It’s hard to believe it’s the middle of December and 2023 is right around the corner. For those shopping for a home or in a variable rate mortgage, the New Year can’t come soon enough. On December 7th, 2022, we experienced the last Prime Rate increase of the year. Many economists believe that this may be the last one for a while and are hoping for a more stable market going forward. In addition to that, some are predicting interest rates may start to decrease by the last quarter of 2023 and/or early 2024.

Inflation & Rate Hikes
Not only did Canadians have to deal with the highest inflation rates we have seen in over 40 years, but they also experienced some of the highest Prime Rate increases since April 2001 when Prime was at 6.50%.
With all these rate hikes, many are left wondering if they should convert their variable-rate mortgages to a fixed rate. Let’s go over the pros & cons of locking in.

Why you might want to lock in
This year we have seen Prime increase 7 times totalling a 4% increase since January 2022. With that said, I don’t blame you for considering locking in! Let’s break down the type of variable-rate mortgages before we get started.

Adjustable Variable-Rate Mortgages
Your payment increases and decreases with Prime Rate adjustments. The only thing guaranteed for your term (ex. 5-year term) is the discount off of Prime Rate, ex. Prime – 1.00%. As of today, if we use this example, your rate would be Prime (6.45%) – 1.00% = 5.45%. With this type of mortgage, your lender typically notifies you of any Prime Rate changes and adjusts your mortgage payment automatically on your behalf.
Static Variable-Rate Mortgages
This is when you are at a variable rate, but your payment stays the same. How does this work? Because your payment does not adjust automatically, the interest within your payment will increase or decrease as Prime changes. Since we have been in a rising rate environment, more interest is being paid to the lender with each Prime Rate increase and less principal is being paid off for your home. Instead of your payment increasing, the lender adjusts your amortization (the period of which you have to repay your total loan, ex. 25 years stretched out to 35 years). However, they can only do that for so long before your whole payment turns into interest and you are no longer paying the principal off. At this point, the lender contacts you and gives you three options: switch to a fixed rate, make a lump sum payment or increase your payments to bring your amortization back in line.

Either option can be worrisome because your payments have either been increasing for the majority of 2022 or now you have been contacted by your bank to adjust your payments significantly. These increases have resulted in a payment difference of hundreds of dollars per month since you first got your mortgage and now you’re considering a fixed rate.

What would it look like if you locked in now?
You may have a couple of options if you’re thinking about locking into a fixed rate, such as staying with your existing lender or switching lenders to find a better rate/mortgage product.

Your lender will provide you with a quote for current fixed rates, but as an example, I’ll use 5.29% for an insurable mortgage. While this may seem like a no-brainer, if you remember my example above of Prime – 1.0% = 5.45% and now fixed rates are similar or lower. While this rarely happens, it’s important to remember the pros and cons of a fixed-rate mortgage.

Pros and Cons of Fixed Rate Mortgages
The obvious benefit of a fixed-rate mortgage is that the payment stays the same for the duration of your term (ex. 5 years). This means no more up and down with Prime Rate changes. That said, you must consider your short and long-term plans when committing to a fixed rate and a new term with your lender. Fixed-rate mortgages tend to have higher penalties in a declining rate environment. So if rates start to drop in the future, as some economists predict will happen by the end of 2023 or early 2024, you may be stuck in your new fixed-rate mortgage because the penalty is too high to break. When rates dropped significantly during the pandemic, many homeowners faced penalties upward of $20,000! So if you think that there is a chance that you may break your new fixed-rate mortgage term, you may want to consider staying in a variable-rate mortgage (which is only a 3-month simple interest penalty).

Final Thoughts
Now that you understand the pros and cons of a variable-rate mortgage, the decision is ultimately yours!

Ask yourselves these few questions:
Are you comfortable staying at your fixed rate for the full term, even if rates drop in the future? If so, consider a fixed rate.
Do you need to know exactly what your payment is every month so that you can budget and keep up with your cost of living? If so, consider a fixed rate.
Are you losing sleep at night worrying about your mortgage payment? If so, consider a fixed rate.
Do you plan to move, upsize or downsize, during your new term (ex. 5 years)? If so, consider staying variable.
Will you need to access equity within your term, consolidate debts, do a renovation or make a large purchase? If so, consider staying variable.
Will you need to add or remove someone from your mortgage within your term? If so, consider staying variable.

An advantage of using a Mortgage Broker/Agent is that I am here to help you understand your options so that you can make an informed decision. If you still have questions or want to run some payment comparisons before you make any commitments.

During the pandemic, millions of people moved. Everyone moved for different reasons, and while 84% of Canadians didn’t need a change due to the pandemic, there were many more first-time buyers during that time, with 53% of buyers in 2021 first-time buyers. So how many moved in or out of Canada?

The results might be surprising.

Where did Canadians Go?

According to Statistics Canada, more than 89,000 people moved away from Ontario. Around 20,000 went to British Columbia, and another 20,000 went to Quebec. Also, approximately 12,000 moved to Nova Scotia, and 23,000 moved to Maritime.

Toronto used to be one of the hottest areas of Canada, but in 2020 and 2021, more people left Toronto. As a result, it was one of the only Canadian cities to lose population during the pandemic.

Why Did Most People Move During the Pandemic?

Homeowners that sold their homes and moved elsewhere did for various reasons. Many wanted more space. With the lockdowns in place, they couldn’t function in the homes they had, with kids doing school from home and parents working from home, everyone needed more space.

Others moved to find more affordable housing. Those that couldn’t afford where they lived because of temporary shutdowns looked for affordable housing elsewhere during the pandemic.

First-time homebuyers, though, did so because they wanted a secure investment and more stability. In addition, almost 35% of first-time buyers did so because they wanted to take advantage of rock-bottom interest rates that they hadn’t seen in a while.

Where did First-Time Buyers Come From?

Most first-time homebuyers lived with friends or family when they bought their first home during the pandemic. Over 40% rented with other friends or family, and 29% lived with family but didn’t pay rent.

Of the first-time homebuyers, 20% were renters for over ten years before they decided to buy a home. On the other hand, 41% of first-time buyers rented for 5 – 9 years before buying a home.

Final Thoughts

Canadians are still moving even with the pandemic somewhat behind us. The largest influx of people moving to different areas has slowed, but many continue to look for more affordable housing or more room as more companies move to remote positions.

Sources:

What Are Common Mortgage Terms & Amortization?

When looking for a mortgage, you have many decisions, including choosing the mortgage terms and amortization. These are two big decisions when choosing your mortgage. Here’s what you should consider when deciding.
What are Mortgage Terms?

Your mortgage terms refer to how long you have to repay your mortgage and the interest rate you’ll pay. You must renew your mortgage or repay the full balance when your term ends.

The Available Mortgage Terms

There are three common mortgage terms most borrowers can choose.

⮕ Short-Term Mortgages

Short-term mortgages have terms of five years or less. A shorter term usually offers a lower interest rate, but you must renew your mortgage (or pay it off) earlier. Most short-term loans are available at both fixed and variable interest rates.

⮕ Long-Term Mortgages

Any mortgage with a term of five years or longer is a long-term mortgage. Most long-term mortgages are for a fixed rate only, and the rates are higher because they are locked in for a longer period, such as 7 or 10 years.

It’s important to know that terms of five years or longer usually have a prepayment penalty if you pay the loan in full within five years.

⮕ Convertible Term Mortgages

A convertible-term mortgage is a short-term mortgage that you can convert to a long-term mortgage. However, when you extend the loan, the interest rate typically increases to the term the lender offered for long-term mortgages when you borrowed your mortgage.
What is Amortization?

Amortization refers to the time it takes to pay your loan in full. Your term refers to how long you have the current lender with your contract rate & terms, before renewing your mortgage. Amortization, usually 30 years or less, refers to how long it will take you to pay the loan, given the current terms with your lender. 

A typical example of this would be a 5-year fixed-rate mortgage (your term) with a 25-year amortization.

What to Consider with Mortgage Terms and Amortization

When considering your mortgage term and amortization, think long-term.

The mortgage term refers to how long you have a specific interest rate before you must renew. Are you comfortable with a shorter term and the requirement to renew your mortgage and/or pay it in full?

If not, a longer term may be a better option for you. However, the longer the amortization or how long it takes you to pay the loan in full, the more interest costs you’ll pay over time.

The less time you have the lender’s money outstanding, the less interest you pay, and vice versa.

When choosing the right terms and amortization, think about what you can afford now and in the long term as you work to pay your home off in full.

However, if you think that your life plans may change before your term is up, consider a shorter term. Longer fixed terms tend to have higher penalties if you break them, which is common if you decide to sell or refinance your home within that 5 years.

Final Thoughts

Your mortgage term and amortization are important factors when applying for a mortgage. Unfortunately, many borrowers focus on the interest rate and don’t think about the long-term effects of the mortgage.

Instead, look at the big picture. What will the loan cost in the long run, and how many unknowns are there? For example, if you take a short-term, how often must you renew the loan and at what cost? Will you likely incur a penalty in the future for breaking your term? A large penalty can certainly outweigh the importance of getting the lowest interest rate.

Looking at the big picture and the loan’s total costs will help make home ownership as affordable as possible, now and in the future.

Very rarely do people have the cash to buy a house in full. Most borrowers must put money down on a home to purchase it, known as a down payment. Lenders make up the difference with a mortgage loan, using your new home as security until your mortgage is paid off. Many borrowers qualify to put down less than 20% on a home but must pay mortgage insurance.

When you put more than 20% down, this insurance is not mandatory. Understanding how mortgage insurance works and whether you should make a 20% down payment is very important when buying a home.

How Much Must you Put Down?

All borrowers have a minimum amount they must put down on a home. You are always free to make a larger down payment but must meet the minimum to qualify. The minimums are as follows:

· Sales price $500,000 or less = 5% down payment
· Sales price $500,000 – $999,999 = 5% down on the first $500,000
and then 10% on any amount over $500,000
· Sales price of $1 million or more – 20% down payment

Keep in mind that just because you have the minimum down payment, doesn’t always mean you qualify. There are many other factors that lenders consider, such as your income, employment history, savings, debts, credit score & history, and much more.

Paying Mortgage Insurance

You’ll pay mortgage insurance if you don’t put down at least 20% on a home. This insurance protects the lender should you stop making your payments. However, you are responsible for the premiums, and lenders can require mortgage insurance even with a 20% down payment if you have bad credit or are self-employed because you are still a high risk of default. This insurance gets added to your mortgage and isn’t required to pay out of pocket. Here is a great calculator by CMHC to determine your potential premiums and mortgage payment: CLICK HERE

There are three companies that provide this insurance to Canadians, CMHC, Canada Guaranty and Sagen. They all offer the same premiums but some have different programs & policies.

How a Down Payment Affects your Mortgage Payment

The more money you put down on a home, the lower your mortgage payment will be because you borrow less to buy the house.

In addition, the more money you put down, the less you’ll pay in mortgage insurance because you have more invested in the home. So if you can meet the 20% down payment requirement, you’ll have the lowest mortgage payment because you won’t pay mortgage insurance (in most cases).

Homebuyer Assistance Programs

If you don’t have 20% to put down, or enough to qualify for a mortgage, there are a couple of plans that may help.

Homebuyer’s Plan (HBP)

The Homebuyer’s Plan allows up to a $35,000 withdrawal from your Registered Retirement Savings Plan. In addition, you won’t pay taxes on the amount you withdraw as long as you repay the amount within 15 years.

Before withdrawing from your RRSP, make sure it won’t affect your long-term retirement plans, especially if you’re nearing retirement.

First-Time Homebuyer Incentive

If you’re a first-time homebuyer, you may be eligible for a shared equity mortgage with the Canada Government.

This financing is interest-free and has a 25-year repayment period. However, you can prepay it at any time and must repay if you sell the house before paying the loan in full.