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Ask the Expert: Should I prepare myself for higher interest rates?

Rates may be at historic lows however, with big banks raising fixed rates and reducing variable-rate discounts, you need to be ready to pay more. As seen in REW.ca

Q: I’m easily able to make payments on my mortgage at the moment as my rate is so low. I saw that the Bank of Canada didn’t cut its overnight rate last week, and that some banks are actually raising interest rates. Should I be prepared for higher interest rates, and if so, what is your advice?

A: Interest rates are still at historical lows, and we keep hearing for years that interest rates are going to rise. If anything, interest rates have dropped.

The Bank of Canada was considering dropping the overnight rate. However, on Wednesday’s announcement they have decided to maintain the overnight rate at 0.5 per cent. Since the Canadian dollar has already fallen sharply and a rate cut could have imprudently triggered a currency rout. There is a great deal of concern about household debt, and another rate cut would add to the risk by encouraging excessive borrowing.

So does this mean that we should stop thinking about rising interest rates? Not at all. It is important to be proactive and prepare yourself for higher interest rates.

The following are some tips that can help you.

  1. income-reportPay down your mortgage faster

To ensure that you don’t over-leverage yourself when interest rates do eventually increase, start by making larger or more frequent payments and make lump-sum prepayments when possible towards your mortgage. This will help you by lowering your principal so you will pay interest on a smaller amount in the future.

  • Consider making a lump-sum payment. Most lenders allow you to pay up to 10 to 20 per cent of your mortgage without a penalty annually. The prepayment amount is applied directly to the principal balance, which will help you save money.
  • Changing your payment frequency is a great way to pay off your mortgage faster. While most people might not have extra money to put a lump-sum payment every year, you can save money by paying the same amount per month and just simply splitting your mortgage payments throughout the month to semi-annual, bi-weekly or weekly payments.

Below is a chart showing how paying more often pays off.

table pay off mortgage faster

(Calculations based on a mortgage amount of $450,142 with a five-year fixed rate of 2.64% and a 25-year amortization.)
  1. Pay down other debt

pay-off-credit-cardsIf you are only making minimum payments on your credit card, it would be a good idea to start paying more. If you are unable to come up with the money to increase your payments, start a budget or see where you can tighten your existing one, cut spending and start paying down your credit card debt with the money you save.

If you are living beyond your means, it won’t get any easier later on. It is better to become proactive, instead of getting in a tighter situation later, especially when interest rates start rising. If you are looking at buying a home, calculate what the payments will be with a higher interest rate and see if you would be comfortable making those payments in the long run. If not, purchase a property of lesser value.

  1. Refinance

If your mortgage is coming up for renewal in the next two to three years, it is worth checking out if you are eligible to refinance now and take advantage of the lower interest rates. Also, if you have equity in your home, this is a great opportunity to pay off some debts and increase your monthly cash flow. Even if you have to pay a penalty for refinancing prior to the end of the term, it could help you save money in the long run. Talk to your mortgage expert to explore the options and see if it makes sense.

  1. Have a contingency fund

imagesQ8W8929HIf you are concerned about higher interest rates when your mortgage comes up for renewal, start working on it now. It’s a good idea to start a contingency fund that can be used to cover the increase in mortgage payments or use that fund to make a lump sum payment on your mortgage. If you are on a variable mortgage, figure out what would be your mortgage payments if you had a fixed rate and put that extra money aside. By making small changes in your daily spending you can save more money in the long run.

  1. Seek professional advice

Having a close relationship and working with your mortgage expert 83834073frequently can help offset some of the stress and confusion. Your mortgage expert can help educate you in areas you might not be familiar with and can help you be prepared for when interest rates do start increasing.

If you are worried if you will be able to afford your home when interest rates increase or if you want to find out how you can save money, give me a call at 778.893.0525 to speak about your options.

 

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Frequently asked questions when buying a home

As seen in the Metro Vancouver New Home Guide.

What do lenders look at when qualifying me for a mortgage?

Most lenders look at the following factors when determining whether you qualify for a mortgage:

  • Income
  • Debts
  • Employment History
  • Credit history
  • Value and marketability of the property you wish to purchase.

How much can I qualify for when buying a home?

Conceptual image - percent growth

Conceptual image – percent growth

In order to determine the amount for which you will qualify, there are two calculations that are used. The first is your Gross Debt Service (GDS) ratio. GDS looks at your proposed new housing costs (mortgage payments, taxes, heating costs and strata/condo fees, if applicable). Generally speaking, this amount should not be more than 35% – 39% of your gross monthly income. For example, if your gross monthly income is $4,400, you should not be spending more than $1,716 in monthly housing expenses. Second, your Total Debt Service (TDS) ratio is calculated. The TDS ratio measures your total debt obligations (including housing costs, loans, car payments and credit card bills). Generally speaking, your TDS ratio should be no more than 42% – 44% of your gross monthly income. The GDS and TDS will depend on your credit. Keep in mind that these numbers are prescribed maximums and that you should strive for lower ratios for a more affordable lifestyle. Before falling in love with a potential new home, you may want to get pre-qualified by a Mortgage Expert. This will help you stay within your price range and spend your time looking at homes you can reasonably afford.

How much money do I need for a down payment?

The minimum down payment required is 5% of the purchase price of the home when you are an employee. When you are self-employed it will depend if you are qualifying based on what you are declaring on your income tax then it will be 5% and at least 10% down payment when you are self-employed and qualifying with an “estimated” gross income instead of the incoming showing on your income tax return. In order to avoid paying mortgage default insurance, you need to have at least a 20% down payment

If I86809937 don’t have the full down payment amount, what can I do?

There are programs available that enable you to use other forms of down payment, such as from your RRSPs, or a gift from a parent, child or siblings. Also, you can borrow the down payment from a line of credit, loan or credit cards. However, in order to qualify you still have to be within the TDS ratios as mentioned above.

What else do I have to pay to purchase a home?

You will have to pay for the closing costs. The lenders require you to have in your bank account at least 1.5% of the purchase price (in addition to the down payment) strictly to cover closing costs. You must have this amount but it doesn’t mean you are going to spend it. The following are some of the closing costs:

  • Legal costs
  • Property tax adjustments
  • Strata/ condo fee adjustments (if applicable)
  • Cost to register property in land title office, etc.

What would be my mortgage payments?

Monthly mortgage payments vary based on several factors, including: the size of your mortgage; whether you are paying mortgage default insurance; your mortgage amortization; your interest rate; and your frequency of making mortgage payments.

What is better a fixed or variable rate mortgage?Discount

The answer to this question depends on your personal risk tolerance. For instance, you are a first-time homebuyer and/or you have a set budget that you can comfortably spend on your mortgage, it’s smart to lock into a fixed mortgage with predictable payments over a specific period of time. If your financial situation can handle the fluctuations of a variable rate mortgage, this may save you some money over the long run.

What is the best interest rate that I can get?

Your credit score plays a big part in the interest rate for which you will qualify,as the riskier you appear as a borrower, the higher your rate will be. Rate is definitely not the most important aspect of a mortgage, however, as many rock-bottom rates often come from no frills mortgage products. In other words, even if you qualify for the lowest rate, you often have to give up other things such as pre-payments and portability privileges when opting for the lowest-rate product. Remember not to focus on the lowest interest rate but on finding the best mortgage with the most favorable terms and rate. While you might end up having a lower rate, it can end up costing you thousands of dollars of unnecessary costs in the long run.

What credit score do I need to qualify?

Generally speaking, you are a prime candidate for a mortgage if your credit score is 680 and above. The higher you score the better, as you will have more options and advantages. These days almost anyone can obtain a mortgage, but the key for those with lower credit scores their options will be more limited and interest rates could be higher. But don’t worry consult a Mortgage Expert to see how they can help you in obtaining a mortgage.

What happens if my credit score isn’t great?

There are several things you can do to boost your credit fairly quickly. Following are five steps you can use to help attain a speedy credit score boost:

  1. Pay down credit cards. The number one way to increase your credit score is to pay down your credit cards so they are below 50% of your limits.
  2. Limit the use of credit cards. Racking up a large amount and then paying it off in monthly installments can hurt your credit score. If there is a balance at the end of the month, this affects your score.
  3. Check credit limits. If your creditor is slower at reporting monthly transactions, this can have a significant impact on how other lenders view your application.
  4. Keep old cards. Older credit is better credit. If you stop using older credit cards, the issuers may stop updating your accounts. Use these cards periodically and then pay them off.
  5. Don’t let mistakes build up. Always dispute any mistakes or situations that may harm your score. If, for instance, a cell phone bill is incorrect and the company will not amend it, you can dispute this by making the credit bureau aware of the situation.

To get more details about these and other questions you might have, give us a call and we will be able to analyze your personal situation and provide you with more information so you can make an informed decision on buying your home.


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What Happens When Financing Falls Through?

If your mortgage approval is rescinded at the last minute, your purchase could be in jeopardy. Here’s how to fix it. As seen in REW.ca

Q: I’m buying an old house, and the offer subject to financing. But what happens if the bank doesn’t approve the house and my financing falls through at the last minute?

A: If your financing falls through at the last minute, we would advise to get an extension on your subject removal date and not remove subjects until your financing is in place.

When you put an offer to purchase a home, you are saying that you will be buying the home provided all the conditions are fulfilled prior to you giving a deposit. Those conditions are commonly refer to as “subject,” such as subject to inspection, review of the strata minutes, financing, etc. During this time you will do your due diligence along with your real estate agent and mortgage expert via the lender. Prior to putting an offer, you would have been pre-approved or pre-qualified. While the lender might have approved you, they have still not approved the property you are purchasing.

Once you have an accepted offer the lender will issue a commitment letter agreeing to approve your mortgage provided you can fulfill the financing conditions. Some of these conditions include income confirmation, source of down payment, appraisal (if required), and approval of property such as property disclosure statement, strata minutes, Form B, etc. It is critical that the lender reviews and approves all of these documents before removing subjects. There has been cases where the lender has no issues with the borrowers but has issues with the property and therefore will not approve the financing.

When you work with a bank you only have one option, but when you work with a mortgage expert because we have access to multiple lenders if one lender doesn’t approve the mortgage, then we are able to go to another lender. This will save time and stress to the client. We have seen many situation in which the lender is not comfortable with the property so, in order to get financing with other lenders, an extension of one or two days is required to ensure all financing conditions are fulfilled and the client feels comfortable in removing subjects.


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How Much Does Mortgage Rate Really Matter?

A great discounted rate on your mortgage is worth nothing if it’s going to cost you thousands in penalties down the line. As seen in REW.ca.

More often than not, borrowers are fixated on their mortgage rate because it’s the one aspect of their home financing they know to ask about. But it’s important to look beyond the mere rates and look into the bigger picture surrounding what is significant when it comes to your specific mortgage needs. It is important to compare apples with apples.

If we dollarize the difference between 2.99 per cent and 3.04 per cent, for instance, it works out to an additional $2.66 in your monthly payment per $100,000 of your mortgage. Over the course of a five-year term, this culminates into just $159.60 per $100,000.

While “no-frills” mortgage products typically offer a lower – or more discounted – interest rate (like the 2.99 per cent used in the example above), when compared with many other available products, the lower rate is really their only perk.

The biggest problem with looking at rate alone is that you may end up paying thousands of dollars in early payout penalties if you opt for a five-year fixed-rate mortgage, for instance, and then decide to move before the five years is up.

No-frills mortgage products won’t let you take your mortgage with you if you purchase another property before your mortgage term is up – for example, portability is not an option with this product. Portability is an important option that could save you money over the long term if the home of your dreams is within your reach before your mortgage term is up and rates have risen, which they have a tendency to do over a five-year period.

This type of product is only plausible for those who have minimal plans to take advantage of benefits that will help pay off your mortgage faster – such as pre-payment privileges including lump-sum payments and increase your mortgage payments between 15 and 20 per cent without penalties.

imagesQ8W8929HOther things to consider is whether you are getting into a collateral mortgage or a conventional mortgage. Unfortunately, many people don’t realize they have a collateral mortgage until it comes time to renew and they don’t have the flexibility they need.

It’s understandable why these products may seem appealing. After all, not everyone feels they have the extra cash to put down a huge lump-sum payment. And who needs a portable mortgage if you’re not planning on moving any time soon?

But it’s important to remember that a lot can change over the course of five years – or whatever term you choose for your mortgage. You could get transferred, find a bigger house, have children, change careers, separate from your spouse, etc. Five years is a long time to be anchored to something.

Many people won’t sign a cell phone contract for longer than two years that they can’t get out of, so why would they then sign a mortgage for five years that they can’t get out of?

The thing is, you can still obtain great mortgage savings without giving up the perks of traditional mortgages. For starters, many lenders are willing to offer significant discounts if you opt for a 30-day “quick close.”

And there are many other ways to save money. For instance, by switching to weekly or bi-weekly mortgage payments, or by obtaining a variable-rate mortgage but increasing your payments to match those of the going five-year fixed rate, you will be ahead of the typical discount of a no-frills product before you know it and you won’t have to give up on options.

Banks don’t give anything away for free – they are there to make money. That’s why it is essential to discuss the full details surrounding the small print behind the low rates. It’s also important to take into account your longer-term goals and ensure your mortgage meets your unique needs now and into the future. As mortgage experts will help you find that balance by finding the best mortgage for you.


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Do I Really Need Mortgage Pre-Approval Before House-Hunting? – conclusion

Mortgage pre-approvals are often recommended for would-be homebuyers – but there are exceptions to every rule. As seen in Rew.ca

Q: I’m beginning my search for a new home. Is it really necessary to get pre-approved for a mortgage first, especially with interest rates going down?

A: Last month we explained the difference between getting pre-qualified and pre-approved for a mortgage. We often recommend that buyers get pre-approved for a mortgage (not just pre-qualified) before they start house-hunting, to put them in the best possible position when that perfect home comes up. But of course, there are exceptions to every rule.

preapproved1Whether you get pre-approved or not, it’s very important to figure out how much you can afford to pay before you start looking. Most home buyers have a rough idea of how much they would feel comfortable paying every month on their mortgage. However, there is no quick and dirty way to translate that monthly payment into a specific maximum mortgage amount. Other factors have to be taken into consideration such as down payment amount, closing costs, mortgage default insurance, property taxes, strata fees (if applicable) and heating costs. And you might be qualified to borrow more or less than you think, depending on your income, debts and credit history.

As discussed last time, obtaining pre-approval on a mortgage can offer advantages, particularly in terms of locking in a great rate for up to 120 days. However, it isn’t always advantageous, depending on the situation.

For example, we recently had a client who had a considerable sum to put as a down payment on a new home. With the price range he was looking at, the loan to value (LTV) ratio would have been close to 50 per cent. As previously mentioned, the most important thing is what you are comfortable paying on a monthly basis, not what you qualify for. This client wanted to keep his payments only a little bit above what he had been paying in rent. He had a great job and income, so he would have been able to qualify for a lot more. He had no credit card debt, no loans or lines of credit but had an established credit history.

Therefore, in this case, we didn’t get him pre-approved, because we knew there would be no problem getting him a great mortgage when the right time came. But we did do an in-depth analysis of his financial situation so he would know what his mortgage payment would be on the price range he was looking at, and also the maximum amount he would qualify for so he would have a wider price range to work with if necessary.

In addition, as interest rates were going down, there was no need to lock in a rate from a lender. However, if we had noticed that interest rates would be moving up again during his house hunting, we would have obtained a pre-approval. As mortgage experts, we do a lot of work behind the scenes to ensure we have the best options for our clients and provide them with the best mortgage available.

It is also important to remember that getting pre-approved doesn’t mean that your mortgage has been fully approved. The final approval is given once you have an accepted offer, your application has been submitted to the lender, and the lender has received and approved all the outstanding financing conditions outlined in a commitment letter.

Purchasing a home can be an emotional and time-consuming process as you want to make sure you find the right home for your needs. Knowing what you qualify for is critical when you start working with your real estate agent, as it shows you are a well-qualified buyer who is serious about purchasing a home. In fact, some agents won’t even show properties to buyers who haven’t talked to a mortgage expert or bank.

Talk to a mortgage expert to find out how much you qualify for and get you started on the road to homeownership.


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Difference between pre-qualified and pre-approved? – part 1

Determining how much house you can afford involves plenty of number crunching. Jorge and Alisa Aragon explain two stages on the road to mortgage approval – As seen in REW.ca 

Q: What is the difference between pre-qualification and pre-approval for a mortgage?

A: Pre-qualification is a relatively simple process where the mortgage broker or bank estimates both your borrowing power and the maximum amount of mortgage you can carry. This is done by providing information about your financial situation, such as your income, assets and debts. This easy and quick step doesn’t take into account your creditworthiness or involve a thorough analysis of your financial situation. It’s simply a place to start to estimate the price range of homes that you could qualify for. As mortgage experts, we do this during our initial meeting to give you a rough idea how much you will be able to qualify for. Pre-approval is a more in-depth analysis of your financial situation, as you will complete an application and provide consent for the lender to obtain your credit report. At this point, the lender has more detailed information on your income, assets and liabilities, and your information has been checked and verified. Your credit report has been pulled to learn about your credit score, history and credit worthiness. Based on this information, the lender will issue a pre-approval letter letting you know what you are likely to be approved for a mortgage and the amount you may be approved for. The pre-approvals can also guarantee current mortgage rates for up to 120 days. It is important to acknowledge that you are not guaranteed to get a mortgage if you are pre-qualified or pre-approved. Many things can happen during the process, and some lenders may give a pre-approval letter without actually verifying your information. Talk to a mortgage expert to get the pre-qualification/pre-approval process started and get you on the road to homeownership.


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It does matter how your mortgage gets registered – collateral or conventional

Many people are unaware that there are two basic types of mortgages: conventional and collateral. With a conventional mortgage, the amount you’re borrowing (property value minus down payment) is the amount that’s registered. But with a collateral mortgage, the amount that’s registered is 100-125% of the property value, and the lender has both a promissory note AND a lien registered against the property for the total registered amount. Most credit unions such as Vancity register their mortgages collateral while TD Canada Trust and ING Direct switched to collateral mortgages in 2010.

The advantage of a collateral mortgage is easy access to credit. Since the mortgage is already registered for a larger amount than you need to buy the house, you can access additional funds in the future without any extra steps or legal fees.

But there are also several downsides of collateral mortgages:

– Free transfers or switches to a new lender when your term is up aren’t usually available. Most other lenders don’t like the fine print and restrictions of collateral mortgages and won’t accept them unless they’re a refinance, which costs you legal and possible appraisal fees.

– You could end up paying a higher interest rate at renewal. If your collateral mortgage makes it difficult to switch lenders at renewal, you don’t have the ability to shop around for the best rate. That could end up costing you up to 1% more on your mortgage rate.

Obviously, it’s very important for you to know up front whether you’re getting into a collateral mortgage or a conventional mortgage. Unfortunately, many people don’t realize they have a collateral mortgage until it comes time to renew and they don’t have the flexibility they need. We would be more than happy to help make sure this doesn’t happen to you!