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Tag: Mortgage refinance

  • The Canadian mortgage stress test, explained

    The Canadian mortgage stress test, explained

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    In 2018, the stress test was expanded to include buyers with more than a 20% down payment (those with uninsured mortgages). Since then, all Canadian home buyers applying through a federally regulated lender—as well as those refinancing their current mortgage—have been required to pass the test.

    Has the stress test changed over the years?

    Yes. The stress test has evolved in a couple of ways, including changes to the qualifying rate itself, and how the rate is applied.

    Until June 2021, the stress test rate was set at either 2% above the contract rate that buyers negotiated with their lender, or at the posted Bank of Canada (BoC) five-year rate, whichever was higher. However, when the BoC slashed rates at the onset of the COVID-19 pandemic, there were concerns that its five-year benchmark rate was too low to adequately protect borrowers from defaulting on their mortgages in the future.

    So, the Office of the Superintendent of Financial Institutions (OSFI), a federal government agency that acts as Canada’s banking watchdog, decided to decouple the minimum qualifying stress test rate from the central bank’s rates, and instead use a set floor rate that is reviewed annually.

    Another change has to do with mortgage renewals. Previously, if borrowers wanted to move their mortgage to a different federally regulated lender at renewal, they needed to “pass” the stress test again as a new applicant. In late 2023, however, the federal government eliminated that requirement on insured or high-ratio mortgages, as part of the Canadian Mortgage Charter. And as of Nov. 21, 2024, borrowers with uninsured mortgages will also be able to switch lenders at renewal and qualify based on market interest rates, rather than the stress tested rate.

    “This is a very good thing,” says Crawford. “Borrowers will be able to qualify at the contract rate, which means they can shop around at renewal instead of just accepting whatever their current lender is offering.”

    It’s important to note, however, that borrowers who are refinancing their mortgage—meaning, they want to change the terms of their mortgage contract, say, to extend the amortization period or to borrow extra money against the home’s equity—must pass the stress test again with either their current lender or a new one.

    What does the stress test mean for borrowers?

    The stress test reduces the size of mortgage that buyers can qualify for, says Crawford. So, unless you are able to come up with a bigger down payment to make up the difference, the test also lowers your maximum purchase price. 

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    Tamar Satov

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  • The Canadian mortgage stress test, explained

    The Canadian mortgage stress test, explained

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    “The stress test was introduced to add a margin of safety to ensure borrowers could make their payments if they faced a change in circumstances—such as if interest rates go up or their income changes,” says Crawford. 

    In 2018, the stress test was expanded to include buyers with more than a 20% down payment (those with uninsured mortgages). Since then, all Canadian home buyers applying through a federally regulated lender—as well as those refinancing their current mortgage—have been required to pass the test.

    Has the stress test changed over the years?

    Yes. The stress test has evolved in a couple of ways, including changes to the qualifying rate itself, and how the rate is applied.

    Until June 2021, the stress test rate was set at either 2% above the contract rate that buyers negotiated with their lender, or at the posted Bank of Canada (BoC) five-year rate, whichever was higher. However, when the BoC slashed rates at the onset of the COVID-19 pandemic, there were concerns that its five-year benchmark rate was too low to adequately protect borrowers from defaulting on their mortgages in the future.

    So, the Office of the Superintendent of Financial Institutions (OSFI), a federal government agency that acts as Canada’s banking watchdog, decided to decouple the minimum qualifying stress test rate from the central bank’s rates, and instead use a set floor rate that is reviewed annually.

    Another change has to do with mortgage renewals. Previously, if borrowers wanted to move their mortgage to a different federally regulated lender at renewal, they needed to “pass” the stress test again as a new applicant. In late 2023, however, the federal government eliminated that requirement on insured or high-ratio mortgages, as part of the Canadian Mortgage Charter. And as of Nov. 21, 2024, borrowers with uninsured mortgages will also be able to switch lenders at renewal and qualify based on market interest rates, rather than the stress tested rate.

    “This is a very good thing,” says Crawford. “Borrowers will be able to qualify at the contract rate, which means they can shop around at renewal instead of just accepting whatever their current lender is offering.”

    It’s important to note, however, that borrowers who are refinancing their mortgage—meaning, they want to change the terms of their mortgage contract, say, to extend the amortization period or to borrow extra money against the home’s equity—must pass the stress test again with either their current lender or a new one.

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    Tamar Satov

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  • Renewing your mortgage? A guide for Canadians – MoneySense

    Renewing your mortgage? A guide for Canadians – MoneySense

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    For those in that position, as well as those whose mortgages expire in the next 12 months, it’s best to go into the renewal process armed with knowledge of the kind of terms you’ll face and your options. Knowing in advance what you’re in for can take some of the sting out of “rate shock.” Depending on what your current lender and others have to offer, it may even make sense to renew before your old mortgage expires.

    Calculating your mortgage renewal

    Use the MoneySense Mortgage Renewal Calculator to get a sense of what you’ll be paying once you renew. This tool allows you to play around with variables, such as the location, amount borrowed, mortgage term, amortization and payment frequency to help find loan terms that work for you. If your current lender has already extended proposed terms for renewal, you can determine whether they are competitive or whether you should consider shopping around. You can even add in related expenses such as property taxes and utility fees to calculate your total costs of home ownership going forward.

    Should you change your mortgage terms and conditions?

    Worried that you’ll get saddled with what ends up looking like a pricey mortgage for the next five years? If you’re confident rates will continue to decline, you can reduce the length of your mortgage term to three years, two—as little as six months. (Conversely, you may conclude you don’t want to go through this often stressful process again that soon.) Read our coverage to learn the ins and outs of altering your mortgage term.

    Or you could consider switching to a variable- or floating-rate mortgage. That way you’ll always be paying a competitive rate of interest, whether it comes with fixed or variable payments. Be aware, though, that even fixed payments can end up rising if they hit a preset trigger rate. We’ve boiled down the arguments for fixed- versus variable-rate loans from some of Canada’s most knowledgeable mortgage minds.

    The best places to buy real estate in Canada

    How to cope with higher payments

    Regardless of the form your new mortgage takes, you will almost certainly be paying more than the one you signed up for in 2019 or 2020. We’ve compiled a list of strategies for managing the higher cost of borrowing (and to not lose your home), from making prepayments when possible to extending your amortization period. You can’t ignore the rest of your financial picture, either; you may have to cut back on discretionary spending, consolidate your other debts or dip into savings and investments to get your household cash flow on a sustainable trajectory.

    Compare the current rates in the table below. Just change the first variable to ”renewing,” and the others as they fit your situation.

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    What if you hit a wall?

    For some homeowners, a lender won’t offer to renew their mortgage at any price. In a higher rate environment or after a troubled mortgage term, your bank may simply decline your mortgage renewal application. Know that that is far from the end of the road. This article about what to do when your renewal is declined also explains how you can try to find a new, willing lender before resorting to the ultimate solution to mortgage-renewal trauma: selling your home.

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    About Michael McCullough


    About Michael McCullough

    Michael is a financial writer and editor in Duncan, B.C. He’s a former managing editor of Canadian Business and editorial director of Canada Wide Media. He also writes for The Globe and Mail and BCBusiness.

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    Michael McCullough

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  • Deloitte Canada predicts more economic growth, benchmark rate below 3% in 2025 – MoneySense

    Deloitte Canada predicts more economic growth, benchmark rate below 3% in 2025 – MoneySense

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    In the company’s fall economic outlook released Thursday, it forecasts the central bank’s interest rate will fall to 3.75% by the end of this year and a neutral rate of 2.75% by mid next year. 

    Meanwhile, it expects the economy to grow moderately as softer labour market conditions persist, especially as many home owners have yet to face higher rates when they refinance their loans.  

    “We do think that we’re going to be in for a decent year next year,” said Dawn Desjardins, chief economist at Deloitte Canada. 

    It appears Canada will successfully skirt a recession despite the impact of higher borrowing costs on the economy, said Desjardins. 

    “It’s hard to argue that the economy is just skating through this period of higher interest rates. But having said that, the overall numbers themselves continue to show the economy is expanding,” she said. 

    “Yes, the labour market has softened, but I don’t think we’re in any kind of crisis in the labour market at this time.”

    Higher interest rates impacting economic growth, labour market

    The Bank of Canada has cut its benchmark rate three times so far this year as inflation has eased, and signalled more cuts are coming. 

    Inflation in Canada hit the central bank’s 2% target in August, falling from 2.5 in July to reach its lowest level since February 2021. 

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    The Canadian Press

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  • What does the new Canadian Mortgage Charter mean for home owners? – MoneySense

    What does the new Canadian Mortgage Charter mean for home owners? – MoneySense

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    How do interest rates relate to affordability?

    In an effort to subdue runaway inflation, the Bank of Canada (BoC) has raised the benchmark interest rate several times over the last 24 months. This rate affects the interest rates of other financial products. The interest offered on guaranteed investment certificates (GICs) is far higher than usual, for example. This is because the benchmark rate is higher.

    Unfortunately for home owners in Canada, the benchmark rate also affects mortgage interest rates. Home owners with variable-rate mortgages, whose interest rates fluctuate with the benchmark rate, have grappled with sharp increases to their mortgage payments over the past few years. But even those with fixed-rate mortgages must contend with higher interest rates when their mortgages come up for renewal.

    “In the face of a rapid global increase in interest rates, many Canadians are feeling the squeeze, particularly when it comes to affording a home to rent or own,” Deputy Prime Minister and Minister of Finance Chrystia Freeland said in a press release. The Canadian Mortgage Charter is one measure intended to provide relief.

    What is the Canadian Mortgage Charter?

    The Canadian Mortgage Charter is a document that lays out expectations for banks and other lending institutions about how they will behave in their relationships with “vulnerable borrowers.” The guidelines stem from a document published by the Financial Consumer Agency of Canada (FCAC) in July 2023, but the charter is a concise and public-facing document. It outlines six things Canadian borrowers can expect of their banks:

    1. Allowing temporary extensions of the amortization period for mortgage holders at risk
    2. Waiving fees and costs that would have otherwise been charged for relief measures
    3. Not requiring insured mortgage holders to requalify under the insured minimum qualifying rate when switching lenders at mortgage renewal
    4. Contacting home owners four to six months in advance of their mortgage renewal to inform them of their renewal options
    5. Giving home owners at risk the ability to make lump sum payments to avoid negative amortization or sell their principal residence without any prepayment penalties
    6. Not charging interest on interest in the event that mortgage relief measures result in a temporary period of negative amortization

    Of these guidelines, numbers three and four are actually new. The charter is the first time lending institutions have been asked not to require mortgage holders to requalify if switching lenders, and the first time they’ve been asked to reach out to borrowers in the months leading up to mortgage renewal.

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    What does this mean for Canadian mortgage holders?

    The Canadian Mortgage Charter is intended to encourage banks to identify at-risk borrowers and offer them mortgage relief measures so that fewer people experience extreme financial hardship or lose their homes.

    The Canadian Mortgage Charter is not a law. Rather, it’s a set of expectations, much like the changes to mortgages, bank account fees, junk fees and dispute resolution proposed by the government earlier this year. And just like with those measures, the only recourse for borrowers if a lender doesn’t heed the government’s request is to make a complaint on the FCAC website. It’s unclear what, if any, consequence there is for non-compliance.

    In additional to the new charter, the Fall Economic Statement announced billions of dollars in financing to accelerate housing construction, plus plans to crack down on short-term rentals “so that homes can be used for Canadians to live in.”

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    Keph Senett

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  • How to use equity to buy a second home – MoneySense

    How to use equity to buy a second home – MoneySense

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    “Potential buyers may not have the cash they require to pay for an asset like a second home in part or in full,” says Maxine Crawford, a mortgage broker with Premiere Mortgage Centre in Toronto. “They may have their money tied up in investments that they cannot or do not want to cash in. By using home equity, however, a buyer can leverage an existing asset in order to purchase in part or in full another significant asset, such as a cottage.”  

    What is home equity?

    Home equity is the difference between the current value of your home and the balance on your mortgage. It refers to the portion of your home’s value that you actually own. 

    You can calculate the equity you have in your home by subtracting what you still owe on your mortgage from the property’s current market value. For example, if your home has an appraised value of $800,000 and you have $300,000 remaining on your mortgage, you have $500,000 in home equity. If you’ve already paid off your mortgage in full, then your home equity is equal to the current market value of the home. 

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    What is a home equity loan?

    A home equity loan (sometimes called a second mortgage) is when a home owner borrows money using the equity they’ve built up in their home as collateral for the new loan. Equity is the difference between the current market value of the property and the balance owing on the mortgage. Typically, home owners can borrow up to 80% of their property’s value, including any balance remaining on the first mortgage.

    How to use equity to buy a second home

    To buy a second property using home equity, you borrow money from a lender against the equity—meaning you use the equity as leverage or collateral. There are a variety of ways a home owner can do this.

    Mortgage refinance: When you refinance your mortgage, you replace your existing mortgage with a new one on different terms, either with your current lender or with a different one (when switching lenders, you may have to pay a prepayment fee, unless your mortgage was up for renewal). When refinancing, you can get a mortgage for up to 80% of your home’s value. Refinancing your mortgage allows you to access the capital needed to buy a second home.

    Home Equity Line of Credit (HELOC): A HELOC works like a traditional line of credit, except your home is used as collateral. You can access up to 65% of your home’s value. Interest rates on HELOCs tend to be higher than those on mortgages. However, you only withdraw money when you need it, and you only pay interest on the amount you withdraw, unlike with a second mortgage or reverse mortgage.

    Second mortgage: This is when you take out an additional loan on your property. Typically, you can access up to 80% of your home’s appraised value, minus the balance remaining on your first mortgage. Second mortgages can be harder to get, because if you default on your payments and your home is sold, the second mortgage provider only receives funds after the first mortgage lender has been repaid. To compensate for this added risk to the second lender, interest rates on second mortgages tend to be higher than for first mortgages.

    Reverse mortgage: Only available to home owners who are 55 or older, a reverse mortgage allows you to borrow up to 55% of your home’s equity, depending on your age and the property’s value. Interest rates may be higher than with a traditional mortgage, and the loan must be paid back if you move or die. You don’t need to make any regular payments on a reverse mortgage, but interest continues to accrue until the loan is repaid. 

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    Sandra MacGregor

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  • Toronto housing bubble: Is it ready to pop? – MoneySense

    Toronto housing bubble: Is it ready to pop? – MoneySense

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    As an example, someone who considered themselves fortunate to secure a 5-year variable rate mortgage at 0.9% in early 2022 may have seen their interest rate soar to 5.4%, leading to a significantly higher required payment. For some, this situation is painful, and for others, it becomes unmanageable. In extreme cases, selling the home they purchased just a few years ago, because they can no longer afford it, may be their only recourse. 

    Source: Michael Pe, CFA

    Furthermore, demand from foreign buyers has also been curtailed by the Canadian government’s recent ban on non-Canadians purchasing property. Resident investors, who have significantly contributed to home price inflation, are also likely to be affected by higher interest rates and diminishing cash flow. 

    When will the Toronto real estate bubble burst? While pinpointing the exact timing of Toronto’s potential real estate correction remains challenging, signs of deflation may already be underway. The TRREB has its benchmark prices, designed to estimate the value of a typical home in the area without distortion from outliers. In October, the real estate board reported the benchmark at $1,103,600, indicating a 2.1% dip from September’s $1,127,000. 

    The prospect of a prolonged period of increased interest rates, driven by the Bank of Canada’s cautious stance amid inflation concerns, alongside reduced affordability, restrictions on foreign buyers, and decreased local investor activity due to higher interest rates, suggests the potential for further market deflation.

    When will housing prices hit bottom?

    Prices are dropping in Toronto, and in Canada as a whole. However, it’s uncertain whether prices will continue to decline or not. The Canada Mortgage and Housing Corporation (CMHC) forecasted home prices to increase in 2024. And according to recent stats from real estate firm Wahl’s 2023 GTA Housing Snapshot Report, underbidding has been rising over the past five months (81% in October). To me, the growth underbidding indicates there are less buyers and lower prices.

    Optimists may argue we’ve seen this environment before, with affordability as the ongoing issue. They may contend that the lack of housing supply and the resilience of the housing market will continue to drive up home values. However, certain conditions such as astronomical inflation and rapid interest rate increases have not been seen in decades. This present landscape contains a new set of headlines, setting the stage for potential falling home prices.

    While it’s impossible to definitively predict if and when the Toronto real estate market will experience a downturn, it’s evident that skyrocketing prices have created an affordability problem for many. 

    Simultaneously, though, it disproportionately benefited others, such as property investors. Despite current conditions suggesting diminishing housing demand, including that of investors, policy makers in Canada, including Toronto, must address and moderate this type of demand in the future. Even after interest rates come down. 

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    Michael Pe, CFA

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  • Tools to calculate your mortgage payments and costs in Canada – MoneySense

    Tools to calculate your mortgage payments and costs in Canada – MoneySense

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    Mortgage payment calculator

    Understanding the long-term financial implications of a home mortgage, particularly the cumulative impact of interest, can be complicated. A mortgage payment calculator is an essential tool to help you make informed home buying decisions. It helps you estimate your regular mortgage payments based on the home’s purchase price, down payment size, loan interest rate and amortization.

    A reliable mortgage payment calculator provides a comprehensive overview of your expected payments, including the total interest you’ll pay over the mortgage term. Additionally, many other housing expenses, such as property taxes, land transfer taxes, and the need for mortgage default insurance, are directly linked to the size of your mortgage and the home’s value. 

    The mortgage payment calculator on MoneySense helps you understand your mortgage payments, including the required closing cash and monthly carrying expenses you will need to buy the home you want. 

    Mortgage insurance calculator

    If you buy a home with less than a 20% down payment in Canada, you must get mortgage default insurance (sometimes, referred to as mortgage insurance). Unlike home insurance, which covers property damage, mortgage default insurance protects the lender if something happens and you can no longer make your mortgage payments. In Canada, this type of insurance is provided by three institutions: CMHC, Sagen and Canada Guaranty.

    The mortgage insurance calculator on MoneySense calculates how much you will pay for mortgage default insurance. Your premium is based on the loan-to-value ratio (LTV) of your home.

    Based on this ratio, the insurance premium falls between 2.8% and 4% for down payments below 20%. While a down payment higher than this may exempt you from purchasing mortgage insurance, the lender might still require it in certain situations. To use the tool, enter the asking price and down payment amount, and it will provide an estimate of your mortgage insurance premium. 

    Land transfer tax calculator

    A one-time fee called a land transfer tax (or land transfer fee) must be paid whenever a property changes hands. The charge is levied by the provincial and territorial governments and/or local municipalities. 

    Land transfer tax—which must be paid in cash—is in effect across all regions except Alberta, Saskatchewan and the three territories. In these areas, a much smaller land transfer fee is imposed instead. If you’re purchasing in Toronto or Montreal, you’ll pay municipal land transfer tax in addition to provincial land transfer tax. 

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    Angela Serednicki

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  • Mortgage refinance calculator – MoneySense

    Mortgage refinance calculator – MoneySense

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    Depending on your circumstances, refinancing your mortgage can be a smart financial choice. However, while refinancing can lead to substantial savings, it can also come with steep costs. That’s when a mortgage refinance calculator can come in. It gives you a quick breakdown of the financial pros and cons of refinancing, which should make it easier for you to decided on the best course of action.

    What is a mortgage refinance?

    To refinance your mortgage means to break your current mortgage contract and negotiate a new one, either with the same lender or a new one. When you refinance your mortgage, you are taking out a new mortgage loan under different terms and paying off your existing one. Sometimes it makes financial sense to refinance a mortgage, but note that doing this before your mortgage is up for renewal can result in prepayment penalty fees. Whether or not to refinance a mortgage is a question many borrowers face at some point. A mortgage refinance calculator can help you decide. 

    How to use a mortgage refinance calculator

    A mortgage refinance can save you money, but it can also come at a significant cost. To help you weigh these pros and cons, the Ratehub mortgage refinance calculator above estimates the fees involved in breaking your mortgage agreement and calculates what your new mortgage payment would be under revised terms. (MoneySense.ca and Ratehub.ca are both owned by Ratehub Inc.)

    Based on the information you enter, it provides four pieces of information useful to home owners considering a refinance. For each scenario (sticking with your current contract and signing a new one), it shows you: the total mortgage amount, the amount of equity you can access, the penalty paid for breaking the mortgage, and the monthly mortgage payment (based on the interest rate you select).  

    Of course, every person’s situation is unique. Though a mortgage refinance calculator is a helpful tool, it’s always good to speak to an expert or mortgage broker, who can discuss all the specifics of your financial situation, before making a final decision. 

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    When should you refinance your mortgage? 

    There are few reasons you may want to break your current mortgage contract and refinance. 

    1. Taking advantage of lower interest rates. Negotiating a lower interest rate can reduce your regular mortgage payment, thus making your mortgage more affordable. It can also save you tens of thousands of dollars over the course of your mortgage. However, any savings that come from lower mortgage payments must be weighed against the cost of prepayment penalties, which can easily add up to thousands of dollars (more on that below). 
    2. Accessing the equity in your home. As you make payments on your mortgage, you steadily build up equity in your property. Your home equity is the difference between the current market value of your property and how much you still owe on your mortgage. Once you’ve built up sufficient equity, you may be able to borrow up to 80% of the appraised value of your home, minus the remaining balance on your mortgage. You can put this money towards home renovations, investment opportunities or even your children’s education. 

    You may also be able to get a home equity line of credit (HELOC), a secured form a credit. With a HELOC, you can access 65% to 80% of your home’s appraised value. Rather than having to break your mortgage and receiving the equity in a lump sum, you can use a HELOC to access the money as needed (the same way other lines of credit work). You only borrow and pay interest on the funds you need. 

    Finally, you may want to refinance your mortgage to consolidate debt. By taking out a mortgage that is bigger than your current one, you can put the extra cash towards paying off higher-interest debt, such as credit card debt, helping yourself save money in the long run. 

    Be aware of prepayment penalties

    Just as there are good reasons to refinance a mortgage, there may be reasons to stick with your current one. A common reason people decide not to refinance is the high cost of prepayment penalties, which lenders charge when you break a mortgage contract early. 

    Fixed-rate mortgage holders typically pay the higher of three months’ interest on their remaining mortgage balance or the interest rate differential (IRD), a penalty based on the difference between your current mortgage rate and the rate the lender would use if lending the funds today. Variable-rate mortgage holders are penalized three months’ interest. (Note: Penalties may vary based on the financial institution, original mortgage contract, term length and more.)

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    Sandra MacGregor

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