Online Mortgage Calculators, Can You Trust Them?

Online Mortgage Calculators, Can You Trust Them?

You’d think an online calculator is a pretty straight forward device, one that you should be able to place your full confidence in, and for the most part they are. Calculators calculate numbers, the numbers are reliable, but how you interpret those numbers… not so much, especially if the goal is mortgage qualification.

If you rely on the numbers from a “What can I afford” or “Mortgage Qualification” calculator without talking to a mortgage professional, you are going to be misinformed. Don’t be fooled, while an online mortgage calculator can help you calculate mortgage payments, or help you assess how additional payments would impact your amortization, they will never be able to give you an exact picture of what you can actually afford and how a lender will consider your mortgage application. 

While mortgage calculators are objective, mortgage lending isn’t. It’s 100% subjective. A lender will consider your financial situation, employment, credit history, assets, liabilities, the property you are looking to purchase, and then compare that with whatever risk profile they currently have the appetite to lend to. Simply put, they don’t just look at the numbers.

An online calculator is a great tool to help you to run different financial scenarios and to help you assess your comfort level with different payment schedules and mortgage amounts, but please don’t rely on an online calculator for mortgage qualification purposes, you will be disappointed.

When the time is right, the very first step in the mortgage qualification process is a preapproval. A preapproval will take a look at all the variables on your application, assess your financial situation, and provide you with a framework to buy a property, based on your unique circumstance. Securing a preapproval comes at no cost to you and you aren’t obligated to buy. It will simply allow you the freedom to move ahead with confidence, knowing exactly where you stand. Something a calculator is unable to do. 

If you would like to talk more about your financial situation, please contact us anytime! 

 

The State of Mortgage Consumers

The State of Mortgage Consumers

Mortgage consumer debt reached a record level in the second quarter of 2017, yet mortgage holders have proven capable of managing their increasing monthly obligations.

That’s according to CMHC’s recently released Mortgage and Consumer Credit Trends report, which said Canadian households’ credit market debt reached a record $1.70 for every dollar of disposable income. Mortgage debt was one of the main drivers, but CMHC notes that credit card and auto loan debt have been accelerating as well.

At the same time, the household saving rate fell to a nine-year low, leaving many Canadians with a “limited financial cushion” to manage their debts, the report noted.

“Despite rising monthly debt obligations in the second quarter of 2017, mortgage holders continued to manage their overall debt fairly,” said Maxim Armstrong, Manager, Housing Indicators and Analytics at CMHC. “Other credit consumers recorded a slight rise in delinquency. On the whole, signs of vulnerabilities for the Canadian housing market and financial system remained low.”

The time period covered by this report was shortly after the implementation of the Department of Finance’s first round of stress-testing measures aimed at insured mortgages. That may have contributed to new loan originations in the second quarter being down 7.3% from a year earlier, and a decline in the average mortgage debt per consumer with a new mortgage.

Here are some of the other key findings:

Mortgage Market

  • Mortgage balances of over $400,000 rose and comprised about one-third of outstanding mortgage debt.
  • The highest concentration of outstanding mortgage debt was in balances ranging from $200,000 and $300,000.
  • The average new mortgage loan amount was 1.4 times higher than the average value of existing mortgage loans.
  • Compared to a year earlier, the average value of scheduled mortgage payments rose by 2.4% for existing mortgages and by 5% for new mortgages

Signs of Credit Vulnerabilities

  • Unsurprisingly, consumers without a mortgage were more susceptible to bankruptcy compared to mortgage holders, and the gap between the two types of consumers widened.
  • The share of mortgage holders with a high likelihood of bankruptcy fell to 5.6%, down 61 bps from a year earlier.
  • Average monthly obligations increased in all major credit products vs. a year earlier. The average non-mortgage obligations for both mortgage holders and consumers without a mortgage rose to their highest level since 2013, to $386 and $249, respectively.
  • The share of mortgages that had payments in arrears of 90 days or more fell to a five-year low, signalling a more liquid market where mortgage holders facing difficulties could easily sell their property before reaching serious delinquency, the report noted.

Credit Scores

  • Consumers with a very good or excellent credit score maintained the largest share of mortgage loans (83.3%), suggesting a low probability of loan defaults.
  • The number and value of mortgage loans outstanding by consumers with a poor credit score fell to its lowest level since 2012.
  • The average credit score continued to improve for mortgage holders with both an existing mortgage and a new mortgage.
  • Those without a mortgage had their lowest average credit score since 2014.

Demographics

  • The majority of mortgage holders are aged 34–54 and account for roughly 60% of the outstanding mortgage balance.
  • Those over 65 represent 10% of the market with 7% of the outstanding balance, and those under 35 represent 17% of the market with nearly 20% of the outstanding mortgage balance.
  • Mortgage holders aged 35–44 made the highest monthly mortgage payments, averaging $1,323.

 

This article was written by Steve Huebl and originally appeared on the Canadian Mortgage Trends on April 25th 2018, Canadian Mortgage Trends is a publication of Mortgage Professionals Canada. 

Bank of Canada Rate Announcement April 18th, 2018

Bank of Canada Rate Announcement April 18th, 2018

The Bank of Canada today maintained its target for the overnight rate at 1 ¼ per cent. The Bank Rate is correspondingly 1 ½ per cent and the deposit rate is 1 per cent.

Inflation in Canada is close to 2 per cent as temporary factors that have been weighing on inflation have largely dissipated, as expected. Consistent with an economy operating with little slack, core measures of inflation have continued to edge up and are all now close to 2 per cent. The transitory impact of higher gasoline prices and recent minimum wage increases will likely cause inflation in 2018 to be modestly higher than the Bank expected in its January Monetary Policy Report (MPR)returning to the 2 per cent target for the rest of the projection horizon.

The global economy is on a modestly stronger track than forecast in January, with upward revisions to growth and potential output in a number of major advanced economies. The outlook for the U.S. economy has been further boosted by new government spending plans. However, escalating geopolitical and trade conflicts risk undermining the global expansion.

In Canada, GDP growth in the first quarter was weaker than the Bank had expected, but should rebound in the second quarter, resulting in 2 per cent average growth in the first half of 2018. The economy is projected to operate slightly above its potential over the next three years, with real GDP growth of about 2 per cent in both 2018 and 2019, and 1.8 per cent in 2020. This stronger profile for GDP incorporates new provincial and federal fiscal measures announced since January. It also reflects upward revisions to estimates of potential output growth, which suggest the Canadian economy has made some progress in building capacity.

Slower economic growth in the first quarter primarily reflects weakness in two areas. Housing markets responded to new mortgage guidelines and other policy measures by pulling forward transactions to late 2017. Exports also faltered, partly owing to transportation bottlenecks. Some of the weakness in housing and exports is expected to be unwound as 2018 progresses.

The Bank anticipates that Canadian exports will strengthen as foreign demand increases, but not sufficiently to recover the ground lost during recent quarters. Export growth is being increasingly limited by capacity constraints in some sectors. Continued gains in business investment should build additional capacity in those sectors and in the economy more generally. However, both exports and investment are being held back by ongoing competitiveness challenges and uncertainty about trade policies.

Growth in consumption remains robust, supported by strong labour income growth. Wages have continued to pick up as expected, even after factoring out recent minimum wage increases in Ontario and Alberta. The Bank will continue to assess labour market data for signs of remaining slack.

Some progress has been made on the key issues being watched closely by Governing Council, particularly the dynamics of inflation and wage growth. This progress reinforces Governing Council’s view that higher interest rates will be warranted over time, although some monetary policy accommodation will still be needed to keep inflation on target. The Bank will also continue to monitor the economy’s sensitivity to interest rate movements and the evolution of economic capacity. In this context, Governing Council will remain cautious with respect to future policy adjustments, guided by incoming data.

This was the third announcement in 2018, here are the announcements dates set out for the remainder of 2018.

  • May 30th 2018
  • July 11th 2018*
  • September 5th 2018
  • October 24th 2018*
  • December 5th 2018

*Monetary Policy Report published

New Construction Assignment

New Construction Assignment

One of the benefits of working with an independent mortgage professional is having lots of great financing options! Rather than dealing with a single lender who has one set of products, brokers work with multiple lenders who offer a wide selection of mortgage financing options. This comes in handy when your situation isn’t “normal” or you don’t quite fit the profile of a standard buyer. Purchasing a new construction home through an assignment contract would be a great example of this. 

Purchasing a new construction home through an assignment contract can be tricky as not every lender wants the added perceived risk of dealing with this type of transaction. Most of these lenders won’t come out and say it, rather they will simply add a significant list of qualifying conditions to make the process harder. The good news is, there are lenders available exclusively through the broker channel that have favourable policies for assignment purchases.

Here are some of the highlights:

  • In order to qualify, all standard purchase qualifications apply (income, credit, and downpayment)
  • Assignments can be at original purchase price, or current market value
  • Minimum 620 beacon score with no previous bankruptcies or consumer proposals
  • The full downpayment must come from the purchaser and not include any seller incentives

As far as documentation goes, the lender is going to want to see the original purchase agreement signed by all parties, the MLS listing, the assignment agreement signed by the builder, original purchaser, and the new buyer. The lender will also want to see the side agreement between the original purchaser and the new buyer that includes the amended purchase price, and the lender will want to substantiate the value through a full appraisal. 

Now, as every situation is different, this list of conditions is in no way exhaustive, but simply meant to show that assigning a new construction purchase contract is in fact doable while highlighting some of the terms necessary to secure financing. 

If you are looking to purchase new construction through an assignment contract, or if you want to discuss purchasing a home through traditional means, please contact us anytime! We have access to the very best products on the market that won’t limit your financing options! 

Mortgages – So Much More Than Just the Lowest Rate!

Mortgages – So Much More Than Just the Lowest Rate!

There aren’t too many Canadians who are able to save up enough money to pay cash for their home. This is why we have mortgages. A mortgage is a loan made to assist a borrower to purchase a property. The property is held as collateral and interest is charged on the loan. Typically a mortgage will be paid back over 25 years (this is called the amortization), and the amount of interest charged is renegotiated every 1-10 years (this is called the term). Over the long run, borrowing money isn’t cheap, despite interest rates being at an all time low!

So, if you need to borrow money in order to buy a property, your number one goal should be to keep your cost of borrowing as low as possible. Bolded and italicized for emphasis. Now, contrary to what years of marketing messaging would have us believe, this doesn’t always mean choosing the mortgage with the lowest rate. Although choosing a mortgage with a low rate is a part of lowering your borrowing costs, it’s not the only factor.

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When looking to lower the overall cost of borrowing throughout the life of your mortgage, there are many factors that should be considered. Here are some of them. 

  • How long do you anticipate living in the property? This could help you decide an appropriate term. 
  • Do you plan on moving for work, do you need flexibility down the road with your mortgage?
  • What does the prepayment penalty look like if you have to break your term? This is probably the biggest factor in lowering your overall cost of borrowing.
  • How is the lender’s interest rate differential calculated, what figures do they use?
  • What are the prepayment privileges?
  • Can you make lump sum payments, or increase your monthly payments, and how is the interest recalculated when you do pay extra?
  • Is the mortgage a collateral charge? This could mean you won’t be able to switch the mortgage upon renewal to another lender without incurring new legal costs. 
  • Should you consider a fixed rate, variable rate, HELOC, or a reverse mortgage? 
  • What is the size of your downpayment? Coming up with more money down might lower (or eliminate) mortgage insurance premiums.

What you will often find is that mortgages with the rock bottom, lowest rates, can have potential hidden costs built in to the mortgage terms that will cost you a lot of money down the road. The difference between 2.59% and 2.69% could save you a few bucks a month, while taking a longer fixed rate term and having to break the mortgage halfway through the term could potentially cost you thousands (tens of thousands). And this is really bad for your overall cost of borrowing. 

As a mortgage consumer who will potentially buy a handful of houses in their life, your best bet is to work with an independent mortgage professional who has your best interest in mind and knows exactly how to keep your cost of borrowing as low as possible. A mortgage is so much more than just a low rate, it’s really about the fine print.

If you would like to talk more about your financial situation or figure out a plan so you can plan ahead for your mortgage, please contact us anytime! 

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