Canadian Bonds Resilience Amid Rising Mortgage Rates: What it Means for Homebuyers
Despite a challenging economic landscape characterized by high interest rates and continued inflationary pressures, Canada's covered bonds have demonstrated robustness that bucks the current trend. In a recent report, Fitch, the renowned credit ratings agency, maintained Canada's AA+ Long-Term Foreign Currency Issuer Default Rating (IDR), lending a reassuring outlook amidst rising mortgage rates.
These persistently high ratings were achieved in spite of a tumultuous 2022, marked by falling home prices, significant inflation, and increased interest rates. Key to this resilience is the structure of the B-20 guidelines governing the loans that form the covered bond pool of assets. A crucial component of these regulations is the mortgage stress test, which mandates that potential homebuyers qualify for an interest rate two percentage points higher than their contractual rate.
But while this resilience bodes well for the market at large, increasing fixed mortgage rates are stirring concerns for a variety of homebuyers. Let's delve into what these developments could mean for new or first-time home buyers, families looking to upsize, and retirees or seniors considering downsizing.
First-time Home Buyers
New entrants into the housing market could feel the pinch of rising fixed mortgage rates, as lenders continue to adjust their rates in line with the surging Government of Canada bond yields. Increases in the rates for 1- and 2-year terms to up to 6.25% and 6.40% respectively have been observed, pushing the financial boundaries for first-time buyers.
Any potential buyers should remain vigilant, considering both their current financial state and potential future rate hikes. On the positive side, first-time buyers could benefit from the stability of bond ratings, indicating a certain degree of resilience in the housing market.
Upsizing Families
For families looking to upsize, higher interest rates may mean larger mortgage payments. While families might have more financial flexibility than first-time buyers, an additional rate hike could strain their budget.
Consequently, families considering upsizing might need to reassess their plans and perhaps delay their move until the market stabilizes. On the flip side, falling house prices might present an opportunity for those with secure financial footing to upgrade their living situation at a potentially lower cost.
Retirees and Seniors
Rising mortgage rates might have a different impact on retirees or seniors, particularly those looking to downsize. If they have an existing mortgage, they could face higher payments with adjustable rates.
Now, those who own their homes outright may find this an advantageous time to sell, particularly in areas where demand remains high despite the falling home prices. They may then opt to rent or move to areas with lower housing costs, effectively capitalizing on the current market conditions.
Given the economic landscape, the Bank of Canada’s recent increase of the overnight rate to 4.75% further compounds these concerns. With persistent high inflation, the bank’s decision puts additional pressure on mortgage borrowers. Current market forecasts suggest another quarter-point rate hike could be around the corner, meaning all categories of buyers need to factor these potential hikes into their planning.
These rising rates have been driven in part by hawkish comments from Federal Reserve Chair Jerome Powell, suggesting more policy tightening is on the horizon. Rate hikes by other global central banks have only amplified concerns about inflation and the economic impact of higher-than-expected policy rates.
The resilience of Canada's covered bonds provides a silver lining to the rising mortgage rates. However, the implications vary greatly for different demographic groups. Whether you're a first-time homebuyer, a family seeking to upsize, or retirees looking to downsize, it's critical to stay informed about the latest market trends. Consider seeking professional financial advice to make decisions that align with your financial goals and the current market landscape.
While the situation might seem daunting, let's put the pieces together and look at the big picture. Despite the falling home prices, the overall economic health of Canada remains positive. This is good news for all segments of buyers, as it reflects a sturdy financial environment that can absorb shocks and rebound from downturns.
Unlocking Your Home's True Potential: The Unbeatable Advantage of a CHIP Reverse Mortgage
In the throes of 2023, we're witnessing a decline in real estate transactions attributed to towering interest rates, marking an opportune moment for us, The Wilson Team, to reassess and refine our financial strategies. Despite temporary pauses in interest-rate hikes by central banks, inflation remains a major concern, compounded by demographic and economic transitions which will undoubtedly have an impact on the lending and real estate spheres.
This shifting landscape calls for an expansion of our services, offering lending solutions that effectively address the evolving needs of our valued clients. At the forefront of these solutions is the CHIP Reverse Mortgage from HomeEquity Bank – a bespoke answer to current financial challenges, particularly for our senior and retired clients.
Retiring With a Plan
In today's aging demographic, the need for accessible cash flow is palpable. Statistics from StatCan reveal that roughly 22% of Canada's working population, aged between 55 and 64, is on the brink of retirement. This group has been grappling with the effects of all-time high inflation rates, a scenario that continues to add pressure even with a slight deceleration. The persistent rise in the cost of food and services exacerbates this burden.
The next few years could present tough choices for Canadians entering their golden years, especially given that the 55+ age group relies heavily on services like healthcare, home care, and leisure. Whether they plan to supplement their pensions, manage unexpected expenses, support their children's first home purchases, or enhance their own homes for comfortable aging in place, seniors will require convenient access to cash flow.
Dealing with Lending Regulation Changes
However, upcoming regulatory changes concerning mortgage lending might complicate this. The traditional cash flow source for homeowners, Home Equity Lines of Credit (HELOCs), could be hit by these changes. The Office of the Superintendent of Financial Institutions (OSFI) has indicated a decrease in the maximum Loan-to-Value (LTV) for combined loan plans from 80% to 65% by the end of 2023. This, coupled with proposed changes to the loan-to-income, debt-to-income restrictions, and interest rate affordability stress tests, could limit borrowing capacity through conventional methods, possibly steering Canadians towards alternative and private lenders.
In this evolving scenario, the CHIP Reverse Mortgage offers an increasingly compelling solution. This program, without any qualifying income criteria, allows Canadians aged 55+ to access tax-free cash up to 55% of their home's value. Without any monthly mortgage payments until they decide to move or sell their homes, retirees gain additional financial flexibility.
Misconceptions About CHIP Reverse Mortgages
Misconceptions about reverse mortgages can deter some people, largely due to a mistaken belief that they're unregulated. However, reverse mortgages in Canada are strictly regulated, with HomeEquity Bank operating as a Schedule 1 Canadian Chartered Bank. Misunderstandings include fears of losing home ownership, owing more than their home's value, and that interest rates and setup costs are exorbitant. These beliefs are far from the truth, with several safeguards in place to protect homeowners' financial security and property rights.
The CHIP Reverse Mortgage from HomeEquity Bank, designed for the current economic climate, can enhance your cash flow by unlocking the equity in your home. This is particularly beneficial for seniors and retirees aiming to secure their financial future. At The Wilson Team, we believe that serving you optimally paves the way for a prosperous financial future, and we're committed to facilitating this process with innovative, long-lasting solutions.
Let's dispel some common misconceptions about reverse mortgages.
Losing Home Ownership
First, the notion that you might lose ownership of your home. The reality is that you continue to hold the title and maintain full control of your home, just like a conventional mortgage. Your only obligations are to live in the home, maintain it well, and manage property taxes and insurance payments.
Owing More Than Your Property Value
Secondly, the concern that you could end up owing more than your home's worth. However, HomeEquity Bank's No Negative Equity Guarantee* ensures that homeowners will never owe more than the fair market value of their property at the time of sale or relocation. This guarantee is an essential safeguard in the current unpredictable economic climate, promising that even if home values fall below the mortgage amount owed, HomeEquity Bank will cover the difference.
*The No Negative Equity Guarantee applies as long as the homeowner maintains the property in good condition, pays property taxes and property insurance, and the property is not in default. The Guarantee excludes administrative expenses and interest that have accumulated after the due date.
Higher Interest Rates
The third misunderstanding is that reverse mortgage interest rates are significantly higher than traditional mortgages. While the rates are a bit higher, the difference is not extreme and has significantly narrowed in the past year. These slightly higher rates balance the fact that clients aren't required to make monthly mortgage payments, thus improving their cash flow.
Long and Costly Process
Finally, there's a belief that arranging a reverse mortgage is a costly process. In reality, like a conventional mortgage, clients need to pay for a property appraisal and independent legal advice. The only additional cost is a one-time closing and administration fee.
The Wilson Team is proud to work with HomeEquity Bank, Canada's leading provider of reverse mortgages, committed to assisting Canadians aged 55+ in enjoying a fulfilling retirement with solutions tailor-made for their needs. With a keen understanding of the market, we can provide robust support to meet your financial needs.
Our dedicated team of Mortgage Specialists manage each file from application to funding. Additionally, we offer comprehensive online tools and resources to keep you well-informed.
To wrap up, our suite of products, including the CHIP Reverse Mortgage can meet your income objectives. Amid this changing economic climate, the CHIP Reverse Mortgage can provide a valuable solution to boost your cash flow by tapping into the equity in your home.
Don't let the fear of the unknown stand in your way. Contact us today to learn more about how we can help secure your financial future with our innovative, long-term solutions.
More Canadians Expected To Default On Their Mortgages
According to a recent Royal Bank of Canada (RBC) report, mortgage delinquencies could rise by more than one-third of current levels over the coming year.
This is largely due to high housing costs, increased interest rates, inflation, and the end of pandemic government support programs.
Although mortgage defaults are currently low, the report noted increases in late payments on other types of products like car loans and credit cards. Mortgage payments may soon follow suit.
Interest Rates
The low rates of 2021 are now a thing of the past. Canadians with variable rate mortgages are already feeling the effects of higher monthly payments.
Those who locked in low fixed rates may experience increased financial pressure when their agreements come up for renewal in the next few years.
High Debt Levels
Canadians are also carrying high levels of debt. According to the report, the debt-to-income ratio of most Canadians is now higher than pre-pandemic levels and is likely to rise.
Canadians now have the highest household debt levels of any country in the G-7. High housing costs have been blamed for this. On average, home prices are now more than double the cost compared to 2011.
Discontinuation Of Pandemic Assistance
The last of the benefits offered by the Canadian government to help people weather the pandemic ended in 2022. These benefits helped many Canadians stay financially stable between during lockdowns and other pandemic restrictions. The RBC report noted net worth actually increased during the pandemic.
With these programs ending, more people could be in financial difficulty this year.
Slowing Economy
The RBC report further predicted a slowing economy in the coming months. How much? The language was cautious, predicting a “modest contraction.” However, the report’s authors believe job losses are likely.
For many Canadians, the loss of a job can mean the difference between keeping up with mortgage payments, and defaulting or selling.
Solutions
Whether you already have a mortgage or are getting into the housing market for the first time, there are things you can do to help ensure financial stability.
It’s important to have a good understanding of your finances. Review them at least monthly so you know where you stand.
It’s also vital to have enough savings to last you at least three to six months without work.
Optional mortgage insurance is another great option that can help protect you and your family from default in the event of job loss, critical illness, or death. Policies usually offer to continue mortgage payments for a specific period, or pay off the mortgage entirely.
Getting a good rate on your mortgage can also make a big difference. While prime lending rates are set by the Bank of Canada, there are differences in the products offered by various institutions. Spending the time to research and compare different offerings can save you thousands of dollars in the long run.
The Takeaway
Although the housing market does seem to be picking up, it’s still best to be cautious when taking on any kind of new debt, even a mortgage.
Make sure you understand the risks and know what you can afford, even if interest rates increase or your financial situation changes.
Working with a mortgage broker can help ensure you get the best rates and terms on your mortgage. Contact us today and we can help you build a secure financial future.
The Ins and Outs of Canada’s Limited Housing Supply
One of the chief issues behind Canada’s high real estate prices is limited housing supply. More and more data show that construction just isn’t keeping up with demand.
But what is causing Canada’s housing crunch? There are many factors ranging from the types of dwellings being built to population growth.
Focus On Apartments And Condos
Although housing development is booming in many cities, there is often more focus on apartment buildings and condominiums. While these are important, especially for first-time buyers, these types of homes don’t always fit the demand.
In an interview for BNN Bloomberg, Bob Dugan, chief economist at the Canadian Mortgage and Housing Corporation (CMHC) noted there is a mismatch between current developments and the needs of many Canadians.
“We have a lot of very small units that aren’t necessarily suitable for families,” he said. “There’s a real lack of say, three-bedroom units being built in urban areas.”
In a recent article for the Fraser Institute, authors Josef Filipowicz, urban and regional policy specialist, and Steve Lafleur, an independent public policy analyst, echoed similar sentiments. They point out that ground-oriented homes (not apartments and condos) sold at the highest volumes during the pandemic. But in the 2010s, this type of development had the fewest completions since the 1960s.
This keeps the demand – and prices – for family homes high.
Land Use Regulations
Land use regulations are necessary to manage city planning and reduce urban sprawl. However, these regulations can significantly slow down or even reduce new housing.
A study by the Fraser Institute found that municipalities with more regulations did in fact grow less. Long project approval times, uncertainty around timelines, and community opposition had the most impact on reducing supply.
Population Growth
According to a report from the Canadian Imperial Bank of Commerce (CIBC), 58% of new Canadian permanent residents in 2022 were new to the country – not already in Canada on student visas, for example. The report authors estimate this increased housing demand by 108%.
The federal government’s new immigration targets could make the situation worse. In November of 2022, the federal government announced it would seek to accept 500,000 new permanent residents annually by 2025. This represents a 75% increase from pre-pandemic levels.
According to Statistics Canada, there were 437,180 new permanent residents in 2022. There were also 607,000 non-permanent residents who entered the country that year. Canada is leading other G-7 countries in population growth.
In order to keep up with housing demand, the CMHC estimates 5.8 million homes will need to be built by 2030.
What Is Being Done
Awareness of the housing supply issue is growing, with many provincial governments and the CMHC committed to solving the problem.
The Ontario government recently proposed an act designed to increase housing supply faster by giving cities more flexibility to expand their boundaries, among other changes. Critics say this could increase urban sprawl and threaten green belt areas.
Housing starts had a record-breaking year in the Ottawa area last year with 11,032 new units, according to a CMHC report. Of these, over 50% were rental units and condominiums. This is good news for renters, investors, and those new to the housing market.
The Takeaway
Financial markets are complicated and real estate is no exception. There are many factors putting pressure on housing supply and demand today.
However, governments and regulators do seem to be taking this issue seriously. The next few years could see a continued growth in supply that may lower demand and improve the market for buyers.
If you’re thinking of buying one of the new builds in the Ottawa area this year, get in touch! We can take a look at your financial picture and help you reach your goals.
Is Qualifying for a Mortgage About to Get Harder?
Canada’s banking regulator says it is considering whether to extend the scope of its mortgage guidelines to include existing mortgages.
OSFI (Office of the Superintendent of Financial Institutions) is a regulatory body in Canada that supervises and regulates financial institutions to ensure their safety and soundness. Recently, OSFI has proposed some changes to the mortgage rules that lenders must follow.
The proposed changes aim to tighten the mortgage underwriting standards to ensure that borrowers can afford their mortgage payments even if interest rates rise, and to address some of the risks associated with the current hot housing market in Canada.
Some of the key changes include:
- A new minimum qualifying rate, which will be the greater of either the contractual mortgage rate plus 2%, or a new "floor" rate of 5.25%. This means that borrowers will need to show that they can afford to make mortgage payments based on a higher interest rate, even if they are getting a lower rate from their lender.
- A tighter debt service ratio limit for uninsured mortgages, which will be reduced from the current limit of 44% to 42%. This means that borrowers will need to have a higher income relative to their debt payments to qualify for a mortgage.
- Stricter requirements for verifying income and assessing the borrower's ability to repay the mortgage.
Overall, these proposed changes are designed to make it harder for some borrowers to qualify for a mortgage, but they are intended to promote stability in the housing market and reduce the risks associated with high levels of household debt.
Is Now the Time to Buy? - April Update, 2023
When is the best time to buy real estate? 5 year ago and we will say this for the next 100 years. There are several reasons why buyers may want to consider purchasing a home in Canada now, even in a balanced market:
- Interest rates have started to decrease on the fixed rates: Interest rates play a significant role in determining the affordability of a mortgage. With interest rates currently dropping in Canada, buyers may be able to secure lower monthly mortgage payments and potentially save money in the long run.
- Market stability: A balanced market means that there is a relatively equal number of buyers and sellers, which can lead to a more stable market with less volatility in prices. This can provide buyers with more confidence in their purchasing decisions.
- Long-term investment: Real estate is typically viewed as a long-term investment, and historic trends show that real estate in Canada has generally increased in value over time. Purchasing a home now may be a wise investment for buyers looking to build equity and potentially benefit from appreciation in the future.
- Lifestyle considerations: For many buyers, purchasing a home is not just about the financial investment, but also about the lifestyle benefits that come with homeownership. Owning a home can provide a sense of security and stability, and allow buyers to customize their living space to suit their needs.
- Higher rates or equity: When houses were selling at record highs last year, there was little room to make an equity position quickly even with lower rates. Mortgage rates will go up and down but when the rates start to get lower, the market picks back up and gives confidence to buyers and again which increases the values of the homes again. This is the perfect time to jump in and buy. Would you rather stress about rates or create equity in the home value.
Overall, while market conditions should certainly be considered when making a home purchase, there are many factors beyond the current state of the market that may influence a buyer's decision. It's important for buyers to carefully consider their personal circumstances and goals before making any major financial decisions.
Looking to BUY, REFINANCE or RENEW in 2023?
If you are renewing, buying or refinancing in 2023 then make sure to connect with your mortgage broker early so that you can start looking at options. The fixed rates are the lowest they have been in a long time (since the big hikes the past year) and there is a very large spread with fixed and variable.
Many of our clients are looking at short term rates as they have become very popular. Taking a longer-term rate may be tempting because the longer the term you lock into right now, the lower the rate. This means the 4- 5 year fixed rates are the lowest rates you can get now. The shorter-term rates which are 1-3 years are higher right now however they could be more beneficial for cost savings longer term. Variable and adjustable-rate mortgages are sitting at the highest point right now. Here are some reasons to consider a shorter-term mortgage right now:
There are several reasons to consider short-term mortgage rates in 2023:
- Flexibility: Short-term mortgages typically have shorter terms, which can provide borrowers with more flexibility to refinance or sell their home without facing prepayment penalties.
- Hedging Rates: Short-term mortgages can be a great way to hedge your long term interest rates. The overall mortgage rates are the highest we have seen in over a decade and going short term can allow you to get into a potentially lower rate in 2 to 3 years when rates start to come down. The commitment is less, and you can start shopping around early. Even though they are priced a bit higher, you can negotiate sooner.
- Mortgage Penalties: If you decided you want to take advantage of a lower rate sooner or need to break the loan for other reasons, then the penalty to break will be much less than trying to break a 5 year fixed.
- Rising home prices: If home prices are increasing rapidly, borrowers may be more willing to take on a short-term mortgage in order to enter the market sooner, with the goal of refinancing or selling once the value of their home has appreciated.
- Mortgage Strategies and Personal Financial Goals: Borrowers may have personal financial goals, such as paying off their mortgage faster or reducing their overall debt, that are better served by a short-term mortgage.
Of course, there are also some potential downsides to short-term mortgages, such as the risk of interest rate fluctuations and the possibility of higher monthly payments if interest rates rise. It's important for borrowers to carefully consider their financial situation and goals when choosing between short-term and long-term mortgages. Having a consultation with our team to understand the pros and cons of different mortgage options and to find the best fit for their needs.
Federal Government Lends A Helping Hand To First-Time Home Buyers
The Government of Canada’s new First Home Savings Account (FHSA) is coming into effect this year. Announced in the 2022 federal budget, the FHSA is a new initiative to help Canadians save towards a downpayment on their first homes.
Although the FHSA is technically now in effect, banks are saying they have to iron out the details and won’t be offering these products until at least summertime.
What Is A First Home Savings Account?
The FHSA is a type of tax-free savings account. Canadians will be able to add up to $8,000 per year. The lifetime limit for these accounts is $40,000.
You aren’t taxed on the money you add to the account, or taxed when you take it out to buy a home.
Who Qualifies?
In order to open an FHSA, you must be a resident of Canada and 18 years of age or older. You must also be a “first-time home buyer.”
According to the Canada Revenue Agency (CRA) you qualify as a “first-time home buyer” if you have not lived in a home you have owned individually or jointly (or your spouse/partner has owned) in the last four years. The same rules apply when you withdraw the money to purchase a home.
What Kinds Of Homes Qualify?
Most homes qualify including condos, townhomes, duplexes, detached houses, and mobile homes.
According to the CRA, the only type of home that doesn’t qualify is, “a share that only provides you with a right to tenancy in the housing unit.” This likely refers to some types of co-operative housing.
Withdrawing Money From FHSAs
Ideally, you will withdraw money from your FHSA when you’re ready to buy a home. Of course, sometimes life gets in the way of even the best-laid plans.
Buying a Home
If you withdraw money from your FHSA to purchase a home, you won’t be taxed on the amount you take out. It’s also important to note that you can combine money from both an RRSP and your FHSA to put towards a down payment.
The home you buy must be in Canada and you need to be a Canadian resident at the time.
When buying, you must qualify as a first-time home buyer, and have an agreement of acquisition or completion of construction. And you can’t have bought the home more than 30 days before making the withdrawal.
You’ll also need to move in (or intend to move in) to the home one year after it is purchased or built.
If You Don’t Withdraw to Buy
You can keep an FHSA open for up to 15 years or until you turn 71, whichever comes first.
If you don’t use the money in an FHSA towards a downpayment on a home, you can transfer it into an RRSP or RRIF account without being taxed. But if you withdraw the money as cash, you do have to claim that amount as income on your taxes.
Pros And Cons
Using an FHSA is dual-purpose, helping you save on taxes while putting money away for a home.
However, there are more strings attached to an FHSA than a Tax-Free Savings Account (TFSA). If you don’t use the money to buy a home, it’s more difficult to withdraw.
In a recent Toronto Star article, financial advisor Tony Sutey explained the FHSA may not be a good option for people earning less than $50,000 per year and recommends a TFSA to those individuals instead.
The Takeaway
The FHSA will be a great way for many Canadians to finance their first homes. But, like any financial product, it may not be a good choice for everyone.
If you’re thinking about buying a home this year and want to explore your options, drop us a line! Buying a home is always easier with experienced professionals in your corner.
Interest Rates - April, 2023
The Bank of Canada left the overnight policy rate at 4.5%, as expected this month, stating their view that inflation will hit 3% by mid-year and reach the 2% target by next year. They admit, however, that demand continues to exceed supply, wage gains are too high, and labour markets are still very tight.The Bank is also continuing its policy of quantitative tightening.
Most economists believe the Bank of Canada will hold the overnight rate at 4.5% for the remainder of this year and begin cutting interest rates in 2024. A few even think that rate cuts will begin late this year.
The movement of interest rates has been at the forefront of the financial market, driving the surge and subsequent cooldown of the 2020 to 2022 housing market. When inflation started to go rampant and the Bank of Canada increased interest rates an additional 2% higher than expected last year, it put a huge dent in the housing bubble. Despite efforts to slow inflation the central banks might need to do more increases. We know that the US has just increased their benchmark rate by .25% in March and with multiple factors like the war in Ukraine, job reports, and high inflation, it has put central bank interest rates under continuous pressure.
The Bank of Canada's meeting on March 8th provided a brief pause in the interest rate hike, giving the financial markets a breather. However, this pause only underscores the tipping point that the market is currently perched upon, with the possibility of inflation or a potential recession. Central banks worldwide are aiming for a "soft landing," but it is easier said than done. This pause is meant to counteract the upward push from the US Federal Reserve, which had initially planned to raise rates by 0.25% or even 0.5%.
The economies of Canada and the US are closely intertwined, and the fluctuation of currency values affects their import and export businesses. If the US interest rates rise higher than Canada's, it could cause a flood of investment and a weaker Canadian dollar. This could make exports, such as oil and gas, more appealing but could also worsen inflation as imports become more expensive.
For people with variable rate mortgages, the Bank of Canada's pause in interest rate hikes is welcome news. However, most new mortgages these days have fixed rates, with a significant gap between fixed and variable rates. In many cases, variable rates are a full 1% to 1.5% higher than fixed rates right now with their bank discounts. Fixed mortgages are closely tied to bond markets, which saw a major decrease the last few weeks – the biggest three-day drop since the early 1980s.
The collapse of SVB, along with Signature Bank and Silvergate sent shockwaves through the financial world, resulting in a nosedive in bond yields, the likes of which we have not seen in almost four decades. With the second and third largest bank failures in the US (SVB and Signature) happening last few weeks, we are seeing a ripple effect. However, experts do not expect this to be a repeat of the 2008 financial crisis, as there are significant differences between SVB's downfall and the events of 2008.
Firstly, this isn't 2008. We are not facing a crisis like we did back then. Secondly, chatter about US bank challenges has slowed down (but not stopped and there are more challenges ahead). But we are not the US. Our banking system is much different up here north of the border. Although when the US sneezes we tend to get a cold, we will be just fine. Sleep well tonight, my friend.
Inflation has cooled again - as of the end of March we were looking at a decline over the previous reporting down to 4.3%. Still high (and food more-so) but on the way down. In fact there are murmurs that the inflation rate could come down to around 3% by the middle of this year and maybe settle at the target 2% by the end of 2024.
Which leads us to interest rates. At its recent last meeting, the Bank of Canada paused on rate leaving it at 4.5%. That's not to say they aren't reserving the right to further increases but we like what we see at this point. There are indications that supply chains are loosening up which helps.
What Is Mortgage Insurance And Do You Need It?
You have car, health, and maybe even life insurance. Do you need mortgage insurance too? For some, the answer is yes. And since it can increase the total cost of your home, it’s good to read up on it before applying for your first mortgage.
What Is Mortgage Insurance?
Mortgage insurance (also called default insurance) protects financial institutions in the event you aren’t able to keep up with mortgage payments and default on the loan.
This is different from optional mortgage insurance which is offered when taking out or renewing a mortgage. Optional insurance policies are in place to help you continue mortgage payments in the event of job loss, critical illness, or death.
Default insurance is provided by the government-run Canadian Mortgage and Housing Corporation (CMHC), or private providers Sagen and Canada Guaranty.
Who Should Have Mortgage Insurance?
Anyone who makes a downpayment of less than 20% on a home that costs up to $1 million is obligated to purchase mortgage insurance. If the home you have set your sights on is over $1 million, you must make a downpayment of at least 20%, in which case mortgage insurance isn’t needed.
For homes under $1 million, the size of downpayments can vary. If you are buying a home that costs less than $500,000, you need to pay at least 5% down. For homes over $500,000, you are expected to pay 5% down on the first $500,000 and 10% on the remainder of the cost. Remember, mortgage insurance is required for any downpayment less than 20%.
How Much Does Mortgage Insurance Cost?
The cost of mortgage insurance depends on the total value of the home and the down payment you make. Insurance costs can range from 2.8%-4% of your mortgage (the total value of the home minus the down payment).
If you buy a more expensive home and want to port your mortgage, the insurance costs can increase to over 6%.
How Is It Paid?
Mortgage insurance is added to your mortgage and you pay it monthly. However, there are some upfront costs. In Ontario, PST is charged on mortgage insurance and you do have to pay it when you purchase the home. If you think you may need this type of insurance, be sure to factor these costs in when budgeting.
Mortgage Insurance Pros and Cons
Making a downpayment of less than 20% can help you get into the housing market earlier. This way, instead of paying rent, you’ll be building equity in a home.
It can also help you avoid being “house poor.” Many people jump into buying a home with a large downpayment only to find they no longer have adequate savings or money for vacations. Paying less money down initially can ensure you have more liquidity.
However, taking out mortgage insurance means you are paying more for your home in the long run.
You also need to qualify for mortgage insurance. This means one more institution will need to evaluate your application. If you think you may need mortgage insurance, consider getting a pre-approval to save time when you’re ready to buy.
The Takeaway
Mortgage insurance has helped many Canadians purchase their homes sooner and it could do the same for you.
If you’re weighing the pros and cons of making a smaller downpayment on a home, give us a call! We can take a customized look at your financial situation and help you come to a decision that’s right for you.