Monday, 10 September 2018

MORTGAGE COSTS ARE GOING UP


The mortgage landscape in Canada is changing so fast that many current mortgage borrowers and first time home buyers may not realize how much it will affect their bottom line.  According to a new CIBC Capital markets reports, 47 per cent of all existing mortgages in Canada are up for renewal in the next year.  This number is significantly higher because CIBC says borrowers in recent years have taken on mortgages with two- or three-year terms, because at the time they were cheaper.  These shorter mortgages have created a refinancing glut, as they are up for renewal alongside the typical five-year mortgages.
New mortgage applicants will be affected in three major ways

Rising interest ratesBoth fixed and variable rates are higher. When it comes to fixed rates, all of Canada’s big banks have raised their five-year fixed mortgage rate. The posted rate for TD, CIBC, BMO, Scotia and RBC is now more than 5 per cent. The move is a reaction to rising bond yields. Bond yields are higher because bond prices are dropping.  This signals higher borrowing costs for corporations and inevitably means it’s costing the bank more to borrow money to lend to mortgage applicants.  When the commercial banks pay more to borrow, so do we.  Variable rates are also inching higher. They are determined by the Bank of Canada’s overnight lending rate. Last announcement they kept rates steady at 1.25 per cent. But the Central Bank is hinting that rates are headed higher soon.

Stricter mortgage rulesStarting in January anyone applying for a new mortgage is subject to a stricter set of rules including a stress test, to show you can make mortgage payments if interest rates rise. The new guidelines are published in the Residential Mortgage Underwriting Practices and Procedures document by the Office of the Superintendent of Financial Institutions Canada (OSFI.)  All borrowers have to qualify at the greater of the two. Either the five-year benchmark rate published by the Bank of Canada or the contractual mortgage rate plus two percentage points.  Currently the Bank of Canada Conventional 5- year mortgage at 5.34 per cent.  This stress test includes anyone wanting to change banks after their term is up.  Those with high ratio mortgages seeking renewal will be unable to shop around because the new rules are making it harder for them to qualify with a new application.  Many will be stuck with their current bank and the rate they are offering.

A new tool to check creditThere is a new way a lender can check your creditworthiness. It's called a Bankruptcy Navigator Index. It predicts how likely it is you could go bankrupt in the next 24 months.  For example, they will look at how much access to credit you already have, your salary, and your outstanding loan obligations. From there they can make a determination of how much of risk you are for bankruptcy, even if you have good credit.  This is on top of the already well understood, credit score, which is somewhere from 300-900.  According to the credit rating agency TransUnion, 650 is the magic number.  A score above 650 will likely qualify you for a standard loan while a score under 650 will likely bring difficulty in receiving new credit. Even though unemployment is at a multiyear low Canadians salaries have been stagnant for almost a decade. Life has become more expensive, and wages have not reflected that.
My best advice is to calculate your costs now. Using a simple a mortgage calculator you can estimate what your new mortgage payments will look like. If you can make lump-sum payments to bring you overall loan down, this will help you when you go to renew as your total loan will be lower. If you’re in a really tight situation you can also extend your mortgage back to 25 years amortization to make it more affordable. But better advice is to try to cut back now, and in the meantime do not take on any new loan obligations.

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