In business school and doing individual research I always came across the same piece of advice “fixed rates are better when interest rates are on the rise and variable rates are better when interest rates are on the decline”. A good-enough piece of advice for a 19-year-old business student who just ate leftover Mac and Cheese for breakfast.

The question of “fixed vs. variable” requires a lot more in-depth consideration than a quick one sentence summary. People don’t analyze both sides in enough detail because they don’t realize how much money can be saved or lost in the process.

Before I give my opinion on fixed vs variable rates, I want to add that I don’t have a crystal ball and I don’t know exactly what rates will do. What I do have is an opinion that’s backed by a lot of data.

I believe variable rates are the way to go from a money saving standpoint!

But you may ask “Aren’t rates on the rise and aren’t the majority of Canadian mortgages fixed? Yes, and yes.

Personally, I’m not as concerned about the status quo. I care about what keeps the most amount of money in my client’s pocket.

Reason 1: Lower Rates

Look at the variable vs fixed rates question as a bet. If you’re choosing a fixed rate mortgage, you’re betting that the prime rate will increase by around 2% or more by the end of the term.

Variable rates increase and decrease with the prime rate so if the government raises the prime rate by 0.25%, your variable rate will also increase by 0.25%.

2% is the number because as of right now there is around a 2% difference between a fixed and a variable rate. For example, one of my favourite lenders has a fixed rate of 4.19% for a 5-year high ratio mortgage (the most common mortgage for a first-time home buyer). The variable rate on the exact same mortgage is 2.3% which is a 1.89% difference at the time of writing (May 17th).

Because the government almost always raises rates by increments of 0.25% it would take 7 to 8 rate hikes for the variable rate to be higher than the fixed rate (0.25% x 8 = 2%). I know the last  2 rate hikes were 0.5% but those were very rare. The 0.5% hikes are proof to what I said above “I don’t have a crystal ball and I don’t know exactly what rates will do”. 

Let’s say that there will be 8 more rate hikes over the next 5 years, the same amount of time as your hypothetical term. I don’t think that will happen and if you do some research, you will probably agree. Now I know what your thinking, “ok so if there are 8 rate hikes in the next 5 years then variable and fixed must be equal”… Wrong!

In the time it took for the rate hikes to happen, you have been saving money with your variable rate. Say it took 3 years for the prime rate to hike 8 times. Your variable would be costing you more in the last 2 years, but you had 3 years of saving. This could be thousands of dollars of savings.

It would take 8, 9 or even 10 rate hikes over your term for your variable rate to cost you money. Will the prime rate increase 2 – 2.5% over the next few years? Who knows… but probably not.

Now what if the Bank of Canada hikes rates less than 8 times? Well that means you would be saving money for the entirety of your term with a variable rate mortgage. Sounds good right? Just wait, it gets better.

Reason 2: Lower Breakage Fee’s

Variable rates normally have lower breakage fees! Not default penalties, breakage fees. Breaking a mortgage is simply when you want to break your contact for whatever your personal reason is, maybe you need to sell or refinance. 

In most situations fixed mortgages calculate breakage fees using the higher amount of IRD or 3 months interest. From my experience IRD calculations will almost always be more than 3 months interest so fixed mortgages almost always use IRD. I could write a separate blog about IRD so to keep it simple, just think IRD = a complex lender dependant calculation. 

3-month interest is simple. It’s just 3 months interest on the remaining balance allowing variable rate mortgage holders to not worry about breakage fees as much. 

Reason 3: Cash Flow

Your last worry about fixed rates might be that you don’t want your payment to increase when you’re on a tight budget. I get it, mortgages are traditionally a homeowner’s biggest debt; however, most lenders offer a set payment just like a fixed and the only thing that would change is the amount that is paid toward principal and interest. 

So, if your payment is $2000 a month and you currently pay $1500 of that to principal and $500 to interest then raising rates might change it to $1400 to principal and $600 to interest. The payment amount would be the same for budgeting purposes and only the principal/ interest amounts within would change. 

The 3 reasons stated above are good reasons to choose a variable rate but they aren’t everything!

In my opinion mortgages are just as much about well being as they are about monetary gain. If a fixed rate lowers stress and helps you sleep at night, then the saying “no price on peace of mind” is particularly true. Also, for certain types of mortgages and financial situations a variable might not be beneficial or even offered so it’s important to have a chat with your mortgage broker (hopefully me) before hand.

I’ve heard a familiar story since I started as a mortgage agent and it goes a little something like this, “My parents/ grandparents/uncle that I only see at thanksgiving bought a house decades ago for $3 and a shoelace and now it’s worth millions. Obviously this is an exaggeration but the message rings true. That’s just the way it was years ago; houses were cheaper and there was less of a discrepancy from housing prices compared to annual income; although, interest rates cost an arm and a leg. At at least you had a property that was gaining equity. 

The housing affordability “crisis” that Canadians are struggling with is affecting millions and needs to be addressed in the coming election. In my opinion, one group of Canadians has been dealt the shortest straw. First Time Home Buyers (FTHB) or should I say aspiring first time home buyers are having a hard time getting into the housing market. The price of housing combined with the mortgage guidelines that lenders have to abide by are making home ownership for FTHB more and more difficult. 

Welcome to “Gillis Gets Political: Part 2” where I focus on what the three major political parties in Canada (Liberal, Convective and NDP) are doing for the FTHB. 

The Liberal Party are planning to include a deferred loan option for the FTHB incentive, Raise insured deal cap to 1.25 million, create a 40k tax free saving account for the purpose of purchasing a home, 25% less mortgage insurance and double the FTHB tax credit. 

The FTHB incentive is a failure and it is in desperate need of a makeover. “Portions of down payments would be provided, interest free, in exchange for a portion of equity in the home. There’s only one problem, it’s a failure (Alloway, 2020)”. The reason being is that it doesn’t really help you qualify; it just makes your payments slightly less once you do. You would then be giving up 5% of the equity you gain in a booming real estate market; it’s not worth it. The deferral loan would allow you to pay back the 5% you borrowed from CMHC at a later date (I’m assuming once the house is sold). This seems like a better option but it really depends on the interest rates they charge and if this loan affects borrowing power. 

Raising the insured deal cap is something that has to happen as housing prices increase but isn’t worth advertising as something that will help the FTHB. Currently if a house is purchased over 1 million it becomes an uninsured deal so you have to provide at least a 20% down payment. An insured deal allows the buyers to place a 5% down payment. So, if the cap is raised to 1.25 million, a buyer could purchase a house over a million and still put a 5% down payment. Only issue? Is there a FTHB that purchasing a home for over a million? Almost everyone who can purchase a home for over a million isn’t really struggling with affordability. 

I really like the 40k tax free First Home Savings Account; it works like an RRSP and TFSA to use up to 40k on a downpayment for a house. This will help a FTHB save a downpayment for a house and the idea of it will force young Canadians to think about homeownership earlier. If you want to learn more about this saving account and TFSA’s/ RRSP’s in general please reach out. 

25% less mortgage insurance and double the tax credit I have included together because it’s a nice offer that will save the FTHB a couple grand but doesn’t really help them qualify. Mortgage insurance is amortized with the entirety of the mortgage for usually 25 years so this really only saves around $10 to $25 a month (estimation that depends on purchase price). Doubling the tax credit would allow the FTHB to receive $1500 instead of $750 as a rebate. As you can see these are nice gestures but not life changing. 

The Conservative Party are planning to fix the stress test, increase insured deal cap and encourage 7 to 10 year mortgage terms.

When I first read that the conservatives are planning to fix the stress test I got really excited because this has a direct impact on borrowing power; however, they are only tweaking it. It’s a shame but it’s better than nothing. “Stress test ‘fix’ for small business owners, contractors and other non-permanent employees (Taylor, 2021)”. So, it will be a bit easier for Canadians who don’t have guaranteed employment like salaried or hourly workers; a step in the right direction, but how much will they actually “fix” the stress test? Only time will tell. 

Just like the Liberals, the Conservatives also plan to raise the insured deal cap making it over a million except they haven’t pinpointed an exact number. Whatever the number is, I don’t know many FTHB’s who are planning on buying a house over a million. 

The encouragement of 7 to 10 year terms is hard to comment on as I’m not sure if they will have some sort of government program that makes 7 to 10 year terms cheaper or will simply just encourage them. If it’s just a simple encouragement I’m unsure how this will help as 7 to 10 year terms have higher rates due to the chance that rates may rise within that time period. Also, 70% of Canadians break their mortgage in order to either refinance or purchase a new home so breakage fees would cost even more for the average Canadian. However, if rates skyrocket it could help Canadians keep these current rates for an extended period.

The New Democratic Party are planning to have 30-year amortizations for the FTHB for starter homes and double the tax credit. 

30-year amortizations are only available for uninsured deals at the moment which requires borrowers to have a 20% down payment. The 5 extra years allows payments to be spread out longer to make qualifying easier. Insured deals (which almost all FTHB’s get) have a max of 25- year amortization. Allowing the FTHB to have a 30-year amortization will increase the amount of mortgage and thus make them more competitive in the marketplace. 

The NDP has the same idea as the Liberals and want to double the tax credit making it $1500 instead of $750. Again, a nice gesture but not life changing. 

Final Thoughts

I like the fact that all of the parties are acknowledging that First Time Home Buyers need some support. It’s a step in the right direction. It’s hard to say if they’re doing enough. If you read my last blog I talked about how increasing supply is the best way to cool this housing market. It’s possible that increasing supply will make it more competitive for the FTHB without addressing any specific FTHB issues but I doubt it.  

The fact of the matter is that the FTHB (for the most part) are younger and because they’re young they have had less time to save money for a down payment and enhance their careers to earn a higher income so they depend on higher mortgage volumes to compete in the housing market. When they’re given the same guidelines as everyone else it becomes extremely hard to compete.

In my opinion, some extra initiative should be supplied to the FTHB. The First Time Home Buyer incentive is useless and either needs to be scrapped or needs some serious changes, possibly a deferral loan option with interest rates the exact same as inflation. A stress test fix that sees the FTHB capable of qualifying at a lower rate than others, even by a small margin would increase the mortgage amount. Another option would be a higher amortization limit to spread out payments. To be honest, there are tons of ways to help out the FTHB but we will see if the government lives up to their promises. 

Alloway, B. (2020, May 25). The first-time home buyer incentive is a Failure: Here’s how to fix it. ReaLawState. Retrieved September 13, 2021, from https://realawstate.com/the-first-time-home-buyer-incentive-failure/.

Gillis Mortgages is getting political! Well not really! I won’t bore you with my political views but I will let you know how this federal election might affect the housing market. 

A lot goes into the platforms of our political parties so I went through them and focused on what is important (please see the link at the bottom for more details). I also only focused on the three biggest parties (Liberal, Conservative and NDP) as some parties haven’t released their housing platforms.

There are two main topics I wanted to discuss that the parties have claimed they will focus on if elected; one is increasing housing supply which is the best way to cure this intense housing market to make it competitive for all and the second is the First Time Home Buyer Plan and this relates directly to most of my clients. For this blog I only focused on housing supply and will publish part 2 about the First Time Home Buyer Plans at a later date. 

SUPPLY PLATFORMS

The Liberal Party plans to build 1.4 million homes in 4 years, donate billions to various housing initiatives such as office space conversion, put a 2 year ban on foreign residential investment and impose a “flipper tax”.

The additional housing supply will definitely help make housing more affordable. This is a simple supply and demand economic law that tells us that if supply increases prices will fall if demand remains the same.  

The billions that will be donated is going to a wide range of causes that seems promising but are hard to comment on as we won’t know the benefits or challenges until later. For example; investing to convert office space into housing will create some supply but most of the vacant office spaces are in cities where Canadians are moving away from. If people want to move away from the city then will this initiative depreciate the city’s housing markets while surrounding areas become more and more expensive? Also, will this create a shortage of office space causing commercial real estate to appreciate at an unhealthy rate? These are the questions that will be answered years from now.

Putting a 2 year ban on foreign investment in residential real estate is a good idea. For the most part these foreign investors are capable of going firm and paying cash. Less competition in a market place is better for buyers and creates affordability. 

The flipper tax is interesting. If you buy a house and own it for less than 12 months you would have to pay 100% capital gains. This means you wouldn’t make any money on the property if owned for less than a year and you would most likely incur some loss due to closing costs. I don’t see the viability of the “flipper” tax in the long run as this would destroy some livelihoods and “flippers” normally purchase homes that the majority of buyers aren’t interested in, however, in the short run I could see this tax limiting competition. 

The Conservative Party plans to build 1 million homes in 3 years, incentivize builders and investors with tax programs, release 15% of  federally owned properties for bid and put a 2 year ban on foreign residential investment. 

Just like the liberals, the conservatives also plan to increase housing supply; just 400,000 less than their left counterparts.  

Incentivizing builders and investors with tax programs seems promising just like the Liberal’s donation strategy; however, we don’t know exactly what these tax programs are. What we do know is that builders will be incentivized to build housing that helps the middle class but mostly the renter market. “Those locked out of ownership find themselves trapped within rental markets where rising prices have made it prohibitively expensive to simply put a roof over one’s head (Zivo, 2021)”. 

Releasing 15% of federally owned properties would increase supply but from what I’ve read the release of 15% of federal owned properties is included in the plan to build 1 million new homes. “O’Toole called the federal government the largest real estate owner in Canada and vowed to release 15 percent of government-owned buildings and land to be repurposed in a bid to build one million new homes over three years (News Staff, 2021)”. So, they would be reallocating real estate instead of building new it seems. This also begs the question of what real estate will they be privatizing? Will the conservatives be converting social and affordable housing that the lower class needs? Again, these are questions that will be answered years from now. 

Conservatives and Liberals both agree that a 2 year ban on foreign residential investment is needed.  

The New Democratic Party (NDP) plans to build 500,000 affordable units over the next 10 years and put a 20% foreign buyers tax. 

The NDP takes a different strategy from the Liberals and Conservatives and dedicated their housing platform to help those who struggle the most in the current competitive market “Housing is considered affordable if it costs less than 30% of a household’s before-tax income (CMHC, 2018)”. Affordable housing depends on the government to subsidize payments whether it’s a rental or ownership. This will clearly help those who need subsidized housing but will it help with current affordability problems? Do they think the housing market will sort itself out? Only time will tell. 

They also take a different approach when it comes to dealing with foreign investment. Instead of a 2 year ban on foreign housing investment that the Liberals and Conservatives agreed upon, the NDP has opted for a 20% foreign tax. It’s possible that they believe foreign investment is too important for the Canadian economy and instead of banning foreign investment completely they can just tax more and thus profit more. 

FINAL THOUGHTS

You may be asking “What party has the most comprehensive plan to help make the housing market more affordable?” The answer is… time will tell.  Politicians have a funny way of not seeing their plans through; what they plan on doing and what they actually do are two completely different things. It’s possible that political plans can change based on unpredictable future events. Take COVID for example; I’m sure numerous initiatives were put on hold because the government needed to focus on a global pandemic.

There is one big problem with increasing housing supply that has the most influence on housing policy and it’s the same as the biggest benefit. Earlier in this blog I said, “if supply increases prices will fall if demand remains the same”. Prices falling is great for Canadians who find the housing market unaffordable but affects Canadians who already own a home. These homeowners will see either a reduction in their home value or a lack of appreciation that they’ve come to expect. These homeowners also hold great importance in elections! “So while the federal parties want to rein in housing prices for Canadians who’d like to buy, there’s an incentive to keep the gravy train going for homeowners, who are generally older, more affluent, and more likely to vote than renters. They’re also more likely to inflate the country’s GDP, giving the governing party economic bragging rights (Hauen, 2021)”. So, it’s possible that political parties could create less supply than advertised in order to entice homeowner votes.

I like to consider myself an optimistic person, so let’s say that the government lives up to their promises and homeowners vote with the belief that a healthy medium of affordability and appreciation is achievable, we still don’t have a magic number of homes to be built that will find that healthy balance between supply and demand. For example, the liberals want to build the most homes at 1.4 million. This may be too many and cause homeowners to lose equity in their homes or it may still not be enough and barely put a dent in Canada’s affordability problem.  

At the end of the day, the best party to vote for based on your own research is the party that supports the issues that you consider important. Liberals seem to have a “put eggs in multiple baskets strategy” that sees the most homes being built and also the most money donated. The conservatives are focusing more on the middle class and the renter market but are doing so by privatizing some public land. The NDP are focused on affordable housing for those that rely on subsidized housing and are going to be less strict on foreign investment.

I hope I helped you summarize the various political approaches regarding housing!  Please see link below for more information…

https://mortgageproscan.ca/advocacy/2021-federal-election?utm_source=SilverpopMailing&utm_medium=email&utm_campaign=Major%20Party%20Housing%20Policy%20Summary%20(English)%20(1)&utm_content=

Zivo, Adam. “Adam Zivo: Why the Conservative Housing Plan Really Is Better than the Others.” nationalpost. National Post, August 28, 2021. https://nationalpost.com/news/politics/election-2021/adam-zivo-why-the-conservative-housing-plan-really-is-better-than-the-others.

Ok so picture this: You just got a great pre-approval with a low rate hold from your unbelievably hard working, intelligent Dominion Lending Centre mortgage agent. Let’s call this hypothetical mortgage agent…Griffin Gillis (self-brag I know but after-all, it is my blog).

After this pre-approval you’ll know your purchase price range and the amount of down payment you’re comfortable putting down on a house. Then you’ll work with your real estate agent and find a perfect property; everything you’re looking for. You place an offer and your offer gets accepted; very exciting!

Your finances are in place and your offer gets accepted, you must be in the clear right?

The answer is most likely if you follow these guidelines.  In one of my first blogs about pre-approvals it states, “a pre-approval is simply a snapshot of your current situation”. If you get a pre-approval months prior to your purchase and your situation has changed, your pre-approval mortgage that you used as a base to place an offer has also changed. This isn’t to scare anyone; it’s simply to inform you.

Below, Dominion Lending Centres’ marketing team has posted 5 guidelines that buyers need to be aware of in the time between the pre-approval and the final approval stage. Being aware of this will help your transaction go smoother.

EMPLOYMENT

When submitting a request for financing, whether a mortgage or car loan or to handle personal debt, one of the most important aspects the lender looks at is employment. If you were working at Company X for five years at $50,000 a year and  just before your deal is finalized you change jobs, the lender will now require proof from the new job. This can include proof that probation for this new job is waived or new job letters and pay stubs at the very least. If you change industries, they will want to see more proof that you are capable of keeping this job. For any employment involving overtime or bonuses, the lender often requests a two-year average which you would not be able to provide at a new position. Another employment change that could hurt your financing approval would be if you decide to change from an employee to be self-employed. When it comes to financing, it is best to wait to make any major employment or life changes until after the deal has gone through.

DOWN PAYMENT SOURCE

As mortgage financing is based on the initial information provided, you will most likely need to do a final verification of the down payment source. If it is different from what the lender has approved, it could spell trouble for your financing approval. Even if you said that your down payment was coming from savings and at the last minute, your parents offered you the funds as a gift, it could affect your approval. This is an acceptable source of down payment, but only if the lender knows about it in advance and has included this in their risk assessment, but it can jeopardize a deal.

DEBT

A week or two before your possession date, the lender will obtain a copy of your credit report and look for any changes to your debt load. Since the mortgage approval is based on how much you owed on that particular date, it is important not to increase your debt before the deal is finalized. Buying a new car or items for the new home must be postponed until after possession; even if they are “do not pay for 12 months” campaigns because you will need to fulfil those payments, regardless of when they start.

BAD CREDIT

One of the biggest roadblocks to mortgage approvals is credit card payments. When you enter the financing process, it is important that your credit score remains positive. If your credit score falls due to late payments, this can cause major issues with your financing. Even if you have a high-ratio mortgage in place which requires CMHC insurance, a lower credit score could mean a withdrawal of the insurance and removal of any financing approval.

MISSING IDENTITY DOCUMENTS

Before a deal is finalized, the lawyer must verify your identity documents and see that they match the mortgage documents. You may think this is obvious but it is important to use your legal name when you apply for a mortgage. Even if you go by your middle name or a nickname, all legal documents should match.

CONCLUSION

To summarize; keep the same job, the down payment source should not change, don’t incur any new debt, pay off any bills right away to keep your credit score high and always be honest throughout the entire home buying process. I understand that sometimes life presents opportunities and challenges at unexpected times. Please reach out to me if you plan on making any life changes that may affect your mortgage approval. The home buying process can be very rewarding and profitable but It’s important to stay in the know!

I would like to start this blog off by saying that the housing market, like any market can change rapidly and isn’t 100% predictable. It’s important to understand that this post isn’t meant to sway anyone’s opinion about the housing market; it’s simply to give readers a better idea of what’s going on. Everything you read below is from research and talking to people in the industry.

What is a housing bubble? A housing bubble is when the prices of homes increase at an unsustainable rate that forces homes to be overvalued and for individuals to become over-leveraged financially. This can cause a crash because eventually demand will decrease, normally at the same time supply is increasing and this will cause a drop in housing prices. In other words, “A crash is when the bubble pops”.

I hear people talking about it all of the time whether from clients, co-workers, friends or family. Everyone seems to have a strong opinion on if the housing bubble is going to burst or not.

I hear realtors say it won’t happen and articles online “guaranteeing” a collapse. I hear home owners enjoying the increase and buyers waiting until the market “crashes”.

Talk. Talk. Talk.

Hearing all this talk can get confusing and overwhelming so I’m going to focus on answering three main questions in this blog. Why is the market so crazy right now? What qualifies a crash? Are we in a bubble right now?

Why is the market so crazy right now? This can be answered in one word, demand!

Ah yes, all of this craziness is all because of a simple supply and demand curve.

To give a brief summary, the housing sales prices are increasing so fast because Canadians have more savings and less places to spend their savings (COVID). Canadians are opting to move out of cities and into surrounding areas that offer more living space (COVID); interest rates are at historic lows and Canada has a low housing inventory (supply). All of these factors contribute to why demand is so high.

What is being done to limit demand and return prices to a healthy appreciation? Well with COVID still an uncertainty, it’s hard to say what will happen with demand. Most Canadians will continue to save money and desire more square footage outside of cities. On top of that, interest rates will most likely stay low. The only real action that the government is taking is to increase the stress test.

Remember the stress test? I wrote about it in my last blog if you need a refresher!

The Canadian government is increasing the stress test on June 1st to make it harder for Canadians to get loans. Although this may sideline some homebuyers, it’s hard to say if it will actually decrease demand. “In this type of stress test it could create a larger gap between lower priced homes and higher end homes..which then puts even more demand on the average home people can afford which will then push the average priced home up even more (Huebl, 2021)” If Huebl is correct and the new stress test forces demand up then its hard to see how demand is going to decrease anytime soon.

What about supply? If part of the reason demand is so high is because supply is so low, then what is the government doing about that? After doing some research the answer seems to be… nothing! ” We’re not incentivizing home builders. We’re not constructing low-income or subsidized housing. (torontorealtyblog, 2021)”

With demand either staying the same or increasing and supply not increasing enough to settle demand, it forces Canadians to pay more for a property in order to win the offer. Individuals who are expecting the market to crash would say that these individuals are over-paying. Individuals who think the housing market will stay strong believe that Canadians are simply paying more. Paying more for housing is something Canadians have been doing year over year for decades, only seeing a few dips in housing prices in recent years like the 1987 stock market crash (not so recent) and the other being in 2017.

I know you’re probably thinking, “Silly Griffin forgot about the housing crash in 2008”. Well you would be mistaken as I’m writing this post about he Canadian housing market and not the American/global housing market.  “The Great Recession of 2008-09, when the subprime mortgage crisis left a lasting impact on housing markets down south, Canadian housing markets somehow dodged the bullet, and have led those in the U.S. ever since. (Haider & Moranis, 2021)” Canada was the only G7 country where the government didn’t have to bail out the big banks with Canada avoiding a crash.

Talking about the housing crashes in the past brings me to answering the next question.

What Qualifies a crash? Well, this is self defined.

Is a housing crash a price decrease of 5%, 10% or is it 90%? Is it when interest rates increase while people are already financially over-leveraged forcing defaults on mortgages? Well, what is it? No honestly I’m asking. I hear so much talk about the housing market crashing without any definition of what they think a crash is. The same goes for people on the other side of the argument. What insinuates a bullish housing market? A specific increase that an individual deems healthy or just a general increase?

To me a housing crash equates to a crisis like we saw in 2008 where more than just housing prices fall and entire economic systems fall apart because of the housing market; however, your definition of a crash could be different. It could be any decrease to housing prices.

People have been talking about a housing crash forever! I know I’m relatively new to the industry but ask any realtor that’s been in the industry for more than 10 years. This is probably the question that they’re most asked,  “Will the bubble pop”?  If you predict the bubble to pop long enough, you will probably be right. However, what you have lost waiting for the housing market to decrease is years and years of increase. From 2000 to 2020 the Canadian housing market has increased by around 158%, including some small decreases in 2017 (around 4.5%) and some select markets in 2008 (DELMENDO, 2021). If you waited to get into the housing market until it “crashed in 2017” then you would have missed out on your property more than doubling.

This brings me to answering the last question. Are we in a bubble right now? Yes. 

By a basic definition of what a housing bubble is, housing prices have been going up at a rapid pace and yes this type of increase is unsustainable. “Ontario is expected to post the biggest annual rise in house prices of a huge 16.3% during 2021, to an average of  823,656 (CA$) (DELMENDO, 2021)”. This statistic was posted at the beginning of 2021, now that we’re in May some markets in Canada are projected for more than a 16.3% increase by the end of the year. Regardless, a 16.3% or higher increase just isn’t sustainable year over year.

However, don’t cancel your home buying plans just yet. Even though this increase is unsustainable, it by no way suggests that the housing bubble will pop and the housing market will crash. Change your mindset from unsustainable increases = market crash to the following: unsustainable increases = several possibilities. No one is saying that the housing price increase is healthy but it’s very likely that the market changes to a healthy appreciation, flatlines or even decreases a little bit.

So yes, we’re in a bubble in the same way that the housing market has always been in a bubble. If the only way to get out of the bubble is for the bubble to pop than the Canadian housing market has been in a bubble for over 30 years.

Could it pop tomorrow? Maybe. Could it pop in 10 years? Maybe.

Verdict.

1. Anything can happen and I encourage you to do your own research and make up your own opinion.
2. Don’t let the fear of a housing bubble scare you as it doesn’t mean the market will crash.
3. Remember that housing is a long term investment and worrying about the possibility of a short term loss could hurt you financially in the long run.

“A housing crash is a temporary event and prices eventually return to normal levels, when demand rises again and home-buying activity resumes. (McNutt, 2021)”.

Huebl, S. (2021, April 8). Https://www.canadianmortgagetrends.com/2021/04/homebuyers-to-face-more-stringent-mortgage-stress-test-after-june-1/. Retrieved May 12, 2021, from https://www.canadianmortgagetrends.com/2021/04/homebuyers-to-face-more-stringent-mortgage-stress-test-after-june-1/

(2021, March 29). Retrieved May 12, 2021, from https://torontorealtyblog.com/blog/the-market-crash-is-coming-right/

Haider, M., & Moranis, S. (2021, January 29). Looking for the reasons why Canada’s housing prices are rising faster than in the U.S. Retrieved May 12, 2021, from https://financialpost.com/real-estate/looking-for-the-reasons-why-canadas-housing-prices-are-rising-faster-than-in-the-u-s

DELMENDO, L. (2021, January 28). Canada’s red-hot housing market. Retrieved May 12, 2021, from https://www.globalpropertyguide.com/North-America/Canada/Price-History#:~:text=Ontario%20is%20expected%20to%20post,and%20New%20Brunswick%20(5.7%25).

McNutt, L. (2021, April 30). What is a housing bubble? And are we in one? Retrieved May 13, 2021, from https://blog.remax.ca/what-is-a-housing-bubble-and-how-will-it-impact-you/

If you have been keeping up with your real estate and mortgage news, I can only assume that you’re a mortgage nerd like myself!  The biggest headline is “Banking Regulators Planning to Increase Stress Test to 5.25% June 1st”. This increase isn’t a guarantee but it’s good to know how this might affect the housing market. For those of you that may be unfamiliar with the stress test and what this raise means, I’m happy to explain the interesting world of the stress test.

*I don’t go into extreme detail about stress tests in this blog to keep it short and informative. If you want to find out more please reach out.*

The stress test is the Bank of Canada’s way of preparing for the worst. They do this by making every individual qualify at a higher rate than they will actually be paying. Just in case someone loses their job or runs into a large amount of debt the Bank of Canada wants to make sure that Canadians can still make their monthly mortgage payments. For example, if your Dominion Lending Centre’s mortgage agent (hopefully me) sets you up with a 2.09% rate on a $500,000 mortgage, your monthly payments would be $1868. The Bank of Canada wants to make sure you can pay a 4.79% (current stress test) on that $500,000 mortgage, making mortgage payments of $2606. Remember; the rate you’re actually paying is the 2.09%, the 4.79% it is just simply an affordability calculation.

The big issue with the stress test is that although it forces Canadians to be financially responsible it also limits how much we can borrow. This is because your “monthly payments” are being qualified at a higher rate making your income more leveraged and lowering the amount a lender will loan. For example, before the stress test was created in 2018 Canadians making $80,000 a year with a 2.09% rate and 25 year amortization could afford a mortgage of $500,000. Now with the stress test and the exact same situation, Canadians can afford a mortgage of $400,000. This directly affects first time home buyers and individuals entering the market with smaller down payments because these groups need higher loan amounts to compete with people who have a lot of equity to invest.

*Numbers above are estimates and are based on assumptions about the client and the market situation*  

The Canadian government is now increasing the stress test from 4.79% to 5.25% lowering how much Canadians can qualify for once again. The goal of this is too cool down the housing market, which has shown huge increases in appreciation. If you’ve done your research, some experts believe this is a great idea and some believe it’s a waste of time. To be honest; it’s both a good and bad idea to raise the stress test.

Cooling down the housing market is a good thing as demand is far too high. The Canadian government needed to try something to slow down the housing market. This could slow down the housing market because it might discourage people from either entering the housing market or finding a new house because they won’t be able to compete in the purchase range that they want. Another positive is that we don’t know how the housing market is going to react once the pandemic is over. By raising the stress test the government is preparing Canadians for the worst just in case the rates go up once society returns to normal.

On the other hand, raising the stress test might have minimal to no affect on the housing market. First of all an increase of .46% (5.25 – 4.79) is not overly significant. If a Canadian could qualify for a $400,000 mortgage ($80,000 annual income and 25 year amortization) under the current stress test at 4.79 then they could qualify for a $380,000 mortgage under the new stress test at 5.25% in the exact same situation. I understand that twenty thousand dollars could be the difference maker but it’s probably not going to discourage enough buyers to cool down demand. If this stress test increase does lower prices in the housing market than it will only be by a minimal amount and not by hundreds of thousands of dollars. This will leave first time home buyers and individuals entering the market with smaller down payments in the exact some situation they were in before and continue to help the individuals who are already equity rich.

I didn’t give you an answer on whether the stress test increase is a good or bad thing and thats because it’s an answer that will reveal itself in the future. In the short term, it’s a minor policy change that will most likely not change the market in a significant way, however, if it forces Canadians to be more financially responsible then it could in fact be very valuable in the long term. This change is set to take place on June 1st so if you’re really concerned about getting qualified with the current stress test please reach out.  I’m happy to help!

I have been employed with Dominion Lending Centres for over half a year now and after months of promoting what I can do for my clients, I was asked by a friend the other day, “What do you actually do”? I was surprised by that, but it’s a really good question. It occurred to me that people know that I’m involved in the mortgage world but don’t know exactly what I do. So, this is what I do.

To put it simply,  I help my clients secure a mortgage that is right for them. I don’t work for any individual lender like banks (CIBC, TD, etc…), credit unions (Meridian, First Ontario, etc…) or monoline lenders (lenders who only offer mortgages). I have access to a majority of lender rates and programs (115 lenders to be exact) which gives me more options for my clients. This also allows me to have an unbiased opinion because I have no affiliation with a specific lender.

The historical way to get a mortgage is for a person to walk into a bank and seek out financing through a specialist that works there. The specialist will offer a couple of mortgage products and all of them are funded by the bank and because the specialst works for the bank, they’re obligated to suggest these products which in essence may reduce your options.

Dominion Lending Centre agents like myself not only have more options, we’re committed to getting you the best mortgage product, no matter where they come from, if they’re right for you.  We’re committed to exceeding your expectations with service and results so that we get your repeat business and you refer us to others. This also drives me to work outside of the typical 9-5 work schedule that so many salaried jobs follow. My clients can contact me at anytime during the week!

Theres a stigma that independent mortgage agents only specialize in clients that aren’t A-side; clients that have poor credit or low income where we have to get creative and find out-side-of-the box mortgage solutions. This is one aspect of our job but in fact most of the mortgage products that I have access to are for A-side clients that are looking to get the best rates and the lowest fees. 

Dominion Lending Centre agents like myself do everything a bank can do but with more options and around the clock care!

“What’s my credit score?” or “How is my credit score calculated?” are some of the questions that I often hear as a mortgage agent. Credit score also goes by “beacon score” and “FICO” score depending on the agency that calculates the score. There is a certain cloud of mystery when it comes to credit score and how these credit bureaus calculate that score. Amid the mystery, credit scores are one of the most important factors when a lender is considering a borrower for a mortgage. The entire premise of credit scores can be confusing but to be honest they might be one of the most simple concepts. Credit score is just a calculation that measures an individual’s ability to pay debts, thus establishing a risk level.

Credit scores are calculated from a range of 300 to 900, 300 being the lowest possible score and 900 being the highest possible score. The lower the score the more risky the borrower is to the lender. This risk level also determines what lender will be willing to take on a certain borrower and what rate that lender can offer. As stated in an earlier blog, a credit score above 660 will be enough to get a mortgage with an A-side lender, allowing the borrower to receive the best rates on the market (providing the rest of the application is strong). A credit score below 660 is handled in a case by case situation as different lenders have different guidelines. A general rule is, the lower the credit the higher the rate and additional fees the client will be paying; however, there are ways to get around poor credit and high rates depending on income, equity and other factors. It gets complicated when explaining this aspect of the mortgage world so if you have a unique situation feel free to reach out with any questions.

In Canada there are two credit agencies: Equifax and TransUnion. Each lender will use at least one of these companies to decipher a credit score for their clients or potential clients. Both of these agencies will show different scores for the same client proving that their algorithms to generate a score are slightly different. Although there is a slight difference, both algorithms have the same core factors that calculate score:

1. Credit Mix (10%): Having multiple types of credit such as credit cards, personal loans, line of credits , mortgages , etc
2. New Credit (10%): looks at how many new forms of credit an individual is taking on in a certain time period. Not just having one credit card for years and no other forms of credit.
3. Credit History (15%): How long credit accounts have been open (the longer the better as long as payments are being made)
4. Credit Utilization (30%): How much of a balance is drawn compared to the limit. Don’t go over 50% of the limit. For example; if you have a credit card with a limit of $5,000 then you shouldn’t exceed a balance of $2,500.
5. Payment History (35%): Late or missed payments, overdue accounts, bankruptcies and any written-off debts will all lower your credit score.

As seen above, payment history and credit utilization controls the largest portion of the credit score.

At the beginning of the blog I stated that credit “might be one of the most simple concepts”. I’m not saying credit scores are a simple concept because I’m in the mortgage industry or because I work with credit every day. Credit scores are a simple concept because I tend to not overthink them. It’s very normal to take on debt; almost everyone has or will take out a loan or use a credit card. Just don’t take on more debt than you can afford and make sure to pay off the debts when you take them on. The best advice I can give to raise a credit score is to use more than one form of credit every month and pay it off by the end of every month. If you can’t do that, set up minimum payments and don’t exceed 50% of available credit.

Don’t let credit scores get you confused or stressed out! If they do, reach out to me.  I’m happy to help you figure out a solution

I was going to title this blog “insured, insurable and uninsured mortgages” but the title “blah, blah and blah mortgages” may have been equally enticing to a reader. My interest in mortgages isn’t always met with the same enthusiasm; however, whether mortgages excite you or not these blogs can help you gain an understanding of the process and make you feel like you aren’t overwhelmed when you begin the process of getting financing for your dream house.

I often hear people quote rates that are the absolute rock bottom market rates. This often gives people an unrealistic view on what rates they can actually qualify for. When you google “mortgage rates” and look at the first set of advertised rates, that doesn’t necessarily mean that you will qualify for the lowest rates. The rate you can actually qualify for depends on a number of things.

1. Fixed vs Variable: Fixed mortgages are set payments with set interest rates; if rates go up or down the client pays the same monthly payments until the term is over. Variable mortgages are fluctuating payments that follows the market trend (better if you know rates are going down). Variable rates are currently advertised as lower with some exceptions depending on the lender and term. Make sure to know the difference before getting excited for a 1.34% variable rate when you actually want a fixed rate.
2. Term: This is the amount of time the client is committed to specific parameters (lender, rates and other conditions). Term is not to be confused with amortization which is the amount of time it takes to fully pay off the loan. The amount of years within the term determines what kind of rates are paid. Lenders normally offer 1,2,3,4,5,7 and 10 year terms but other types of terms can be found depending on the lender. Traditionally, the lowest rates are a 5 year term which also makes it the most popular. Be sure to know what type of term you’re interested in before expecting a certain rate.
3. Limited: Certain mortgage rates have limits to them or are only available for a limited time. One example is Bona Fida sale clauses: this clause within a mortgage blocks you from refinancing with another lender when your term is over and either has extremely high breakage fees or simply wont allow you get out of your mortgage. Quick close mortgages are another example: these mortgages are only available for a limited time and require the closing date to be within a specified time period. There are other clauses and programs that offer low rates just like the two listed above that home buyers should be carful about. Make sure to read or have a mortgage agent read over the commitment before you get into something that might not benefit you in the long term.

The listed items above are very simple explanations of how certain aspects of a mortgage could confuse someone with regards to rates; however, to throughly explain all of the details would require a much longer post. If you want to find out more, please reach out.  I’d love to talk with you about your plans.

If you’re not already teeming with excitement about rates and how to remain confident in a market with hundreds of mortgage programs, here’s the grand finale that determines what type of rate you can get: Insured, insurable and uninsured mortgages! Yes, the exclamation mark was necessary. It’s just that important. I find myself quoting those three words everyday to figure out what type of rate I can get for my clients. Let’s go through them!

Insured mortgages or high ratio mortgages offer the lowest rates because they are least risky to the lenders. They require the borrower to pay an insurance premium that protects the lender if the borrower were ever to default. This type of mortgage is mandatory when the down payment is under 20%. They also have a maximum 25 year amortization, raising monthly payments and lower borrowing power because the client wouldn’t be able to stretch payments over 30 years. Also, if the client requires a mortgage on a rental property, refinancing or for a property above a million dollars they would not be eligible for an insured mortgage. I often hear people quote insured rates because they’re the lowest. Even though they’re the lowest, make sure you can qualify for an insured mortgage and make sure the added premium/restrictions are viable for you.

Insurable mortgages normally offer rates higher than insured mortgages but lower or similar to uninsured mortgages. They also require mortgage insurance and are less risky to the lender. However, the insurance premium is paid by the lender and not the borrower to protect themselves. Insurable mortgages follow all of the same guidelines as insured because they’re not available to clients wishing to purchase a rental property, get a refinance or purchase a property over a million dollars. The only difference is that down payment has to be over 20% and no insurance premium is paid by borrower.

Insured and insurable mortgages are restricted to clients purchasing a property over a million dollars; however, if a property was purchased for under a million dollars and that property appreciated in value over the first term of said mortgage the client would be allowed to stay in their insured or insurable mortgage until the end of the term.

Uninsured mortgages offer the highest rates because they aren’t insured and as a result riskier to lenders. This mortgage allows for everything that insured and insurable mortgages allow and have less restrictions. Rental purchases, refinances and properties above a million dollars are all uninsured deals. They also allow amortization up to 30 years, giving clients more borrowing power and a 20% down payment or more is required.

In summary, mortgage rates depend on a multitude of factors and it’s more important to fully understand your mortgage than disregarding a mortgage product simply because it’s rate is not rock bottom.

I’m a young agent in the mortgage industry and because of this many of my clients are young first time home buyers.  I’m often asked to complete pre-approvals for first time home buyers to help them determine what they can afford.  This has given me a unique perspective in understanding on how young people view pre-approvals. 

The entire mortgage process can be lengthy and at times frustrating; however, working with a reputable mortgage agent can help make the process more organized and less stressful.  I like to break the mortgage journey into steps which allows the client to focus on one task at a time which helps make the process clearer.  I could describe each step in detail but you would end up reading a book and not a blog, so I’ll start simply and focus on one step at a time. The first step in helping my clients (first time home buyer or  repeat home buyers) purchase a  house is evaluating how much they can afford. This is done through a pre-approval. In my experience, most people have a general idea of what a pre-approval is but they don’t always understand the steps involved and how important it is. Pre-approvals are extremely beneficial because of two main reasons; estimated price range and rate holds. 

When you decide to enter the housing market, you can’t just start looking at any home. Obviously, the housing market has different price ranges and you could potentially get into a risky situation if your offer gets accepted on a house that you can’t ultimately afford. Lucky for you, you’re reading my blog and you’ll see that getting pre-approved before the house hunting process starts is the smartest move. When you reach out to me for a pre-approval I look at three main things: income, down payment and credit.

By providing a few income documents I can see what you can afford from a monthly payment perspective and I’ll make sure your debt to income ratios would be acceptable to a lender. After considering your income, a picture of the loan amount starts to come together.

An estimation for a down payment is added to the loan amount to see the potential purchase price (mortgage loan + down payment) . It also determines what type of loan you could possibly get: high ratio (less than 20%, insurance premium), insurable (over 20%, max 25 year amortization) and uninsurable (over 20%, max 30 year amortization). A lot more goes into the types of loans listed above but I’ll leave that  for a different blog. The down payment could come from a variety of sources (savings, equity, gifts etc..) 

Pulling credit is the final stage of the pre approval. It provides an overview of the client’s ability to pay off previous or current loans. Credit can be confusing and i’m going to cover this at a different time but if you have any questions about credit please feel free to reach out. Generally, a credit score of 650 or higher is usually acceptable; however, exceptions can be made depending on the lender or the equity that the client has.

Once the income, down payment and credit are identified, a mortgage amount that is affordable and that the lenders will most likely approve will be estimated. This pre-approval number is not 100% guaranteed as anything could happen from that time to an actually approval date. A pre-approval is simply a snapshot of your current situation. Thats why it’s important to not change jobs, take on new debt and spend large sums of money unnecessarily. We will then submit that information to a lender for a pre-approval letter (almost every lender will give a letter). It’s an automated system so the letter is received relatively quick as a computer system trusts the information that was imputed. Once a pre approval letter is received the client gets a rate hold.

If you’re shopping for a home, or have worked with a mortgage professional in the past, you’ve most likely heard of rate holds before. If not, it is something that every potential homeowner should be aware of. If you are not familiar with the term, a ‘rate hold’ refers to locking in a specific mortgage rate for a limited period of time. This is offered through most lenders, assuming you are a potential client looking to purchase a home and need a mortgage.

If you qualify for a rate hold, there are a few things you should know – from restrictions to benefits! The first and most important is that rate holds are typically only offered for a period of 90-120 days. So, once you have created your mortgage application with a broker and submitted it at the interest rate that best suits you, that rate will be protected for 90-120 days while you shop.

A rate hold is not a commitment. It does not force you to work with that specific lender. It also does not affect your future chances of receiving approval down the road. This can be truly beneficial in volatile markets or those with high competition. If you submit your application to a lender for a fixed rate of 2.49% on a five year term, but while you are searching for your perfect home that rate moves up to 2.99%, the rate hold will protect you and allow you to still sign at 2.49%. This can mean huge savings!

Another benefit is that, if the rates go down, it does not stop you from taking advantage of the lower offer. Instead, it protects you from rate increases after you’ve determined your budget and are in the process of purchasing a home. It is also important to note that, once the rate hold expires after 90-120 days, there is nothing stopping you from submitting another rate hold. It will just be subject to the interest rates as they stand on the day of submission.

I hope this information of pre approvals helped your understanding. I will be posting weekly blogs about the mortgage world!