fast.

 

Lump Sum Payments

Paying a lump sum payment on your mortgage will shorten the time it takes to pay off your loan. Whether you put extra money down monthly, quarterly or yearly, the long-term savings will be substantial.

Every year, you can pay a lump sum of up to 20% of the outstanding principal. An annual lump sum payment will not only reduce the total amount of interest you pay, but it can also shave years off of the life of your mortgage.  For example, if you paid 10% of the remaining mortgage each year for five years, you will have paid 50% of the mortgage and halved the projected amortization period.

 

Accelerated Payment Plans

If your mortgage payment schedule only includes monthly payments, consider opting for an accelerated payment plan. An accelerated payment breaks your monthly bill into smaller amounts that are withdrawn weekly or biweekly. Accelerated plans with more frequent installments reduce the interest you’d pay over time. That is the equivalent of making one extra payment each year.

 

Same Payment on Lower Interest Loans

If your mortgage renewal has a lower interest rate, request to keep your monthly installments the same as they were with your previous rate. By maintaining a consistent payment plan on a lower interest loan, you will be paying more of your mortgage without impacting your budget. That will reduce the total interest you pay and the length of your mortgage.

 

Increase Mortgage Payments

When refinancing your mortgage, ask to increase your payments rather than accept the monthly rate set by the lender. Even a small increase of $100.00 more per month will lower the total interest you pay and take years off the life of your mortgage.

A home loan is typically the biggest debt most Canadians have, taking much of your hard-earned money, especially considering the interest fees. There are many simple and highly effective measures you can take to pay off your mortgage fast. Talk with a mortgage broker about the best mortgage renewal terms as well as strategies to lower debt so that you can be debt-free sooner.  

 

To find out how you can pay off your mortgage faster, contact one of our mortgage brokers for your free consultation by clicking on our ‘Apply Now’ button, emailing us at info@mortgages.ca, or by calling #647-795-8700 ext. 0 today.

 

With Mortgages.ca, you have nothing to lose and only great INSIGHTS to gain.

blog, Home Ownership

How to Budget Closing Costs for a Home Purchase

Forgetting to budget for closing costs is one of the most common mistakes new homeowners make

 

Calculate-Closing-Costs-Calculator

 

By:
Steve Harrison,
Mortgage Broker

If you are thinking of buying a home, you’ve probably started saving for the down payment. But have you considered how much you will need to save for the closing costs? If you haven’t, you are not alone. 

What are Closing Costs?

Closing costs are all the fees you will need to pay when the sale of the home or property is finalized. Some expenses are mandatory while others are optional, but before looking for a new home, it is important to talk to a mortgage broker about all of the financial obligations that come with buying a home. Your professional mortgage broker will explain what fees you will have to pay so that you can plan your closing day budget.

Why It Is Important to Save for Closing Fees

Not planning for closing fees will create unnecessary and unwanted financial challenges. Homeowners who are unprepared for closing day fees are often surprised, frustrated, and stressed by the additional expenses they’re asked to pay. Before buying a home, ask your broker about all of the fees that you’ll have to pay in addition to the mortgage.

Financial experts recommend saving between 1.5% to 2% of your home’s total value on your final mortgage closing costs. For example, if you are planning to buy a house for $600,000.00, you will need to save between $9,000.00 to $12,000.00 for your closing costs, such as land transfer taxes and legal fees.

Mandatory Closing Costs

Mandatory costs are the fees you have to pay on the closing day, such as lawyer fees, land transfer fees, homeowner’s insurance, and mortgage insurance taxes (if applicable).

You might also be responsible for paying prorated property tax and utility bill monies to the previous owner if they have prepaid these expenses. That would be outlined by your lawyer in your statement of adjustments.

Optional Closing Day Fees

Optional mortgage fees are expenses that you might have to save for, but they are not necessities. Moving costs, some utility hookup fees, changing the locks to your new home, renovations or upgrades, purchasing household items, pest control inspections, and unexpected repairs are all considered optional closing costs.

Photo by Douglas Sheppard on Unsplash

Buying a home can be expensive from start to finish. From deposits to closing fees, home buyers must save enough money to cover all the costs associated with purchasing a property.  Speaking to a mortgage broker before you start looking for your first home can help you plan for all areas of the purchase so that you can set realistic financial goals for your home purchase.

Need Mortgage Advice?

For a free consultation, visit our website and click on the ‘Apply Now’ button. You can also contact us by email at info@mortgages.ca or by phone at 647-795-8700 x 0.

With Mortgages.ca, you have nothing to lose and only great insights to gain.

blog

Mortgage Broker vs. Bank: Which Makes Sense For Me?

Purchasing a home is one of the most exciting experiences for first-time homeowners, but it can also be quite stressful.

mortgage broker meeting

Image Credit: Nik Macmillan

James Harrison, AMP
President / Mortgage Broker
Mortgages.ca

 

There are many steps to walk through before getting the keys to your new property, and a big challenge is securing a mortgage. Traditionally, most homebuyers use their own banks to finance a home purchase. In recent years, more mortgage holders have wondered if they should renew with a bank or look at other finance options. Let’s look at why more buyers are visiting brokers instead of a bank to refinance their home loan.

 

More Lenders & Options

As the cost of home ownership rises, buyers are looking for ways to save money. Bank representatives can only give homebuyers the services and rates offered by their company. On the other hand, mortgage brokers are not working for one lender but will work with 30 or more lenders from a variety of institutions, including major banks, credit unions, trust companies, and more. Your options are far more varied when working with a mortgage broker, and they do the work of researching and vetting for you.

 

Greater Knowledge of the Industry

Banks provide many different services to their clients, and while knowledgeable, representatives are not experts on mortgages and loans. Their expertise is limited to the bank’s services, policies, and loan structures.

Brokers specialize in mortgages, so they have superior knowledge of the industry as a whole. They work with tens of lenders and have an understanding of all the loans each lender provides. A mortgage broker’s job is to find the best options for loans and mortgage renewals, and they are always keeping up with the latest industry news and trends. So you can rest assured your broker can assess your needs and match you with the best mortgages.

 

A Mortgage Broker Works for You

A bank works primarily for itself, not its customers. The services are based on the institution’s gains, not on the client’s. Bankers make sure mortgage loans will not hurt their bottom line and will limit risks at all costs.  

Mortgage brokers work for their clients. Their job is to find the deal that best suits your needs. A broker looks at your situation, including your short-term and long-term goals, then helps you find a suitable mortgage from the right lender. They will go through all the pros and cons of each agency and answer your questions to ensure you have a clear understanding of the loan and lender.

Buying real estate is one of the most significant and expensive investments you will ever make, and struggling to find the right lender can add unnecessary stress. Whether you are a first-time homebuyer or you want to refinance your existing mortgage, a mortgage broker can help you choose the right lender to meet your current and future needs.  

While most consumers went to their own bank in the past, more homeowners are seeking the help of a mortgage broker. Good mortgage brokers are experts who work to find the best deal for each client. If you’re getting a mortgage or adjusting one, research different brokerages and full-time brokers that can help you. Read reviews online or ask your friends, family, co-workers, and realtor for recommendations.

 

For more information on how a mortgage broker can help you, contact Mortgages.ca today for your free, no-obligation consultation. You can contact us by phone at 647-795-8700 x 0, by email at info@mortgages.ca, or by visiting our website and clicking ‘Apply Now’ to speak to a mortgage broker today.

With a mortgage broker, you have nothing to lose and only great INSIGHTS to gain.

blog, Mortgage Education

Mortgage Pre-Approvals: Top 3 Common Myths [VIDEO]

If you’re preparing to take the next step in the home-buying process, a pre-approval consultation is a key first step that can save you time and money

pre-approvals consultation

Image Credit: Rawpixel

Pre-approvals are a CRUCIAL first step in your mortgage journey. If you’re a first time homebuyer, it’s completely normal to feel apprehensive about the process but this apprehension often stems from common myths (often learned through friends and family who are well-intentioned and eager to assist but may be misinformed). It is important to speak to a licensed and experienced mortgage broker who can provide prompt answers to your questions while understanding how home ownership fits within your long- and short- term financial goals.

 

The Pre-Approval Process

A pre-approval consultation is a very simple process that generally takes about 10-15 minutes via telephone or online application. In order to recommend the best mortgage rate and products, your broker will first need to determine your mortgage eligibility by verifying your employment and/or income (via tax returns, paystubs, and/or letter of employment).

For example:

If you are salaried/hourly, a broker will request:

  • most recent paystub
  • letter of employment
  • last two year T4s (tax returns)

 

If you are self-employed, a broker will request:

  • last two year T1 generals full
  • last two year notice of assessments (with confirmation of taxes up to date)
  • if incorporated, we will additionally ask for
    • last 2 year business financials
    • articles of corporation

 

Upon determining your mortgage eligibility, your mortgage broker will narrow down the products and rates for which you qualify and get you started on your mortgage journey.

 

Debunking the Myths

Click our video below to see James Harrison, President and Mortgage Broker for Mortgages.ca unpack 3 of the most common myths of mortgage pre-approvals:

  • Myth #1: Pre-Qualified = Pre-Approval
  • Myth #2: Pre-Approved = Unconditional Offer Time
  • Myth #3: Pre-Approvals Last Forever

 

For more information on how a mortgage broker can help you, contact Mortgages.ca today for your free, no-obligation consultation. You can contact us by phone at 647-795-8700 x 0, by email at info@mortgages.ca, or by visiting our website and clicking ‘Apply Now’ to speak to a mortgage broker today.

With a mortgage broker, you have nothing to lose and only great INSIGHTS to gain.

blog, Mortgage News

5-Year Fixed Rates Drop Due to Predicted Prime Rate Cuts

What does the arrival of a dropped 5-year fixed product mean for the variable versus fixed debate? Frankly, not much.

5-year fixed products drop over anticipated prime rate cuts

Image Source: Al x

James Harrison, AMP
President / Mortgage Broker

As of this week, economists are predicting the prime rate could actually start coming down. As a result, banks and lenders have been dropping the 5-year fixed rates and removing the discounting on the variable products so as to encourage clients to go fixed.


Don’t Be Fooled: We’ve Seen This Strategy Before

The banks have been aggressively pushing the 5-year fixed rates for the past 8 months now, using the fear over the last few rate increases as reason enough to consider the switch. But lest we forget: the 5-year fixed product is the most profitable product for the banks, not you.

When the prime rate goes up, banks systematically try to convince variable clients to break their mortgage and instead lock into a new fixed rate that is generally 0.75%-1.00% higher than the current variable rate. And based on 2018’s recent Mortgage Consumer Report, this fear mongering works — noting at least 68% of Canadians are talked into a fixed rate product.

But rest assured, when our variable clients call–panicked after a prime rate increase–our answer is always the same:

Our Clients: Do we lock in?
Us: No!

An Alternative (& More Effective) Strategy

Say NO to 5-year fixed but you should increase your payments as if you did lock in! This way, you are paying off your mortgage faster without the higher interest cost and terrible terms & conditions of the bank’s 5-year fixed product.

Speak with a Mortgage Professional

Regardless, you should always work with a professional and experienced mortgage broker in making these decisions. By definition, a mortgage broker works for you, independent of the bank’s interests.

If you’re considering a switch and your bank suggests a 5 year fixed rate product, make sure to ask them “why?” Think critically and get a second opinion from a mortgage professional. It’s your hard-earned money, it should stay in your pockets.

In Summary:

  • Go variable
  • Increase your payments from day one as if you went fixed and
  • Always stay loyal to yourself first–not your bank.

Let’s Connect!

For more information, click Apply Now, email us at info@mortgages.ca, or call 647-795-8700 x 0 today for your free, no-obligation consultation.

With the help of a Mortgages.ca broker, you have nothing to lose and only great INSIGHTS to gain.

 

blog, Mortgage Education

How to Pay Down Debt & Increase Your Cash Flow

Owing money can quickly become a vicious cycle when most of your earnings go toward paying creditors instead of lining your own pockets.

Pay-Down-Debt-Increase-Cash-Flow

James Harrison, AMP
Mortgages.ca

 

Many Canadians have accumulated debt to finance major milestones or to pay for smaller day-to-day items. Though debt is quite common, you should keep a close eye on your loans and think about cutting down. According to the Bank of Canada, most Canadians now owe $1.70 for every dollar they earn. As interest rates climb, homeowners are focusing on paying off debt and saving money in 2019.  

The higher your debt load, the less cash flow you have. Before your bills become too much to handle, talk to a mortgage broker about debt consolidation options and your eligibility to refinance. Mortgage brokers have the knowledge and resources to advise you on the most effective ways to pay down debt and increase your cash flow.

 

Pay High-Interest Loans First

Loans like credit cards, lines of credit, high mortgage rate loans, and private company loans are harder to pay off because a bigger portion of your payment goes toward interest. You can save money by paying off these bills first. For larger amounts that take longer to pay, consolidating debts into a lower interest secure line of credit or mortgage line of credit will help you save money so that you can repay the debt quickly.

 

Refinance Your Mortgage

You can lower your monthly mortgage payment and increase your cash flow when you refinance your home loan. Rather than continue to pay unrealistically high interest rates, you can consult a mortgage broker to find a lender that offers lower rates so that you can put more money toward the actual loan. A broker can also advise you on the best options to reduce your monthly mortgage payment so you can save more money for other things, like childcare.  

 

Consolidate Your Loans

If you have too much credit card debt or high-interest debt, consolidating them into one low-interest loan will reduce your monthly expenses to one manageable bill.

 

Save for an Emergency Fund

Saving money can be challenging when you owe creditors, but having money for unexpected emergencies will reduce your risk of going further in debt. Increase your cash flow by putting part of your earnings away each month so that you’re better prepared in an emergency.

In today’s borrowing culture, Canadian homeowners have high debt. Multiple loans and high interest rates can negatively impact your credit rating if you cannot pay your bills. Before your debt load becomes overwhelming, talk to a mortgage broker. A broker can help you find effective ways to save money by refinancing your mortgage or consolidating debt to a lower interest rate line of credit, and you can avoid lowering your credit score.

 

For more information on how a mortgage broker can help you reduce your debt, click Apply Now, email us at info@mortgages.ca, or call 647-795-8700 x 0 today for your free, no-obligation consultation.

With the help of a Mortgages.ca broker, you have nothing to lose and only great INSIGHTS to gain.

blog, Mortgage Education

Buying a Second Home? It’s Simpler Than You Think!

Expanding your lifestyle to include a recreational property like a cottage, chalet or cabin is a simple process

 

By Steve Harrison
Mortgages.ca

 

Buying a Second Home

People tend to think securing financing for a second property will be an overwhelming and complicated process. But if you’ve already purchased a property (which, of course you have, this is your second property), you’re already very familiar with the process.

 

Process and rates are the same

For one, the approval process for buying a second property is similar to that of buying a primary residence, and the minimum downpayment is the same — which can be as little as five per cent of the total purchase.

Sometimes people are concerned they won’t be eligible for the same rates on a mortgage for a cottage, but a mortgage for your cottage is just like a mortgage for your primary home. Although purchasing any home with less than 20% down would have a mortgage insurance premium, there would not be a rate premium just because you’re buying a second home/cottage.

For some of our younger clients, the idea of buying a cottage is increasingly becoming more attractive. They choose to live in a smaller condo during the week, then spend weekends and holidays in a recreational home outside of the city. It’s a lifestyle choice that’s especially appealing for people who have the option to work remotely.

 

Refinancing to increase wealth

One great method to help with the down payment of your second home is to refinance the mortgage on your first property. Some clients don’t realize this is a viable option, but it’s a great way to use some of the capital in your current home to help land your dream vacation home.

Example:

Let’s say you’ve bought a home for $700,000 and you had a mortgage of $560,000. And now that home has increased in value since you bought it and is now worth $1 million, meanwhile you’ve got $500,000 left outstanding on your current mortgage.

That means you’ve got $500,000 of equity in your home. Assuming the person qualifies, they could refinance their current property to 80% (800k), which would give them 300k in cash to use towards a vacation home.  With the current refinancing rules, you’ll always have to leave 20% equity in your home.

 

Using a home equity line of credit

Alternatively, you can consider using a home equity line of credit to help finance the purchase of your second home.  For example, one of our clients recently used a home equity line of credit to buy a cabin. They had already refinanced their home to have the line of credit available, and when they found a great deal on a cabin up north, they were able to jump on it right away.

They paid cash for the cabin using the line of credit, which is a slightly higher rate than a mortgage on the cabin, but it worked for them and depending on your situation we can help you figure out what would work for you. Which leads me to my last point:

 

Make Sure to work with a licensed broker

As licensed mortgage brokers, we help our clients get the mortgage that’s right for them by negotiating on their behalf with banks, credit unions, and other mortgage providers for the best rates and products. Our services are free to home buyers, and our fees are paid by lenders. You have nothing to lose and great insights to gain!

Are you considering buying a second home? Apply Now or Contact Us via phone (647-795-8700) or email (info@mortgages.ca)

 

blog, Mortgage Education

Making the Most of Your Mortgage Broker

Source: Which Mortgage

The process of becoming a homeowner can be long and arduous, and your mortgage broker is one of your key allies in getting a mortgage in order to buy a home. But if done right, the relationship between you and your broker doesn’t stop once you have the keys.

 

mortgage-broker-meeting

 

Depending on how your individual mortgage is structured, you’re going to be up for a renewal at least twice over the life of your mortgage – and, for many people five or more times. That means many opportunities to reconnect with your mortgage broker, not only to get you the best interest rates available at the time, but to evaluate where your mortgage falls in your overall financial picture.

A good mortgage broker will definitely want to keep you as a client over the lifetime of your mortgage, so your broker will probably already have their own efforts in place to reach out to you every so often and checking in on how your mortgage payments are coming along. They might even have a newsletter of some kind, with helpful tips for homeowners. Either way, it’s only to your benefit to have a good relationship with your broker; here are some ways that you can make the most out of that relationship over a long period of time.

Be honest

When getting your mortgage, there’s no point in lying about your occupation, your income, or your debt. It’s all going to come out in the wash anyway, and your broker can’t place your mortgage application with the best lender for you if they don’t have all of the facts. Not to mention that you’re going to have to come clean eventually when the lender does their due diligence on you. If you don’t tell the truth and lie about details on your mortgage application, then you’re committing mortgage fraud, which is something that you want to avoid at all costs. This holds true after you’ve gotten your mortgage as well – be honest when it comes to what you want and don’t want for your next mortgage term. Remember that your broker works for you and is paid (by lenders) to deal with the situation that you present to them, not the situation that works best for them and/or is easiest to place.

Keep in touch

Months, even years, may go by, but don’t let your mortgage broker become a stranger. As mentioned, your broker may – and should – reach out to you every so often, but if they don’t, don’t be afraid to initiate contact with them, even if it’s just dropping a quick email to say hello or asking a simple question. This way, when you actually need something or it’s time to discuss renewal, your mortgage broker won’t have to think, “Who is this person?”

Don’t be shy

Things change. Your broker doesn’t expect your financial realities to be the same 10 years down the road as they were when you got your mortgage. If you’ve changed your plans and now want to own a farm or move out of province or even start thinking about investment properties, don’t hesitate to let your broker know. They can only help you develop a mortgage plan if they know what your plans are; otherwise, the options that they suggest for you might not work for your short-term and/or long-term goals.

Refer

If you’re happy with your mortgage broker, don’t keep them to yourself! A large part of a broker’s business is referrals, and often those referrals come from clients who they’ve previously worked with to get mortgages. If you know someone who is looking for a mortgage, maybe even someone who is unfamiliar with the role of a mortgage broker, offer to put them in touch with yours. It’s really a win-win-win situation: good for your friend who needs a mortgage, good for your broker who needs the business, and good for you, who just bought some goodwill from both parties.

Educate yourself

Part of the reason it’s beneficial to speak with a mortgage broker is so that you can learn about the wide range of products and services in the market that they can get for you. But if you do your own research into a mortgage product or subject before speaking with them about it, then you can have a much more productive conversation about the products and see how they apply to your situation. You’ll be able to ask more detailed questions, and will probably understand your broker’s responses a bit bitter. It never hurts to do some preliminary homework.

Just like your relationship with your realtor, the relationship with your mortgage broker is a long-term one. Knowing how to make the most out of that relationship over the life of your mortgage can really work out in your favour.

blog, Mortgage Education, Mortgage Refinance

The Smart Homeowner’s Guide to Refinancing

Mortgage refinancing is a tool you can use to improve your financial future

smart-homeowners-guide-to-refinancing

By Steve Harrison
Mortgages.ca

 

Over my 10 years in the mortgage industry, I’ve noticed that homeowners who refinance strategically can significantly improve their overall financial situations.

And you can do it, too. By refinancing whenever the math makes sense, you can make incremental gains that add up over time.

 

Why you should care about refinancing?

Whether you’re considering this option now or not, it’s important that you understand the basics. That way, when you’re faced with an unexpected financial challenge in the future, or an investment opportunity comes along, you’ll have a clear understanding of how your home equity can help you achieve your goals. The more you understand the short and long term benefits of refinancing, the more financially proactive you can be.

 

What is refinancing?

Refinancing is the process of ending a mortgage agreement in order to replace it with a new one. The first loan is paid off in full and a new loan is created, either with a new lender or the existing lender.

Whereas a straight switch to a new lender (also known as a transfer) can change only the interest rate or term of a mortgage, a refinance can involve increasing the total amount of the loan and/or changing the length of amortization.

 

Why refinance?

  • To Consolidate Debt

We often recommend our clients to refinance in order to consolidate other forms of debt they may be carrying. A mortgage is the cheapest way to borrow money, so it’s often beneficial to transfer accumulated debt — from credit cards, lines of credit, student debt, car loans — to a mortgage. This way you can avoid paying the higher rate of interest on those other forms of debt.  

  • To Access Home Equity

When clients need to take cash from their home equity, refinancing is the way to do it. This is a cheap way to access cash for investing in a rental property, sending a child to university, doing a major renovation, covering unexpected medical costs, or starting a business. Canadians can access up to 80 per cent of the value of their home by refinancing.

  • To Achieve Long Term Goals

In some cases, refinancing can help homeowners increase their long term wealth. For example, refinancing could make it possible for a homeowner to move from their starter house or condo into a new home, while keeping the starter home as an investment property, thereby increasing their net worth over time.

Other benefits include:

  • Access lower rates when rates have dropped
  • Lower monthly payments
  • Add a home equity line of credit

 

Should-I-Refinance

When should I refinance?

When your mortgage term is up, you have three options:

  • Renewing the loan with your existing lender at a similar rate with a similar term
  • Transferring your loan to a new lender at a different rate or term
  • Refinancing

When the math works out to your benefit, it’s a good time to refinance.

Unfortunately, if you have an immediate need access to your home equity, you can’t wait for the ideal time and you may be forced to break your existing mortgage. In that case, you’ll need to pay the penalties involved with breaking your mortgage. Pre-payment penalties can be significant, depending on the size of your outstanding mortgage. Still, despite penalties, it can still be beneficial to refinance.

Lenders sometimes offer refinancing promotions in which they pay the costs when you move your loan to their institution. A mortgage broker can alert you to those promotions and advise about whether the lender offering them is the right one for you.

 

What are the costs of refinancing?

The costs of refinancing include:

  • If you’re breaking your mortgage, prepayment penalties will apply (amounts vary)
  • Lawyer fees ($800-$1500)
  • Discharge fees ($300-$400)
  • Appraisal ($300-$400)

Occasionally, lenders will offer promotions in which they pay the costs associated with refinancing. Your broker can inform you of these temporary offers if they apply to your situation.  

 

Do I have to qualify for refinancing?

Yes. You’ll have to apply for a new mortgage, going through the process of providing proof of income, statements of debts and assets, and credit scores to your new lender.

 

Is there a downside to refinancing?

If there is a risk to refinancing, it’s the temptation to continue adding to consumer debt after consolidation. Lifestyle changes are sometimes necessary in order to avoid having to refinance again.

 

What are the steps to refinancing?

Though some see refinancing as time-consuming, I try to make the process as simple as possible. Here’s an overview of the steps to follow with your mortgage broker:

  1. Review your financial situation and goals
  2. Find the right refinancing loan
  3. Review documents
  4. Apply for the new loan
  5. Await review of your application by the chosen lender
  6. Once mortgage is approved, broker orders an appraisal
  7. You sign the loan commitment
  8. You see your notary or lawyer, who will oversee the loan disbursement

 

Advice is always free. Call or email us to set up a consultation anytime.

E: Info@Mortgages.ca
P: 647-795-8700

blog, Mortgage Education, Mortgage Refinance

Fixed vs. Variable: Which Mortgage is the Better Choice?

Compared to fixed-rate mortgages, variable-rate options cost less for the borrower — even when rates are expected to rise

variable-vs-fixed-consider-the-numbers

By James Harrison
Mortgages.ca

 

When you’re thinking about what kind of mortgage you need, you might be tempted to do what many Canadians do without giving it much thought: They choose a fixed rate.

Fixed-rate mortgages are the most common type of home loan. According to a report by Mortgage Professionals Canada, 72 per cent of Canadians who bought homes in 2016 or 2017 secured fixed-rate mortgages.

Especially when news media stories predict interest rate hikes in the near future, borrowers grasp onto fixed-rate mortgages. They’re willing to pay a rate premium in exchange for a consistent monthly payment and a feeling of certainty.

 

But they’re not doing themselves any favours.

 

The media hype around possible interest rate hikes is often inaccurate, and the fear is fuelled by banks who profit from locking borrowers in at the premium rates attached to fixed-rate mortgages. These loans are simply more profitable than variable-rate mortgages, so banks like to create the impression that a five-year fixed mortgage is the obvious choice.

The fact is, a variable-rate mortgage is almost always a better choice for borrowers who want to pay less for their loan. And that’s true even when rates are expected to go up.

 

Feeling the variable-rate jitters?

Many borrowers are feeling nervous now because the Bank of Canada has hiked the key interest rate five times since July 2017, from .50 to 1.75 per cent, and economists have predicted more raises in 2019.

Those nerves are understandable. But when you do the math, and when you know the history of how interest rates move in Canada, it becomes clear that a variable-rate mortgage can still save you thousands in interest payments compared to a comparable fixed-rate product.

Not only that, it’s possible to reduce the risk and maximize the benefit of a variable-rate mortgage by making strategic monthly payments that are a little higher than they need to be from day one.

But more on that smart strategy in a minute. First, let’s look at the reasons why variable mortgages are a better choice.

 

Why variable-rate mortgages cost less

Variable rates are typically lower than fixed rates. But the spread between the two types of mortgages can vary.

That’s because variable mortgage rates are tied to the prime rate. When the Bank of Canada’s prime rate goes up, variable mortgage rates follow. On the other hand, fixed mortgage rates are primarily influenced by the yield on government bonds of the same term. The two types of mortgage are influenced by different factors, so the spread fluctuates.

When rates for five-year fixed mortgages are at least 0.5 per cent higher than rates for comparable five-year variable mortgages, it makes more mathematical sense to choose a variable product.

The spread is important because when it’s 0.5 per cent or more, it’s extremely unlikely that rates will go up enough during the five-year term of a mortgage to make a variable mortgage more expensive than a fixed one.

We know it’s unlikely because we can look at how the Bank of Canada’s has historically adjusted its prime rate, which in turn causes variable mortgage rates to go up or down.

When the Bank of Canada implements federal monetary policy by adjusting the prime rate, it rarely does so quickly. It moves the rate up or down by 0.25 per cent with each adjustment, then it waits to see the effect on inflation.

As well, given historical trends, it’s extremely unlikely that rates will only go upward over the five-year term of a mortgage. They may go up for a while, but then they’ll go down again because of the cyclical nature of the economy.

 

We can apply our understanding of history and make some reasonable predictions about the future. Looking forward at the next five years, we see that while rates may go up a few times over the next two or three years, an economic recession is due in 2020 or 2021. Rate decreases are the federal bank’s likely response.

With the current spread between five-year fixed and five-year variable rates, the prime rate would have to go up by 0.25 per cent about seven or eight times over the next five years for you to start losing more with a variable-rate mortgage than you would with a fixed-rate mortgage. It would have to stay up, too, with no rate drops in between.

But that scenario is beyond imaginable for most people in the financial industry. If the prime rate were to go up — and only up — seven or eight times in less than five years, we’d be experiencing a widespread economic meltdown the likes of which we’ve never seen. It’s extremely unlikely.

 

The exception to the ‘variable is better’ rule

When we look at historical data, we can see the spread between fixed and variable mortgages is almost always greater than 0.5 per cent in Canada. Over the past decade, the spread has usually stayed between about 0.7 and 1 per cent.

There was a short period in 2016 when rates for fixed mortgages were low and the spread between fixed and variable was a mere 0.3 per cent. During that period, there was a strong reason to choose a fixed mortgage. But it’s extremely unlikely that we’ll see rates and spreads like that again anytime soon.

 

Why variable rate mortgages are more flexible

In addition to offering lower costs, variable rate mortgages allow borrowers more control and flexibility than a fixed mortgage.

In a variable mortgage, the borrower can break the mortgage at any time with only a three-month interest penalty. Compare that to fixed rate penalties, which are equal to either three-months interest or the IRD, or interest-rate differential calculation, whichever is higher.

For example, on a $500,000 variable-rate mortgage, the penalty for breaking it would be about $3,000 compared to a $20,0000 penalty on a comparable fixed-rate mortgage with a big bank.

No one plans to break a mortgage, but life happens. And avoiding a $20,000 penalty can make a dramatic difference in your life when you’re going through unexpected life changes.

In addition, a variable-rate mortgage allows you to lock into a fixed rate at any point. But it doesn’t work the other way. A fixed-rate mortgage cannot be changed to a variable one during the length of the term. You’re stuck with a fixed rate for the entire five years, no matter which way rates go.

How to reduce the risk of a variable mortgage

We suggest our clients choose a variable mortgage, but that they make monthly payments as if they had chosen a fixed one with a higher rate of interest.

That means they structure their household budgets in order to pay more than the minimum payment with each monthly payment. An extra $200 or $300 per month goes toward paying off principal instead of interest before rates have had time to increase. So the borrower saves thousands in interest over the life of the loan. And they pay down thousands more of the principal while they wait for any potential rate increase.

The strategy also builds in a buffer of three or four potential rate increases. Even if the prime rate goes up steadily for a year or two, the borrower is already used to a higher payment and their household budget is not affected by the rate changes.

In the 11 years I’ve been in the mortgage business, I’ve never once had a client regret going variable, but I’ve had many regret going fixed.

What to do if rates start to rise

The option to go fixed always exists for borrowers in variable mortgages. And when the news is full of predictions that interest rates are going up, clients sometimes call to ask about locking in to a fixed rate.

We never advise our clients to take the option of going fixed.

Instead, we suggest they increase their payments as if they did lock in. Or we suggest they break the current variable-rate mortgage and set up a new one with an even better variable discount.

What to look for in a fixed mortgage

As a licensed mortgage broker, I consider it my responsibility to explain the pros and cons of fixed-rate and variable-rate products. And I keep an eye on the spread, so I know I’m always giving up to date advice on which option makes more mathematical sense. But some borrowers will choose a fixed mortgage every time, no matter what the math indicates.

In that case, and also when the spread does drop below the 0.5 per cent mark, it’s important to choose the best possible terms for a fixed-rate mortgage, paying close attention to prepayment penalties.

While most borrowers have no intention of breaking their mortgage, about 60 per cent of Canadians do. So if you’re going fixed, you must look carefully at the penalties you’ll incur if you end up having to break it.

We recommend our clients choose non-bank lenders (also known as monoline lenders) when they do choose a fixed-rate mortgage. These dedicated mortgage lenders calculate IRD penalties differently than banks do. While banks use the posted rate to calculate the IRD, monoline lenders use a rate that’s an average of about 1.5 per cent lower. That means a significantly lower penalty when your loan is with a monoline lender.

 

How a mortgage broker helps

As a licensed mortgage broker, I help my clients get the mortgage that’s right for them by negotiating on their behalf with banks, credit unions, and other mortgage providers for the best rates and products. The cost of my services are free to home buyers. My fees are paid by lenders.

 

Interested in refinancing to reduce your mortgage costs? Call me to set up a free consultation.