A variable rate mortgage has more risk than a fixed rate.  Because your rate & payment fluctuates, the bank wants to make sure that, when rates go up, you have enough income to cover that increase.  So when you qualify for a variable, instead of basing the formula on that juicy low variable rate of 2.2%, they’re going to use the 5 year qualifying rate, which is 5.49%.

That’s quite a difference in rate.  I want to give you an idea of what those numbers mean, so let’s say you earn $60,000, have no debts &, for illustrative purposes, we’re going to ignore the costs of ownership like taxes, heat, strata fees, etc.

Qualifying with today’s best 5 year fixed of 3.69%, <20%, on a 25 year, you would be eligible for a mortgage of roughly $340,000.  Now, using those same numbers, going with a variable & using the qualifying rate of 5.49%, that same client is eligible for a mortgage of around $285,000 – 15% less.

So this is important to know.  If you’re looking at homes in the north end of your affordability range, you may not have a choice.  A 5 year fixed may be the only way you can purchase.

Now, you do get a break if you have 20% down or more.  Because you have more equity in the home, most lenders allow you to qualify using the 3 year posted rate, not the 5 year, which will improve your qualification limit.

To find out how much you qualify for going with a fixed or variable, contact me.

Ryan Zupan
Mortgage Planner
604.250.6122
ryan@mortgagecentrebc.com

Hi, Ryan here with the Mortgage Centre City Wide. I know we’re really going through the basics here & breaking down the topics of these videos to their most basic form, but a fixed rate mortgage is really, well, very simple. Your interest rate & mortgage payment are fixed throughout the length of your term. Of course, you can fix your payments at a higher level, but that minimum monthly amount & the rate that’s based off of are fixed for your term.

So, I think a better topic here is explaining what drives your fixed rate mortgage, or, how do banks determine their 5 year mortgage rate. Remember, in my video on what controls your variable rate, we learned that the Bank of Canada is in the drivers seat. Well, fixed mortgage rates are determined by the market & are based off of government bond yields. Why?

After mortgages are arranged, they are packed up & sold on the markets as Mortgage-Backed Securities (MBS). These investments are similar to government bonds and actually compete against each other as low-risk investments. So when the yield on the 5 year bond increases, investors are attracted away from Mortgage Backed Securities to the corresponding bond because, now, the bond has a higher yield. To become more competitive, then, lenders will increase fixed rates & vice versa.

So the final question we have here is why do bond yields increase or decrease? The coupon for the bond, or the income that bond produces, is fixed, so why would someone want to pay more or less for that fixed income?
Well it’s driven by supply & demand. When the stock market is in turmoil, people want a safe place to put their money, so they may go after bonds. The more people wanting to buy bonds, the higher the price increase &, in turn, the more the yield decreases.

This is probably getting into another topic but bond yield & price have an inverse relationship. All you really need to know is when the markets are volatile, the yield on bonds decrease & therefore fixed rates will decrease. On the other side, when the markets are strong, investors are attracted away from bonds, their price decreases, yield increases, as will fixed rates.

Now typically, the spread between the bond yield & the corresponding fixed rate is 1.2 — 1.4%, but fixed rates are kind of like gas prices, they’re quick to go up but slow to trickle down. So if you want to get an idea of when 5 year fixed rates are going to increase, keep an eye on the 5 year bond yield. Or call me.

Ryan Zupan
Mortgage Planner

Last week, we went over what is a variable rate. Today we’re going to go one step backward & explain where that variable rate comes from.

Going with a variable, you are opening up your mortgage to a lot more risk than with a fixed rate. Of course, because your rate changes throughout the year, there is no limit to how high this rate could go throughout the term. So, it’s very important for those going with a variable, to understand who or what controls Prime Rate & how they can get an idea of where their rate is going throughout the term.

Your variable, remember, is tied to the bank’s prime rate, so what determines prime rate?

Prime rate is controlled by the Bank of Canada’s overnight rate; they are directly related. 8 times per year, the Bank of Canada announces whether they will increase, decrease or leave target for the overnight rate unchanged. This is an important announcement for those with variable mortgages because this will tell you what’s going to happen to your mortgage for the next month or two.
Why would the Bank of Canada change the overnight rate, or in turn, Prime Rate?

This is really a tool the Bank of Canada uses to control inflation & the economy. When the economy is strong & the price of goods is increasing, inflation begins to happen. To try to slow down inflation, the Bank of Canada will increase this rate to get the economy under control. Higher interest rates means it’s more expensive to borrow. When it’s more expensive to borrow, you can expect less borrowing to happen, so less stimulus to the economy.

On the other hand, when the economy is slow, as we saw the Great Recession beginning 2007, the Bank of Canada wanted to encourage borrowing to ignite the economy. In this case, they lowered the target for the overnight rate to make it more attractive to borrow. Lower interest rates means it costs less to borrow. If I’ve been holding off on buying, when the government lowers that rate, it might just be enough incentive for me to take out that business loan, or buy a house, or whatever; it’s more attractive for me to borrow.

So with your variable rate mortgage, Prime Rate is not some magic number your bank uses to punish you or anything like that, it is determined by the Bank of Canada, which is basing its decision on the economy.

If you’d like to know more information on this topic or if you’d like to know where economists are predicting prime rate to go over the next 2 years, contact me.

Ryan Zupan
Mortgage Planner

Hi Ryan here with the Mortgage Centre City Wide. Today, we’re starting a new series of videos on the fixed/variable — qualifying for, penalties with, which is better — basically, any question you can think of related to these topics, I’m going to cover so tune in during the upcoming weeks.

Today, though, we’re going to start today with the basics — what is a variable rate mortgage?

With a variable rate mortgage, as you can guess from the name, the interest rate changes throughout the term. Your interest rate is going to be tied to the bank’s prime rate. You’re going to have some kind of discount to prime. Right now, a good discount is prime — 0.8%. So no matter where prime goes throughout the term, you’ll always be 0.8% below that mark. Right now, prime is 3%, so your rate starting out will be 2.2%. Now, if the big banks’ economists are correct & prime increases to 4% by the end of this year, your rate at that time will be 3.2%.

Now, there are open variable rate mortgages & closed variable rate mortgages. With open mortgages, you can pay the mortgage out at anytime, without a penalty. With closed variable, if you want to exceed your prepayment privileges or end your mortgage early, you have to pay the penalty. Generally speaking, unless you’re planning on selling the home in the very short term, as in, a few months, it’s better to go with a closed variable. The reason being, with an open variable, instead or prime minus, you’re looking at prime plus 1%. So instead of 2.2% (closed), you’re looking at 4% (open). Because the interest rate is so much higher & you’re paying so much more interest compared to a closed variable, it’s likely going to be better to pay the penalty & go with a closed.

There are 2 types of closed variable mortgages — fixed payment & fixed amortization. With fixed payment variables, obviously your payment is the same each month but when your interest rate rises, your amortization increases. Conversely, when your rate decreases, your amortization decreases. This is great in a declining rate environment because your amortization will shrink down without you having to pay more money each month. HOWEVER, in a rising interest rate environment, like the one we’re facing today, this is generally not something I’d recommend because your amortization may increase to the point of getting you in trouble.

With fixed amortization variables, when your interest rate changes, so does your payment. If you want a fixed payment, I urge all my clients going with variables to do so but fixed it at a higher level. Watch my “variable rate mortgage strategy video” for more info on this.

That’s our very basic breakdown of the different types of variables out there, watch my next video on what controls your variable rate mortgage.

Ryan Zupan
Mortgage Planner
604.250.6122
ryan@mortgagcentrebc.com

Let’s look at this example. Let’s say you want to buy a $400K condo &, right now, you have 5% saved for a down payment – $20K. The CMHC premium in this case is $10,450. To avoid paying that, you will need $60K MORE than you have right now. I’m going to need $80,000 for a 20% down payment. Ask yourself, how long will it take you to save that $60K? 4 years? 5 years? Maybe longer? How much higher do you expect property values to have increased by that time? More than that $10K? Is it worth waiting?

Let’s say you are able to save $12K / year & it would take you 5 years to save the 20% down payment. If you went ahead & bought today with 5% down, paid that premium, then just applied that $12K per year as a lump-sum on your mortgage, not only will you pay off that premium in a year’s time, but, compared to buying with 20% down, after your 5 year term, you will have a lower outstanding balance, a lower payment & be 5 years closer to paying off your 25 year mortgage than you would waiting. All this AND you get to buy a home today, for today’s prices, with interest rates still much lower than they’ll likely be in 5 years & avoid paying rent for the next 5 years.

If you’d like more information on the insurance premiums, or you’d like me to calculate how much the premiums are going to cost you – is it worth you buying today or is it worth waiting – contact me, I’m Ryan at City Wide Financial.

Ryan Zupan
Mortgage Planner
604.250.6122
ryan@mortgagecentrebc.com

Hi, Ryan Zupan here with The Mortgage Centre – City Wide.  Today, we’re continuing our talks on the very basics of a mortgage & go over mortgage insurance.  What is mortgage insurance?

Here in Canada, if you purchase a home with less than 20% down, you will need to purchase mortgage insurance.  Commonly referred to as CMHC, but is also offered by Genworth & Canada Guaranty.  Your mortgage insurance premiums are the same no matter where you go, so you don’t have to worry about shopping around.  And that amount is just added to the mortgage amount & paid off over time.

Now the guidelines between the insurers aren’t actually the same.  So this is where a broker can be very useful because we can match you up with a lender that works with the insurer, who best fits your situation.  Not all lenders work with all the insurers.

So what kind of premiums are we talking about?  If you purchase a home with the minimum down payment – 5% – the premium is 2.75% of the mortgage amount, not the purchase price.  The premium does go down for every 5% you put down:

5% down – 2.75%
10% down – 2.00%
15% down – 1.75%
20% down – n/a

Now, if you choose an amortization longer than 25 years, let’s say 30 years, that premium is 0.20% more.

In my opinion, mortgage insurance is a good thing, because without it, first time buyers would have a much harder time getting into the real estate market.

Without mortgage insurance, banks would not want to finance purchases with, say, 5% down because it’s a riskier investment.  Banks do not like foreclosures because they typically lose money going through all the legal proceedings, the lost mortgage income & trying to sell the place.  That 5% of your equity will get swallowed up extremely quickly if you decide to run off to Tahiti after closing.

More options are good options.

I’m Ryan with the Mortgage Centre – tune into my next video where we’ll go over why it’s better to pay the premium & buy, rather than waiting to save 20% down.

Ryan Zupan
ryan@mortgagecentrebc.com
604.250.6122

Ryan Zupan here with City Wide Financial. This is the first of a series of segments I’m going to do on the basic elements of your mortgage. We’re going to first talk about amortization. The amortization is like the lifespan of your mortgage. Making regular payments, this is how long it will take you to repay the loan. The longer your amortization, the less your payments will be. All things being equal, the shorter the amortization, the higher your payments will be.

So why would anyone want a shorter amortization? The longer you draw out your mortgage, the longer your amortization, the more interest you will pay over time. So you want to find a middle ground, where you have a mortgage payment you feel comfortable making, but also one that isn’t going to have your mortgage follow you around until retirement.

Right now, in Canada, the longest amortization you can choose with less than 20% down, is 30 years. There are a few institutions that will accept 35 year or longer amortizations with 20% down, but those are really exceptions & you don’t want your mortgage to follow you around that long.

If you choose, say, a 30 year amortization, all is not list. If you go with accelerated payments, say accelerated bi-weekly payments, you’re going to bring that amortization down to pretty close to 25 years. You’re going to lose 5 years right out of the gate.

Even, when you first buy, if you’re worried that you don’t want your mortgage to follow you around until retirement, there are lot of strategies & ways that we can cut that time down & save you money.

For more information on the different elements of a mortgage, check out my later videos or contact me:

Ryan Zupan
Mortgage Planner
604.250.6122
ryan@mortgagecentrebc.com

That $25K of my money is my down payment.  Down payment is the amount of equity you’re putting into your home.  So you have your down payment (equity) & your mortgage (debt).  Down payment + mortgage = purchase price.  The minimum down payment here in Canada is 5%.  There are programs available where you can borrow that 5%.

For down payments between 5-20%, you need to purchase mortgage insurance.  I will discuss this in my next video, but you’ve probably heard the word CMHC used a lot lately, that’s mortgage insurance.  So, for down payments between 5-20%, you need to purchase insurance, so it will be a little more expensive for you.

The last thing I’ll talk about is, sometimes people are faced with the dilemma – should I save for a home or for retirement.  If I max out my RRSP each year, that doesn’t leave much extra to save for a down payment.  The government has a program available for first time buyers, where you are allowed to use up to $25K from your RRSPs to buy a home.  There are some restrictions & you do have to pay the amount back, but you can look at my website for more info: http://www.ryanzupan.com/first-time-buyers/tax-incentives

If you’d like to know how much you can afford, or to lock in a rate, contact me, Ryan at City Wide Financial.

Ryan Zupan
Mortgage Planner
604.250.6122
ryan@mortgagecentrebc.com

Hi Ryan Zupan here with City Wide Financial. Today I’m going to talk about your mortgage term. There are 2 time frames you need to think about when you get your mortgage. The first is your amortization – the life of your mortgage – the second is your mortgage term – the length of your mortgage contract. This is the period of time where you & your lender agree to a specific interest rate, payment & options (in the case of a variable rate, your payment & rate would fluctuate throughout the year).

Your mortgage options are things like your prepayment privileges. How much money can you put towards your mortgage each year? How much can you increase your payment? What happens if you miss a payment? Your ability to move the mortgage to another home if you sell your property? There’s a lot of things to consider.

It’s important that you choose the right term, because if you break your term, if you break your mortgage early, you have to pay a penalty. In a lot of cases that penalty is quite expensive. It’s very important that you think about your goals with that property.

If, for example, your investment portfolio does well, or you get transferred, or house prices increase such that you want to sell. It’s important that you have chosen the right term so that you cost is minimized.

A big mistake I see with buyers, is when they are shopping for their mortgage, they are just looking at interest rate. Rate is just one piece of the pie. If you’re going to sign a 5 year term, for example, you should be looking at what are your total interest costs over that 5 year period? What will your outstanding balance be at the end of term?

Sometimes it’s better going with a slightly higher interest rate IF you have better mortgage options because that mortgage is going to cost you less over the 5 year period.

There are two types of terms: short term (6 months – 3 years) & long terms (3 years & above). Unless you’re planning on selling your home in under 5 years, most people go with a 5 year term. That’s the sweet spot, right now anyways, between getting a low rate & locking it in for a relatively long period of time.

Some people, who are OK with more risk, will just go after short terms. With a shorter terms, your rate is less, so they prefer renegotiating their mortgage every 2-3 years & chasing that lower rate. It really depends on your risk tolerance, your plans with the property, etc.

If you’d like to help choosing the right term or you would like to know your interest costs over the term of your current mortgage, contact me, I’m Ryan at City Wide Financial.

Alright, so it is everyone’s favorite time of year, Tax Season!  Now, if you’re like me, you enjoy paying taxes as much as you enjoy finding an empty toilet paper roll in a public washroom.  They’re both revolting.  But in my effort to symbolically “spare a square,” I’m going to share some insight into how making prepayments on your mortgage are related to income tax.

Keep in mind, I’m a Mortgage professional & not a tax expert, but there are some very basic truisms I’d like to share:
Unlike the States, mortgage interest in Canada is not tax-deductible.  The monthly payments you make are with your after-tax income — what I mean is, the payments are with money you’ve earned & already paid tax on.  This makes it even more important to make prepayments on your mortgage early, as you will not only save dramatically on you long-term interest costs, but you’ll save from having to apply future after-tax dollars to your mortgage payments.

If you have a mortgage interest rate of 5%, for every $1000 of principle you reduce your debt by, you will save $50 in after tax cash each year.  Looking at it this way, in an income tax bracket of, say, 40%, you need to earn $83.33 to pay the interest for every $1000 of outstanding principle so there is a huge benefit to reducing this balance.

Any prepayments — whether it’s lump-sum, doubling up payments, increasing payments, anything above your required monthly commitment — are going directly to reducing your outstanding balance.  You wont’t have to pay interest down the road on that amount so you are saving your future, after tax dollars.

You could also think of this as your return on investment for making prepayments is 8.33% before tax & 5% after tax, which is better than most fixed return investments — bonds, GICs, etc.

So make lump-sum payments, double up payments when you can, use your RRSP-driven tax rebate to pay down your mortgage, you’ll not only save tremendous amounts of interest, but you’ll save from having to apply future after-tax dollars to your mortgage.

For more information on mortgage tax strategies, or learn how you should be using your prepayment privileges, contact me, I’m Ryan @ City Wide Financial.

Ryan Zupan
Mortgage Planner
ryan@mortgagecentrebc.com
604.250.6122