Bank of Canada Rate Change – Should I lock in?

Interest Rates Nathan Lawrence 13 Sep

This past week the Bank of Canada increased their lending rate for the 2nd time in as many months.  The changes in the Prime Lender Rates means that those with a variable mortgage rates will have seen that their mortgages rates adjusted alongside the changes to Prime Rate.  For those of you with variable rates, the first thing that probably crossed your mind was “should I lock in?”

 

Even though your interest rate may have increased, it does not mean that you should immediately lock into a fixed rate mortgage.  An associate of ours from B.C, Dustan Woodhouse had this to share earlier this week about the increase:

 

“If your discount from Prime (now 3.20%) is 0.50% or deeper – then the variable rate product remains a really great place to be.

 If your discount from Prime is 0.25% or less, then depending on which lender you are with you may consider converting to a fixed rate, BUT…

Keep in mind the penalty to prepay (i.e. refinance or sale of property) a variable early is ~0.50% of the mortgage balance, whereas if in a (4yr/5yr or longer) fixed rate mortgage the penalty can be closer to 4.5% of the mortgage balance ***depending upon which specific lender you are with and how long of a term you lock in for.

It is usually to the lenders greater benefit that you lock into a fixed rate, rarely is it to your own benefit.”

 

I could not have summarized it any better myself, so I won’t try.

 

So what should you do?

The first thing that you should be doing is avoiding the immediate draw or feeling of “I need to lock in”.  There are several different aspects of your mortgage and personal financial situation that should be considered prior to locking in.  There are many questions to ask yourself prior to locking in and most of which the lenders are unlikely to ask you. Your lender is re-active, not pro-active – you need to be pro-active. And sometimes being pro-active results in no action being taken at all.

Simply because the Bank of Canada increased interest rates twice, this does not immediately mean that they will do it again.  There are many economic factors outside of their control that will impact their decisions regarding future potential increases.

Presently, the key is not to react quickly.  If you have questions about your specific situation and how the increase may impact you, feel free to give us a call to chat about things in more detail.  Allow us the opportunity to ask the questions that need to be asked prior to making a quick switch.

 

Food for thought…

Back in 2010 rates increased 0.25% three times, and that sat stagnant for nearly five full years before two 0.25% decreases back downward.

In other words the last time Prime was pushed as high as it stands today, it sat there for five full years. And was then cut.

 

The next Bank of Canada meeting is October 25, 2017.

I will be watching and waiting.

 

Mortgage Terms Decoded

First Time Home Buyers Nathan Lawrence 28 Jun

If you are a first-time home buyer there is a good chance you’ve never heard some of the common words associated with mortgages. A good mortgage agent will guide you through and explain each step of the process to you, and if you don’t understand something be sure to ask questions. To help you prepare for your first mortgage pre-approval meeting here are some terms you’ll want to understand.

Mortgage Term

This is the length of time you are locked into your mortgage with a specific lender before you have to renew.  Many first-time homebuyers choose a term of 5 years; however, other term lengths are available such as 1-year, 3-years, 7-years, etc. The length of the mortgage term that you choose will also effect your interest rate that you receive. When deciding on your term length it is important that you speak with your mortgage broker about your long-term and short-term goals. Your mortgage term can also be broken but there can be some expensive penalties to do so, you’ll also want to ask your mortgage broker about these as they can vary greatly from lender to lender.

Amortization

This is the total length of time you will have your mortgage until it is paid off in full (granted you don’t refinance, move, or make any changes to payments). Most mortgages are amortized over 25 years. If you use a mortgage calculator online (such as this one) you can see the difference the amortization can make on your payment.

Down Payment

This is the percentage of your home purchase that you will have to pay to your lender. The minimum down payment in Canada is 5% (for a $200,000 home this would $10,000). The majority of first time home buyers use a 5% down payment but there are some benefits to putting a larger down payment on your home which you can ask your mortgage broker about. When saving it is also important to not forget about closing costs, most lenders will want to see 1.5% of your home purchase saved in your bank account as well as your down payment (so to purchase a $200,000 house you’ll actually need $13,000 saved).

Rate

Everyone always focuses so much on this four-letter word, the lower your interest rate the lower your mortgage payment will be. A good mortgage broker will find you the lowest rate possible; however, they will also make sure that the mortgage features you receive are just as good (these can at times be just as important as the interest rate).

Purchase Plus Improvements – You just found your dream home!!…. sort of

First Time Home Buyers Nathan Lawrence 8 May

In a competitive real estate market or a market that is suffering from a lack of available listings, the Purchase Plus Improvements mortgage could be your saving grace.  Regardless of whether you’ve just started your search for a new home or if you’ve been hunting for months, this is something that you should be thinking about each time you walk into a potential house.

Of all the homes that you’ve looked at so far, you have likely walked into at least one home by this point and said to yourself “Well this house looks great, but if it wasn’t for that incredibly dated _______”.  You fill in the blank here…Kitchen, bathroom, flooring, basement, etc.   If you have passed up the opportunity to purchase that potentially perfect property because of the costs of required improvements, it’s important that you know there is a solution to your problem.  Enter, the Purchase Plus Improvement Mortgage.

In a nutshell, a purchase plus improvements mortgage allows you (the home buyer) to roll the costs of improvements into your mortgage.  The new mortgage allows you the ability to finance those much-needed repairs and get you into that home of your dreams!   The mortgage comes with a great interest rate and one simple mortgage payment.  Had you chosen to purchase the home and not include the renovation costs into the mortgage, then you might end up financing the improvements on a higher interest rate unsecured debt which also give you a second payment to make each month.

The first step to take is a conversation with your Mortgage Broker about specifically how that Purchase Plus Improvements Mortgage would apply to your application and specific situation.  Understanding the types of improvements that can be included in the financing will help you better understand which potential houses might work great for you.

Working with your Realtor, the Mortgage Broker will help guide you through the final approval process.  The main difference between a Mortgage vs. a Purchase Plus Improvements Mortgage is the need for quotes.  As part of the verification process, your Mortgage Broker and the Lender will need to see a quote for the work that is planned for the improvements.  The quotes will provide us with the cost and plan details required to secure the final approval.  Getting you into a house of your dreams!

If you have questions about how a Purchase Plus Improvements Mortgage could work for you, take the time to connect with our team anytime!!

The Costs of Closing

First Time Home Buyers Nathan Lawrence 8 Feb

So you’ve saved for a down payment for the new home you would like to purchase and have enough money in your piggy bank; however, before you put an offer on your dream home make sure you’ve considered saving for one more thing. This is the closing costs for your home purchase.

Most mortgage lenders will want to see 1.5% of the purchase price of your home in your bank account to cover the closing costs. So in reality you need to have a little bit more than the minimum 5% down payment saved and should have actually saved a minimum of 6.5% total. So where is all this money going? A number of different places actually.

Home Inspection

It is a good idea to hire a home inspector to inspect the property you plan to purchase. A home inspection usually costs between $350-$400 but could save you thousands if they uncover a leaky roof, electrical issues or mold. This is always a good condition to put in your offer to purchase as a safety precaution and will give you the ability to back out of the deal.

Rural Properties

Rural properties will have a few inspections that you will want to complete, these include:

  • Well Flow & Water Quality Test: $250
  • Septic Tank Test (Pumped): $150-$200
  • Septic Field Inspection: $275-$300
  • Fuel Cost if Oil Tank: Cost will vary
  • Propane Cost if propane heat: Cost will vary

Appraisal

Sometimes depending on the property you are purchasing the lender will require an appraisal. You can usually expect this if you purchase a private listing or are buying an estate sale. The minimum cost of an appraisal is $300.

Mortgage Default Insurance

If your down payment is less than 20% CMHC is going to require mortgage insurance. You won’t need to pay this amount up front as it will be added to your mortgage and reflected in your monthly payments. There will also be HST on this amount. The HST component can not be added into the mortgage and will be part of the closing cost adjustments made by the lawyer on closing.

Legal Fees

A home purchase requires a lawyer to register the title of your property, do a lien search, complete the land transfer tax, distribute funds, etc. On average it is a good idea to set aside $1,000 to $1,500 for legal fees as an estimated amount.

Land Transfer tax

Land Transfer tax is based on the value of your home and can be calculated online and is based on a special equation. First time home buyers can qualify to get a rebate of up to $4,000 on land transfer tax.

Property Tax and Other Utilities

If the previous owner pre-paid any of the property taxes or utilities these will be refunded to them and charged to you. You will usually get a break down of these amounts a couple of days before closing. Also some utility companies will require a deposit to set up a new account, these can range from $50 to $200 and are usually refunded back to you after a period of time.

Moving Costs

Finally don’t forget about the cost to hire a moving truck or people to move your home for you. This cost will vary depending on the size of moving vehicle you require and how far you are moving.

I Want to Buy a Fixer Upper … But how do I afford the Fixing Part?

Renovations Nathan Lawrence 26 Sep

So you found the perfect home, but it needs a little TLC. Maybe you need a new roof, new furnace, new windows, or a kitchen update. All of these renovations can add up quickly and like many first time buyers, you may not have the money to cover the costs of these expensive renovations.

The good news is that there is a solution! It’s called a purchase + improvements mortgage. This allows you to purchase the home and get extra money to do the repairs as part of your total mortgage. Rather than having to come up with $10K or $20K to pay for improvements, this can be added into your mortgage. Your interest rate will also be lower than if you were to apply for an unsecured personal line of credit or putting the renovation costs onto your credit cards.

A few particulars to understand …

  • Estimates for the work will be required to get an approval for improvements.
  • Lenders and CMHC look for improvements that will add value to the home.
  • Improvements are typically required to be completed within 60-90 days from time of purchase.
  • The money for the improvements is released to you after the work is completed so you may require a way of carrying some costs until the work is done.
  • The improvements can be completed by yourself or a contractor. If doing the work yourself, only the costs of materials can be covered.
  • Depending on the scope of the work, applicable permits may be required.

 

Lenders don’t mind lending money to do improvements as it adds to the value and marketability of the home. A purchase plus improvement mortgage is a great way of turning that home with potential into your dream home. When getting pre-approved for your mortgage take the time to speak with your realtor and mortgage broker about how a purchase plus improvement mortgage may work for you!

Should I Get Pre-Approved?

First Time Home Buyers Nathan Lawrence 20 Jul

If you’re wondering what the answer to that question is, it’s simple, yes! A pre-approval is even more important as a first time buyer, not only will it help you understand mortgage financing it will also make you more confident when you go and write an offer on a house.

What is a pre-approval?

Quite simply a pre-approval looks at your income, assets, liabilities, and credit score and approves you for a maximum mortgage amount.  It looks at your current situation and determines if you would be a good borrower by assessing your ability to repay the mortgage loan. There are strict rules in Canada about mortgage lending which are based on your personal debt ratios that are calculated as a percentage of your debt payments vs gross monthly income.  Therefore, even if you have a good job with a large income it does not guarantee you will get a mortgage loan if you are also carrying a large debt load. Speaking with a mortgage broker will help you understand your unique situation.

Why a pre-approval can help

If you can say that you’ve been pre-approved when writing an offer it gives you a better advantage over someone that has not been pre-approved. This lets the seller know that you are a serious buyer who is able to secure financing on the property (which is important unless you can pay cash).

Also by getting a pre-approval you will have started your mortgage application and your mortgage agent will be able to request a lot of the required documentation ahead of time. Once you have an accepted offer the mortgage agent only has to get information on the property before submitting it for a full approval. This can save a considerable amount of time and can ensure your mortgage approval goes quickly and smoothly.

What a Pre-Approval Isn’t

One thing you have to remember about a pre-approval is that it is not a full approval. There are two things that the lender considers when approving a mortgage loan. The first is the borrower and their ability to repay the loan. The second is the property; in the event that a home owner defaults on the mortgage loan, the lender wants to ensure that they have a marketable property that they are able to resell. When getting a pre-approval you haven’t found a home yet so the process only assess the borrower. Once you have an accepted offer on a home it is then submitted to the lender for full approval with both the borrower’s details and the property details. This is why it is important to include a financing condition in your offer in case the lender does not approve the property or another unforeseen aspect of the application.

Getting pre-approved for a mortgage is the smartest way to approach securing a mortgage on a new home. It will give you time to meet with a mortgage agent that can answer any of your questions regarding mortgage financing. It will also put you in a stronger position when putting an offer in on a home and can make you more confident that the mortgage approval stage will go smoothly.

How a Mortgage Works when you Build a Home

Home Buyers Nathan Lawrence 11 Feb

Building a new home may seem like a complex and daunting undertaking but your mortgage doesn’t have to be. This particular blog post will discuss and highlight some of the key stages of a progress mortgage and what you should be prepared for.   A progress draw mortgage can be utilized under two different building scenarios:

1st:  A Self Built Home – You are acting as a general contractor and hiring trades.  You may also be doing some of the work yourself.

2nd: You’ve hired a contractor to build a home on a lot which you own and they require advances throughout the construction process.

A progress advance mortgage is exactly what it sounds like…rather than receiving your full mortgage in one lump sum, a construction mortgage is advanced in intervals as the house is being built. There are usually three or four draws (advances) at 19%, 45%, 75%, and 100% completion. Each advance will require a progress inspection report, which will note the percentage completed prior to the advancement of funds.

It is always important to meet with your Mortgage Broker anytime you are thinking about mortgages…but it is especially important when thinking about a Progress Advance Mortgage as there is a large number of details that need to be considered and ironed out early in the process.   For instance, the advances always happen at the end of a phase of construction.  As such, there may be expenses that you may need to carry until that stage’s advance is released.  This makes planning cash flow for your construction project very important.

So what are the typical stages?

Advance: Land/Foundation Preparation

The first phase of the building project is where you will be breaking ground to lay the foundation of your new home. Although some lenders will vary, typically during this stage the foundation is poured and back filled. Once complete, your Mortgage Broker will work with you to coordinate the inspection and advance.

Advance: Lock Up Stage

The second phase of the building project is called Lock Up.  This is when the structure is complete and the building can be locked up.  Meaning that the walls are up, roof is on, windows and doors are installed. Your progress inspection report will typically indicate that your home is 45% completed and you will receive your second advancement of funds.

Advance: Ready for Finishes. 

For the third advance stage, the house is ready for the finishing work.  So at this point, the dry wall is up, taped and mudded.  This means that everything behind the dry wall is done…insulation, wiring, plumbing, etc.  The house is ready for the final touches.

Final Advance:  100% Complete.

You’ve made it and survived!  That’s right, you are ready to move into your new home.  During the final phase, all of the finishing work has been completed.  The lighting installed, walls painted, flooring, cabinets and fixtures are all in and ready for you to use.   At this stage you will receive the final advance of your mortgage, completing the process with one final progress inspection report.

In closing…

Although there are many decisions to be made when building a home, such as choosing house plans,  trim,  paint, and so on,  we often do not put enough focus on the details of the mortgage. It doesn’t get the attention it demands because it is not as “exciting” as the rest of the process.  It is important to make sure that the time is taken to properly understand the mortgage process, advance requirements and the various stages.  If you understand this going into the planning and building stages, you will find that the process is much less stressful than it otherwise could have been.

It is also important that you build your team of professionals and that those professionals know who each other are.  Building a home involves more than just contractors.  You also need to ensure that your insurance agent, realtor, mortgage broker, and lawyer are pulled in at the right stage. They need to know who each other are in the event that they require specific details about the build. Doing your homework and putting the time in upfront to get everything organized will save you headaches during the build.

Happy Building!