Kelly Wilson, Author at Mortgage Brokers Ottawa - First-Time, CHIP, & More

The Gap Between Fixed and Variable Rate Mortgages is Narrowing.

Rising Interest Rates Are To Blame

With the Bank of Canada’s prime lending rate currently at 5.95%, the cost of variable-rate mortgages is almost on par with fixed rates for the first time since 2019.

Fixed mortgage rates, which are locked in at the beginning of a term, and stay the same during that term, are typically higher than variable rates since they offer more stability to investors.

Since the Bank of Canada (BOC) has raised its interest rates six times in the past year, the costs of variable mortgages have soared. The rates for variable mortgages are tied to the BOC’s prime lending rate (usually plus or minus some percentage points).

Another rate hike is expected next month, which could push the cost of variable mortgages even higher.

What This Means For Home Owners

Many Canadians continue to prefer variable rates, even in the current climate. Variable rates tend, on average, to be less expensive over time. They also offer more flexibility.

However, if variable rates do begin to exceed fixed rates, this may change.

Homeowners with signed fixed-rate mortgages are likely breathing a sigh of relief since their interest rates were likely relatively low compared to today’s rates.

Those with variable-rate mortgages may feel the strain on their budgets with the recent increases and may wonder if switching to a fixed rate is right for them.

If you are considering buying a home or applying for a mortgage, you may be wondering which option is best for you. The answer is that it depends on your current situation and risk tolerance.

Fixed Rate Pros And Cons

Fixed-rate mortgages offer peace of mind knowing your monthly mortgage payments won’t change over your term. The downside is that if the current rates do go down in the next few months or years, you could be stuck paying a higher rate.

These mortgages are typically recommended for people with little wiggle room in their budgets, and who are starting out with their mortgages, meaning that a higher proportion of their monthly payments go to paying off interest.

Variable Rate Pros And Cons

Variable rate mortgages do tend to be less expensive over time. However, if you decide to go with this option, be sure you have the money in your budget to handle higher costs if the interest rates go up. The current rate of 5.95% may seem high now, but historically rates have gone as high as 21% in Canada.

These mortgages also have greater flexibility. If you would like to pay off your mortgage faster than the allotted time, this could be a good option for you. Variable mortgages are also good choices for those who have been paying off their mortgages for a while, and are paying less interest as a result.

Don’t Do It Alone

Your situation is unique, and having a trusted advisor on your side can make all the difference. If you have any questions about your current mortgage, or are looking for a new one, get in touch with us today. We’re always happy to help!

by Kelly Wilson

Rate and BOC – Should You Be Locking In?

Bank of Canada increased the overnight rate from 3.25% to 3.75%

As inflation remains at some of the highest levels, rates are potentially rising again by the end of the year. 50 bps is what October 26th brought and another possible rate hike in December. This will directly impact all HELOCs, unsecured Lines of Credit and variable-rate mortgages.

The big questions for many are should I lock in my mortgage and what happens at my renewal? The most important thing to remember is that the variable is 3 months of interest anytime to get out of and fixed comes with higher penalties if you break mid-term to renegotiate later. The other thing to remember is that if you paid 1.5% – 3.00% over the past couple of years and now the rate is 5.45% to 6.45%, you have paid an average of around 3.5% to 4.75%.

The idea behind a variable, was to pay the mortgage down while interest rates were at historical lows and then use the strategy to either go against inflation by increasing your payments, set your payments as if you were paying a fixed, invest or create cash flow. If you are looking to lock in, everyone has a different discount from prime and will be offered different rates to lock in. The lock-in rate will be a term that is equal to or greater than what you have left on your current term to avoid penalty.

So here are the steps to take if you are considering a lock-in rate. Call the lender and ask the following:

What rate can you offer from 3- 5 year fixed?
What is the current or remaining amortization?
What would my new payments be with these new rates?
What is the balance of the mortgage?
Find out what the payment will look like if it goes up another 1% or more

Then you can email our team with these options, and we can see if there is something better for you available.

To speed things up for our team – make sure you know what your current rate is and put it in the email. Make sure you let us know who your lender/ bank is so we can get you some details

How To Fight Inflation

Here is a list of strategies and options we have put together for you to help you combat inflation:

If you started a business, then make sure to pay off the no-tax deductible debt first like the mortgage
Use savings to pre-pay the mortgage down for now and you can always pull back out later or set aside to pay the difference or pay off outside debt to outside debt
Look at extending the amortization to 30 years if you have 20% equity
Look at locking in and setting the rate to avoid fluctuations
Consolidate debt into the mortgage such as credit cards, LOCS, and large expenses coming your way, pay off vehicles with high payments and put funds in your bank account – remember your equity is still your money
Contact your car company and ask them to extend your car payments
Add a HELOC to your house
Potentially get a co-signor if you do not qualify to increase the mortgage such as a parent or sibling
Turn your mortgage into a tax-deductible mortgage
Add money to the mortgage to create an emergency fund
Do not do accelerated payments for now. Go back to regular payments to increase monthly cash flows
Lock into shorter terms
Co live by house hacking and rent out space
Co-mortgage with someone by inviting a joint partner to your home

The 5-year fixed today is between 4.89% and 5.89%. The rates will vary depending on what your current mortgage was priced at and the fixed lock-in rates with your lender.

So let us know if you have any questions or need any assistance.

by Kelly Wilson

Using Readvanceable Mortgages To Your Advantage

Why You Should Consider Getting One

These days it seems as though the housing market has been cooling down, so it doesn't come as a surprise that many Canadians are moving forward with their house-buying plans.

With so many mortgage options, it can be difficult to choose one that's best for you. Be that as it may, readvanceable mortgages are definitely an option to explore, especially in today's economic climate.

They are a lesser-known option but worth considering if you're looking to buy a home or even refinance your mortgage.

Readvanceable Mortgages Explained

For starters, a readvanceable mortgage is comprised of a line of credit which allows for borrowing and a mortgage. Essentially, this type of mortgage combines a home equity line of credit, also known as HELOC, with a traditional mortgage.

Personal finance writer Julia Kagan explains that readvanceable mortgages allow the borrower to "add a line of credit to the loan, permitting the borrower to re-borrow any part of the principal paid down."

How Is A Readvancable Mortgage Different Than A HELOC?

Both HELOCs and readvanceable mortgages have similar features but there are a couple of things setting them apart.

A HELOC is a type of credit that enables access to large reserves to be used for debt repayments or for purchases with a higher price tag. Many opt for HELOCs due to the competitive variable rates at which they are offered. With this line of credit, your home's equity is taken as collateral, explaining the access to a large pot of funds.

Using A Readvancable Mortgage For The Smith Manoeuvre

Borrowers can make their readvanceable mortgage interest payments tax-deductible using the Smith Manoeuvre.

Back in 2002, financial planner Fraser Smith created a debt conversion strategy known as the Smith Manoeuvre. By having a readvanceable mortgage and using the Smith Manoeuvre, borrowers will potentially be able to profit and reap the benefits of tax-deductibles.

October Rate Hike To Impact Housing Market?

BOC: Condoning More Interest Rate Hikes

Canadians, especially homeowners, have been grappling with the increased interest rates since the Bank of Canada announced the hike just last month. Raising by 75 basis points, the rate sits at 3.25% and has buyers holding off on purchasing homes, despite the re-calibrating housing market.

Calls for More Rate Hike--Up to 4 %

Recently, the leadership from the Bank of Canada made a statement on the Bank's stance on interest rates in the wake of inflation:

"In September, we raised our policy interest rate for the fifth consecutive time since March. And we indicated that interest rates will likely need to go higher still to bring inflation down to the 2% target."- said Tiff Macklem, Governor at the Bank of Canada.

Canada's Correcting Housing Market will Continue Cooling

Now that another interest rate hike is on the table for Canada, homeowners are wondering how this will impact the housing market.

Mortgage professionals, like RBC's Robert Hogue, have been saying that the housing market is more so re-calibrating as opposed to crashing.

As predicted, before the September rate hike announcement, further rate hikes coming before 2023 will lead to mortgage rate increases. Aside from mortgage rate increases, a second rate hike will impact the purchasing habits of buyers. Not to mention sellers might be on the sidelines.

Mapping Out Housing Price Drops across Canada

Some markets cooling off amid NBC's recent interest hike

The idea of buying and owning a house has become increasingly difficult for many Canadians over the past two years.

Remember the beginning of the pandemic, when housing prices dropped drastically and the rate of home ownership shot up to record highs? It won't return to the same level however, with the recent interest hike, Canadians can expect to see housing prices dropping across Canada in the coming months.

The Average Price

Last week, the Canadian Real Estate Association (CREA) released a revised report, highlighting the national statistics of housing prices. Based on recent figures, last month, the national average home price was $637,673, revealing a 3.9% decrement from August 2021.

Though this might be the national average, it's important to consider the heavy influences of two markets in particular. The Greater Toronto Area (GTA) and Greater Vancouver have some of the steepest sales and prices in the housing market, so their numbers have a significant impact on the average.

Considering the situation in Toronto, the average home price dropped 12.4% to $760,400 in August after prices peaked in March. However, based on predictions some Canadian cities will see a steeper drop than others.

Suburb vs. Downtown

Although markets are expected to drop across Canada, a recent Bloomberg report points to new data showing that plummeting prices may not be equally distributed throughout cities. When the pandemic hit, we were all confined to our homes, leading to everyone wanting more space.

The best place to find space and big backyards are, of course, the suburbs, hence the increase in purchasing suburban homes during the pandemic. With the shift to remote work, that made sense for many Canadians.

Market Forecast for 2023

As the Canadian housing market continues to go through changes and we see prices drop, this has left many wondering what's to come next year. Just over a month ago, Dejardins released an updated report predicting that the decline in housing prices will continue into next year.

At the end of 2023, it is still projected that Canadian property prices will be greater than they were before the pandemic.

by Kelly Wilson

Save Money on your Taxes using The Smith Manoeuvre

Get the most out of your mortgage

In Canada, homeowners and residents aren't able to deduct the interest paid on their mortgages from their taxes. Most Canadians wish that instead, they could reap the benefits of a tax-deductible mortgage interest that American homeowners have. However, luckily for Canadian homeowners, there is a loophole that can help, the Smith Manoeuvre.

What is the Smith Manoeuvre and how can you use it?

For starters, the Smith Manoeuvre was developed in 2002 by financial planner Fraser Smith in his book. Broadly, the Smith Manoeuvre is what some call a conversion strategy. Since mortgage interest isn't tax-deductible for Canadian homeowners, this method provides a way to convert mortgage interest into tax-deductible investment loan interest. What this means is any interest paid on a loan used to purchase investments (such as stocks, mutual funds, etc.) is tax-deductible.

The premise of the Smith Manoeuvre is to take the equity out of your home and use it to invest. Many Canadians already take equity out of their homes, for example refinancing. So what makes the Smith Manoeuvre different from refinancing and why is it better?

Well for starters, with refinancing there are many fees that come along with it. Since you're breaking a mortgage agreement, that gets followed up with financial penalties and appraisal fees. That's why the Smith Manoeuvre presents itself as a better option for Canadians since those fees aren't attached. Basically, the Smith Manoeuvre is a home equity line of credit, also known as a HELOC.

Risk vs Reward

When used properly, the Smith Manoeuver can have great benefits and result in a tax refund. But since this method is using a leveraged investment as a way to claim interest through tax deductions, it's important to consider the risk associated with it.

Before starting this process, it is important to sit down with your financial advisor to discuss the pros and cons of the Smith Manoeuvre considering your financial status. For example, if you are someone who likes to play it safe, then this may not be the financing avenue for you.

NBC's Interest Rate Hike Speculated To Bring Mortgage Market Stabilization

Over the past year, Canadians have watched the continued climb of interest rates. This September, the National Bank of Canada is expected to raise the rates once again, however, economists predict that this could be the final hike for a while. This is the fifth rate increase this year as the Bank of Canada continues to grapple with rising inflation. Economists Benjamin Tal and Karyne Charbonneau predict the hike to hit the 75bps mark, amounting to the key target rate of approximately 3.25% as detailed in a recent report.

In a TD report, economist Rishi Sondhi explains that 5-year bond yields are predicted to decrease from 2022 to 2023 as consumption slows due to elevated interest rates. This applies pressure not only on household debt but mortgage debt, which Tal and Charbonneau explain a large quantity was accrued in an environment where the low-interest rate was conducive.

Mortgage Debt & Household Sensitivity

Though current interest rates are considered lower by comparison to historical rates, the pressure of inflation alongside the burden of increased rates will indicate a slow in consumption. Benjamin Tal and Karyne Charbonneau say that "...households’ fundamentals are now generally stronger than seen at the eve of previous hiking cycles." They also state that the "...structure of household debt will shield many borrowers from the full sting of higher rates in the coming year." In Q3, the Bank of Canada reported successful results for portfolios containing home equity lines of credit and mortgages.

Despite progress in the latter, with rising interest rates looming, a slowdown is predicted to follow. Considering this, it is noteworthy that 11% of NBC's mortgage borrowers are investors, and 31% of its mortgages have variable interest rates. Taking into account the percentage of mortgages that utilize variable interest rates alongside inflation, this suggests that households will have a higher sensitivity toward raising rates.

At this time, economists don't predict further rate hikes in 2023, however, there is also no indication that interest rates may be lowered in 2024. In essence, Canadian households will have to burden with the increase in rates and inflation however, the capacity to maintain consumption growth at the current rate should preclude the Bank of Canada from loosening monetary policy in 2023.

Housing Market Stabilization

As monetary policy tightens to bring current excessive inflation rates back to targeted levels, mortgage rates are anticipated to increase. In Canada Mortgage and Housing Corporation's Spring 2022 report, it is said that higher rates will have a limited effect on home demand and price growth in 2022. The report also states that "...this will be especially true in centers like Vancouver, Toronto, and Montreal where tight resale market conditions will overwhelm higher mortgage rates initially."

Mortgage volume at the National Bank of Canada increased 8% on a yearly basis, leading economists to predict that the demand for real estate secured financing will continue to stabilize, returning to pre-COVID levels given the rising interest rate environment. At the same time, housing prices are expected to shift, re-stabilizing as an effort to backtrack the soaring 46% accumulation that occurred throughout the pandemic. Most notably, previously where housing prices sky-rocked, namely Ontario and British Colombia, where the steepest declines in price can be found.

Home Prices Could Fall More Than 12% By Next Year

Canada's Housing Market In The Middle of Corrections

High-interest rates could have influenced the correction of the housing market that is currently ongoing in Canada. According to one of the country's largest banks, home prices could decline more than 12 percent, Bloomberg reports. Robert Hogue, RBC's economist, also predicts that the number of total home sales in the country will decline by 42% by next year.

Adult Children Were Given $10B To Buy Homes

However, the basic rule of supply and demand led to the rise in prices, which are abnormally high right now. That then led to making the rest of the renting population extremely hesitant to buy their own home, especially with the current interest rates.

The ongoing corrections should cool off all of that and take the weight off the homeowners' shoulders in the future when the drops in prices and sales cause interest rates to stop rising and go back to what we're used to, hopefully.

The Benefits of A Good Credit Score

How to maintain the high numbers

Even though the conversation about a good credit score is pretty common and happens almost daily for some, paying attention to maintaining a good one has not been a priority for others. Mistake number one. Surviving with bad credit is doable, but expensive and makes life harder than it should be.

Taking care of your credit score is crucial if you want to avoid missing out on big opportunities. Not only that, but you will also end you paying more than you should - after all, having a good credit score means lower interest rates, among other things! Here are the biggest benefits of having a good credit score.

Six Benefits Of Having A Good Credit Score

1. Lower Interest Rates

When applying for a loan, whether it's a mortgage or a credit card, a lender will check your credit score. Based on the number, they will determine your interest rates. With a good credit score, you almost always qualify for low-interest rates. The lower the interest rate, the sooner you'll pay off your debt, and the more assets you'll have for spending on other things.

2. Higher Mortgage Amounts And Limits

After proving to the banks that you can handle your money and demonstrating to them how responsible you are, they will let you take on more responsibility. Since you've proven that you pay back what you owe on time, they will let you borrow more money, giving you greater buying power which is very important in today's real estate market for example.

3. Easier Approval On Rentals and Jobs

More and more landlords want to check your credit score as a part of their tenant screening process. A bad credit score can definitely affect your chances of getting the apartment you want. Even some jobs need security clearance and proof you know how to handle your finances. They need to make sure you won't take bribes, for example, or steal from the company because of your financial issues.

4. Lower Insurance Rates

You need insurance for so many things: tenant's insurance, home insurance, car insurance, life insurance, etc. Having a good credit score will lower your premium and avoid paying more. Insurance companies use your credit score to design the insurance risk score. If you have a low credit score, you could end up paying 100% more than what you would pay with a good credit score.

5. Negotiating Power

With a good credit score comes leverage to negotiate for anything you're borrowing for.

You can negotiate your way to a lower interest rate on a new loan or a credit card. With a low credit score, banks and lenders will not let you win this one and the fees on loan terms will remain as high as possible.

6. Build Assets

All the way to wealth. The possibilities are endless - you can get RRSPS loans, rental properties, leverage your mortgage to invest, become an accredited investor, buy abroad, etc. With low credit, you lose out on major opportunities!

How To Have a Good Credit Score?

By avoiding these common mistakes:

Don't get added to someone's credit card - have your own.
Don't close all your accounts, even if you don't use them. The creditors like seeing two accounts. Use them
Have two types of loans - a static loan and a revolving loan. For example, a car loan (static) and credit card (revolving).
Don't exceed 65% of your limit.
Pay your bills on time. Set up automatic payments to help you with this.

by Kelly Wilson

Canada's Interest Rates Still Not The Highest They've Ever Been

There Is Room For Improvement

If you thought today's mortgage rates were high, guess again. With Canada's interest rates rising, it's easy to go into full panic mode. The current prime rate - the rate banks and lenders use to determine interest rates for loans and lines of credit - is at 3.70% and will continue to rise. But, this isn't even close to what the rates were like in the 70s or even 20 years ago.

Even though rates today are higher than they have been in recent years, they are still low when you compare them in a long-term context. Keep in mind that Interest rates are a reflection of the country's economy and current global situation. So, with every major change in global politics, or certain events - the value of money will change, even for a bit.

That's the situation we're currently in - the pandemic and certain political events have caused major inflation on a global level and changes in mortgage rates are bound to happen.

But that doesn't mean the negative effects of these events are here long-term. The economy has already been through a similar state, with average interest rates for a five-year mortgage being as high as 21.46 percent in 1981! Let's compare.

The History Of Interest rates In Canada

For example, the most popular rate in Canada is the five-year fixed mortgage rate. According to Statistics Canada, this is the mortgage type that accounted for about half of the existing conventional mortgages.

Currently, if you were to opt for a conventional five-year mortgage rate, your interest rate would come to about 6.04 percent. If you did the same forty years ago, in July 1982 - that rate would have been 19.22 percent! Why is that?

The recession, mainly. In 1981, the Bank of Canada raised its benchmark lending rate to a whopping 21% for various reasons: the mentioned recession, the Iranian Revolution which affected oil production, etc.

After that, the average five-year fixed rates have generally moved downwards, but we're far from the worst. Now, the average rates are about as high as they were during the Great recession in 2007. And we all remember how bad that was.

However, even after that recession, we managed to lower the interest rates to about 3.5% just a year ago. That means that, depending on future events, the interest fees could go back to "normal" as we know it and settle down.

Sure, now is a scary time for some people that just dipped their toes in the home-buying waters. Higher rates might happen. However, the best thing for you to do now is to extend your amortization period, according to Kelly Wilson.

As she stated for the Canadian Press - yes, you will pay interest for a longer period, but it could make room for some debt paying or retirement savings, because "It's still cheaper borrowing than anywhere other place you can borrow."

by Kelly Wilson