Nick Holloway

By Nick Holloway The first widely recognized credit card was introduced in 1958 and have been growing in popularity ever since. Credit cards have revolutionised the way we pay for goods and services and frequently come with perks such as points or other benefits, however it is important to understand how the interest charges work to ensure you are able to make an informed decision to use the credit facility responsibly. The one simple rule to follow is pay off the credit card statement balance in full by the due date specified to avoid any interest being applied to your account. Depending on extenuating circumstances, this may not always be possible to pay the statement balance in full, and in such a scenario, I will explain how the interest is calculated and applied according to the general terms of the credit card agreement. Federally regulated financial institutions in Canada who issue credit cards are required to provide consumers with a minimum 21-day interest free grace period on credit card purchases (noting - this excludes cash advances or cash-like transactions which are charged interest from day one and until this amount is repaid in full), with this grace period commencing from the point of issuing the monthly billing cycle statement to the customer. The grace period includes purchases made from the beginning of the given billing cycle which extends this interest free period up to a maximum of around 50 calendar days, depending on the date the purchase is made during the billing cycle. According to this legislation, you are not required to pay any interest on your credit card purchases when you pay the statement balance in full and prior to the due date specified on the credit card statement. What happens if I fail to pay the full amount of the statement balance? To run a hypothetical and simplified scenario, lets say we have a billing cycle which commences on the first of the month with an annual interest rate applied at 23.99% (or equivalent of 2% per month). In this example, a credit card purchase is made on the 1st day of the billing cycle for $5,000 and a further purchase made on the 15th day for $5,000, which closes this billing cycle with a final statement balance of $10,000. For this first month which we will assume is 30 days in total, we can calculate the average daily balance for this period of $7,500, then by multiplying this amount with the monthly interest rate of 2% equals a sum of around $150 in interest accrued. We move into a second month and the statement is subsequently issued on the 1st day of this following month which requests the outstanding balance of $10,000 to be paid by the due date of 22nd, noting this is in line with the 21-day interest free grace period noted above. The customer pays off $5,000 of this balance on the 15th of the month, with a further $5,000 paid on the 30th of the month which closes out the remaining statement balance in full. As there is an outstanding statement balance (of any amount) remaining past the statement due date, we can expect the above terms of the credit card agreement will apply and an interest charge posted to the account based on the average balance for the entire 60-day period, which aligns the period by when the total balance of this statement period has been repaid in full. We can now calculate the average balance for the second month which is effectively a mirror to the first month with an average balance of $7,500 which equals a further $150 in interest, which combined for the complete 60-day period equals a sum of around $300 in interest which would be applied to the account at the beginning of the next billing cycle and statement, and any subsequent purchases made in this following month are provided the same overall grace periods until those become due in the next statement, and so on. So, I should make sure I pay off the entire statement balance by the due date each month? Ideally, this will be the case for every credit card statement received to avoid any interest being applied to the account. However, there maybe times where this is not possible when resolving a short term cashflow situation. As an immediate priority, it is important that if you are experiencing difficultly with paying your credit card in full, you should look to make sure at least the minimum payment is paid by the due date as missed or late payments may negatively affect your credit report scoring as well as incurring additional fees over and above the interest charges mentioned above. If it looks like you are unable to pay the entire statement balance by the due date, it is better to pay as much as you can afford and as early as possible which assists with reducing the average balance over the billing cycle and will reduce the overall interest charge which apply, while also helping the account to return to a point of paying the statement balance in full over subsequent billing cycles. Should the difficulties of repaying the balance continue over a longer timeframe, it is important to understand what alternative credit options are available to assist with reducing the overall interest rate which apply to the outstanding amount. For homeowners, this may be possible by way of a refinance of your existing mortgage which releases the equity built up in the property and helps with consolidated the higher interest rate debt and replaces it with a significantly lower rate alternative. Please reach out if you require further assistance so we can accurately assess the specific options available to manage your debts in the most cost-effective manner.

By Nick Holloway - When borrowers are finalizing their mortgage options, they need to decide how they want to schedule the regular payments. There are many options to choose from, while my general recommendation leans toward choosing a repayment schedule which fits best with the households budgeting needs and requirements. You can select your regular mortgage payment amounts on a monthly, semi-monthly, bi-weekly, or weekly basis. Alternatively, you can opt to pay down your mortgage loan principal balance quicker by using an accelerated bi-weekly or accelerated weekly repayment schedule. To understand the repayment schedule, we must initially understand the parameters of the repayment period, which is referred to as the amortization schedule, commonly set to 25 years in Canada. Each regular payment is broken out into a principal and interest component, noting the amortization schedule reduces the overall principal balance owed over time. As a result, the balance of the payment amount applied to principal balance increases and likewise decreases the interest component over time. In other words, you only pay interest on the remaining principal balance at the time of making your payment, basing the necessary interest calculation on this principal balance and period elapsed from the preceding regular payment being received by the lender. What repayment frequency should I choose? We can break this out into two main categories, a regular repayment, or an accelerated repayment schedule. The regular repayment schedule will amortize the loan to match the amortization period, which we will set herein at 25 years for the sake of consistency. Noting that you are only paying interest on the balance of the principal at each regular payment interval, the increase in frequency from say a monthly to bi-weekly payment doesnt have a significant bearing on the overall interest costs over the lifetime of the mortgage. To make a quick comparison, we can annualize the projected payment amount by multiplying the monthly payment by 12, the bi-weekly by 26 and the weekly by 52, then comparing the sum of those differences. For example, if we take an initial $500,000 mortgage principal balance with a 2.5% contract interest rate compounded semi-annually, the regular monthly principal and interest payment comes to $2,239.83. The annualized payment total is $26,877.97, with the bi-weekly totalling $26,862.99 ($14.98 less than monthly), followed by the weekly totalling $26,856.57 ($21.40 less than monthly). What is an accelerated repayment schedule? The accelerated repayment schedule is calculated by simply taking the regular monthly payment amount, then dividing this amount in two for the accelerated bi-weekly or dividing in four with the accelerated weekly schedule. Essentially, this results in increasing the overall amount of your payment contributions over time as the borrower is making the dollar equivalent of 13 monthly payments over the span of a 12 month period. If we carry over from the above example and annualize this amount, we have $26,877.97 + $2,239.83 = $29,117.80. The effect of this increase in your overall payment contributions results in an acceleration of the principal balance being paid down over time, which reduces the timeframe of a 25 year amortization to around 22 years and 5 months to extinguish the principal balance in this example. If we hold these same parameters constant, the projected interest costs over the lifetime of the mortgage are $171,949.34 for the regular monthly payment, which is reduced to $152,296.60 with the accelerated bi-weekly option. The benefit is an overall interest saving of $19,652.74 over the lifetime of the mortgage loan, however this benefit is moderated by an increase in the regular payment amount which has the effect of reducing the households overall cashflow. Are there other ways to pay down the principal quicker? Mortgages in Canada come with a variety of pre-payment privileges which allow the increase of your regular payment amount and/or applying lump sum payments which similarly have the effect of paying the mortgage principal down quicker than the amortization schedule selected. Arguably, these pre-payment privileges can be tailored to more exact specifics of the borrowers overall goal and budgeting requirements in respect of increasing the pace of principal paydown, while still managing the cashflow needs of the household. These strategies are however not mutually exclusive since the pre-payment privileges can be combined with the accelerated repayment schedule to suit the borrowers requirements accordingly. As with many things in life, one size doesnt fit all.

By Nick Holloway We have been provided confirmation yesterday that the new minimum qualification rate will be the greater of the borrowers mortgage contract rate plus 2%, or 5.25% as of June 1, 2021. This is an increase of 0.46% from the current minimum mortgage qualification rate applied at 4.79% (or 2% above contract rate). Are all mortgages required to adhere to the change? In short, yes this will be applied to all residential mortgages in Canada, regardless of the Loan to Value (LTV). The changes were originally outlined by an open letter from the Office of the Superintendent of Financial Institutions (OFSI) on April 8th, 2021 as changes to existing Guideline B-20 - Residential Mortgage Underwriting Practices and Procedures. The changes indicated by OFSI was anticipated to apply to all mortgages which are uninsured (i.e., residential mortgages with a down payment of 20% or more). The initial announcement did not apply to insured mortgages (i.e., residential mortgages with a down payment of less than 20% and requiring mortgage default insurance) as the Minister of Finance sets the minimum qualifying rate for all insured mortgages. However, the announcement released yesterday by the Department of Finance Canada has confirmed the Federal Government will align with OFSI new rules by establishing the new minimum qualification rate for all insured mortgages approved on June 1st, 2021 or later. Will this affect my mortgage qualification? If you have received a mortgage approval for a purchase, transfer/switch, or refinance before the change to the new rules, there will be no change to your approval as these will be considered based on the previous qualification rate, even if the funding date occurs after the June 1, 2021 change. It has been indicated in the OFSI website that it is up to lenders discretion whether the old rules can be applied to pre-approvals, although it should be noted this differs from the Ministry of Finance announcement yesterday which categorically states the new rules apply to all mortgage approved on June 1, 2021, or later (indicating a mortgage approval is required with an accepted offer and/or subject property in place). As these announcements are different in their exact verbiage and we are reliant on lenders specific guidance, it would be prudent to assume that any current pre-approvals which turn to an approval on or after June 1, 2021 will be required to follow to the new mortgage qualification rules. What is the impact of the change in respect of affordability? Mortgage qualification is based on calculating Debt Servicing Ratios. The first being Gross Debt Servicing ratio (GDS) and secondly the Total Debt Servicing ratio (TDS). To simplify my example, I shall apply only the GDS ratio to a maximum permitted percentage of 39% with an assumption that there are not sufficient outstanding debts which would trigger the maximum TDS ratio. The GDS is the sum of Principal and Interest mortgage payment using the minimum qualification rate with a 25-year amortization, Property Tax and Heat (commonly referred to as PITH), divided by the households verifiable gross income amount. If we assume a household income totals $100k while applying an amount of $4,000 for property tax and $1,200 for heat each year, the maximum amount the borrowers mortgage qualifies for under the 4.79% rate equals $494,400. We can think of this as a Debt to Income ratio of 4.944, in other words for every $20,226 of annual income equates to $100k in mortgage qualified. By applying the increase in the minimum qualification rate from 4.79% to 5.25% with all other parameters being equal, this is a reduction in the loan maximum to $472,660, with a Debt to Income ratio now at 4.7266, or for every $21,1567 of annual income for each $100k in mortgage qualified. While the TDS ratios are dependant on property taxes and heat which can vary the exact amounts of the approval and changes, we can establish from the above numbers the impact in this example is a reduction of 4.6% in the total loan maximum under the new rules.

By Nick Holloway - When we look at the overall debt obligations of Canadian households, we generallyfind the bulk of outstanding loan balances fall into the category of mortgage or vehicle payment. This article addresses specifically how vehicle loan payments restrict the debt servicing ability of the borrower in relation to mortgage qualification, and while other debt obligations such as credit cards or student debts apply to overall debt servicing, these items are outside of the scope of this piece. To begin with a brief overview of the qualifying ratios used for mortgage qualification, these are worked out as a percentage of the applicants gross income. Firstly, there is the Gross Debt Ratio (GDR) which accounts for the expenses regarding the mortgage payment, property taxes and heat (plus 50% of Condo fee, if applicable). Secondly, the Total Debt Ratio (TDS), which accounts for the same line items as the GDR, but also includes all other debt obligations. In its simplest form, these ratios are calculated by summing all the relevant expenses together, then dividing by the gross income amount. It should be noted for the actual mortgage payment used in these calculations is determined by the current Bank of Canada Qualification Rate, at the time of writing is 4.79% or 2% above contract rate (whichever is higher), and not by your actual mortgage payment based on your contract rate. As a typical example of the ratios lenders require for qualifying a mortgage amount, most fall to a maximum of 39% for the GDR and a higher tolerance of 44% for the TDS, which we observe is a 5% difference (Ill come back to this later). To look from the perspective of a first-time homebuyer who has no additional debts, the TDS and GDS ratios would be the same number, so we can determine the overall mortgage qualification is limited to no higher than a GDS of 39%. If the applicant were to add a car payment or other debt lines, this will result in an increase for the TDS ratio. To see this in practice, we accept an applicants annual income is at $120,000, which can be converted to $10,000 per month. For the GDS, lets assume the monthly expenses noted above total $3,900 per month, we calculate $3,900 divided by $10,000 equals 0.39 (39% written as a decimal). Now to work out the TDS ratio, we have to include additional monthly debt liabilities to the equation, so assuming the applicant has added a monthly vehicle payment in the amount of $500, then $3,900 plus $500 equals $4,400 divided by $10,000 results in 0.44 and is at our upper limit for the TDS ratio. To optimise mortgage affordability, the applicant would ideally prefer to avoid triggering the TDS ratio as this may act to restrict the amount of the mortgage loan and property they wish to qualify for. To see the triggering of a TDS in practice as a continuation from the above example, if we adjust the monthly car payment up by $100 per month to $600, the resulting TDS ratio is increased to 0.45, or 45%, which is greater than the TDS threshold by 1%. The resulting difference in affordability means a reduction of around 3% less mortgage which the applicant can qualify for based on the same income level. In conclusion, it is important to understand how the debt servicing translate to mortgage affordability and take consideration as to how best to optimise this. Assuming it is necessary to add a vehicle payment, a simple rule of thumb is considering limiting the amount of your monthly vehicle payment to less than 5% of your gross monthly income (i.e. Gross monthly income x 5%), or if it is possible to adjust the timing of a vehicle loan until after you have completed on your home purchase and associated mortgage funding, this will assist with minimizing your TDS ratios accordingly. If you have any questions regarding taking on new debt obligations, it is recommended you consult in advance with your mortgage professional so they can best advise based on your specific circumstances and help with aligning to your long term goals accordingly.

By Nick Holloway - As a mortgage professional, a question which comes up regularly is whether a borrower should wait to purchase a property until they have a down payment of 20% or more. As with most mortgages in Canada, it is necessary for the borrower to pay a mortgage default insurance premium as a percentage of the mortgage funds borrowed to either CMHC, Genworth, or Canada Guaranty when the down-payment is less than 20%. When the down-payment is greater than 20%, the borrower is generally not required to pay the mortgage default insurance premium. This question requires a closer examination of the numbers so a borrower can make an informed decision as to which best suits their needs, so I want to explore a couple of different scenarios to aid in this decision-making process. Firstly, we need to understand what our two scenarios are to consider, and for the purposes of this illustration, the borrower can qualify in both cases based on their current and future income and debt levels. They are looking for a property of around $500,000 which will suit their specific needs and lifestyle. The initial scenario is they currently have a sufficient cash resource to cover a 5% down payment with the associated closing costs and are looking to purchase straight away. The alternative scenario is the client is intending to take the next 3 years to save for the additional down-payment to make up the balance of the 20% down payment to avoid the mortgage default insurance, they will continue to rent in the meantime. We are to assume the house-prices and a fixed rate of 3% compounded semi-annually with a 25-year repayment schedule will remain the same in both scenarios to remove variable considerations from the model. Scenario one Buy the house now The client finds their ideal property for $500,000 and they are to apply the 5% down-payment would result with a $475,000 balance to mortgage. As the borrower is required to apply a mortgage default insurance premium of 4% of the mortgage balance, this equals $19,000 which is applied to the principal of the mortgage loan for a total of $494,000. It should be noted the insurance premium requires the amount of provincial sales tax (PST) has to be added to the closing costs which cannot be added to the mortgage amount. In this case, we want to understand the break even point of paying down the $19,000 insurance balance based on the principal and interest payments being made towards the overall loan. To look at the first monthly mortgage payment which is set one month after taking possession of the property, we calculate this as a total of $2,337.83 which is made up of $1,110.48 as principal and $1,227.35 as interest. The outstanding principal is now at $492,889.52 after one month. If we move along the repayment schedule to the completion of the 17th monthly payment, we can see the new principal balance is $474,741.89. At this point, we have broken even on paying down the excess mortgage insurance balance. At the end of the first 3 years, the mortgage principal balance is now reduced to $452,234.53. Scenario two Buy the house later The client has successfully increased their savings over the last 3 years by an additional $50,000 to make the balance for their 20% down payment of $100,000, or an equivalent increase of savings per month of $1,388.88 over 36 months. The closing costs to purchase their ideal property of $500,000 are broadly in line with the first scenario based on the same purchase price (apart from the PST mentioned above), but the initial mortgage amount is $400,000 with the absence of a mortgage premium. They opt for 25 years and the lower monthly payment is $1,892.98, however they are also going to take a longer time to repay than scenario one so they want to see if they can align the repayment schedule to 22 years to match the same maturity, the payment increases to $2,067.81 in this scenario. Conclusions As you can see from the above guide, we are isolatingonly one item of the overall considerationfor homeownership against alternative shelter options and associated costs. We are not looking at comparable rents available in the market, nor items such as property appreciation, property taxes or maintenance for the homeowner which may change these outcomes. We also have to consider the discipline required to save the additional down payment in scenario two whilst still having shelter costs of rent in the meantime, whereas scenario one may have an excess savings rate they could apply to accelerate their mortgage principal repayments asthey may not have rental payments to consider. The decision for home ownership is a personal choice and should be taken as a combination of many different factors. I trust the above guide helps with looking at one ofthesefactors to assist withthe overall decision making process.

By Nick Holloway - When borrowers are assessing their mortgage options with a mortgage professional, one consideration is how long the borrower will need to repay the mortgage loan. This repayment schedule is referred to as an amortization of loan, which spreads the repayment of principal and interest payments over multiple periods until the principal loan amount is reduced to zero. In most instances, mortgages are offered with a 25-year amortization, although this can be made longer or shorter depending on the options available for the specific mortgage product. It is important to differentiate the amortization period from the term of the mortgage, which in Canada is most commonly over a 5 year term, after which time the borrower will be required to renew into a new term or move lenders in order to continue with the amortization of the remaining principal balance. How are my mortgage payments determined? The borrower is provided with options to repay the mortgage weekly, bi-weekly or monthly. For ease of example, I will focus on a monthly payment over a 25-year repayment period. Given a 5-year term of the loan, we can determine the borrower will make 60 monthly repayments of principal and interest payments over the period. Assuming an initial principal amount is advanced on the first day of a given month and totals $400,000 with a fixed rate of 3% compounded semi-annually, the first scheduled payment will be due one calendar month following the advancement of the loan, calculated on the principal outstanding amount of $400,000. The payment would total $1,892.98 and is broken down into a principal amount of $899.18 and interest amount of $993.81, which results in a lower principal amount of $399,100.82. For the second monthly payment, the interest component is calculated on this lower principal amount, so while the payment amount of $1,892.98 remains unchanged, the principal amount is increased to $901.41, with the corresponding interest amount reducing by $2.24 to the amount of $991.57. If we fast forward to the 60th payment at the end of the 5-year term, the proportion paid to principal has increased to $1,040.94, while the interest portion is reduced to $852.04, with an outstanding principal balance of $341,898.42. We can determine in this case that principal has been reduced by $58,101.58, or alternatively by 14.53% from the original $400,000 balance. The interest paid over the corresponding period totals $55,477.34. What if I were to defer my mortgage payment, what happens then? If a borrower needs to defer their mortgage payment to manage their immediate cash-flow requirements, this results in no principal and interest payments are applied to the loan balance at the scheduled payment date(s). The interest is still accruing on the loan however, so it should be expected that on the scheduled payment dates, interest continues to be applied to the loan balance in a similar way to a credit card or line of credit balance would, which results in an increase in the principal amount until a time that principal and interest payments are able to be resumed. To refer back to our original example with the balance at $400,000 and assuming the deferral is made at this point, we should expect the new mortgage balance will increase by $993.81 to equal $400,993.81, in effect this is similar to the above amortization schedule but working in reverse. For the following month, the interest on the new balance increases by $2.47 to $996.28, and assuming this is continued for a 6-month period, the new interest totals $6,000 and resulting principal mortgage balance equals $406,000. The borrowers defined benefit is an increase in cash flow of $11,357.88 realized over the 6-month period which they otherwise would have been putting towards their mortgage payments according to my initial example. If we are to capitalize this interest to the mortgage principal, we want to work out the new mortgage amount going forward. If we assume the repayment is calculated over the same 25-year period, the new payment amount equals $1,921.38, or alternatively if this were calculated over a twenty four and a half year basis, the new payment equals $1,947.81. The increases from the original payment amount of $1,892.98 is $28.40 or $54.83 respectively. What should I do next? In summary, it is important to understand the costs and benefits of deferring your mortgage. If there is an immediate need to increase cash flow to replace a loss of earnings given the current Covid-19 situation, the flexibility of being able to apply to your lender for a mortgage payment deferral will likely come at a substantially lower interest rate when compared to unsecured borrowing options such as through credit cards or lines of credit. The payment deferral provides temporary relief, and it is with anticipation that earning potential will improve following the initial shock and the economy begins to function normally again once restrictions on physical distancing are able to be lifted. Should there be an opportunity in the future to increase your mortgage repayments to reduce your overall interest costs, this can be achieved by utilizing the pre-payment features offered with your mortgage.

By Nick Holloway - One of the first steps of considering a mortgage for the purchase of a owner-occupied property, is the amount of funds available to make the purchase. Commonly referred to as a down payment, this is a percentage of the purchase price required for completing the purchase, with the remaining portion as the principal balance of the mortgage loan. There are primarily two distinct categories of down payment in Canada, a down payment of between 5% and 20%, defined as a high ratio or insured mortgage. Alternatively, with a down payment greater than 20%, this is defined as a conventional mortgage, which is further categorized as either an insurable or uninsurable mortgage. You may alternatively see the amount of the down payment expressed as a loan to value (LTV) ratio, in which case an LTV between 80% and 95% is classed as high ratio, and an LTV less than 80% is classed as a conventional mortgage. Insured Mortgage Should the borrower require a high ratio mortgage, it would be necessary for the borrower to pay a mortgage default insurance premium. There are currently three mortgage insurers in Canada - CMHC, Genworth and Canada Guaranty, who effectively guarantee the repayment of the mortgage to the lender, in case of default by the borrower. It is primarily for this reason that you see the most competitive mortgage rates offered in this space. There are several specific guidelines for all insured mortgages, most notably the current regulations state an insured mortgage cannot have an amortization period of more than 25-years and the property price must be under $1 million. The premium which is charged to the borrower is tiered depending on whether the down payment is up to 5%, 10% or 15% of the property price. Specifically looking at the premium for a 5% down payment, the mortgage default insurance premium is currently 4% of the total mortgage amount and this amount can be added, or capitalized, into the mortgage amount. To run some numbers, on a $400,000 property with a 5% down payment and a fixed 5-year term at a rate of 2.69% over a 25-year amortization period, the mortgage would total $380,000 and results in an insurance premium of $15,200 giving a mortgage amount totalling $395,200. The good news is that after around 16-17 months of repaying the scheduled interest and principal payments, the borrower should expect the contributed principal payments to have paid off the mortgage default premium in full (i.e. remaining principal of around $380,000), and by the end of the 5-year term, the remaining principal is reduced further to a balance of $335,760 from the original total mortgage amount. If we assume a modest appreciation in the property of say $20,000 over the same five-year period, the resulting LTV is under 80% at this moment in time. Insurable Mortgage With a conventional mortgage, most mortgages fall into an insurable bracket, which means the mortgage can be default insured and is required to follow similar insurer guidelines mentioned above. However, the difference is the lender has the option to purchase mortgage default insurance in the back end, commonly referred to as bulk or portfolio insured. With the lender purchasing the applicable insurance, this provides the lender the ability to securitize their mortgage loans which can be sold to investors, therefore reducing default risk which in turn lowers funding costs and those savings are passed to the borrower. The rate offered on insurable mortgages are typically higher than the insured mortgage, however, rates offered by a number of lenders are tiered based on LTV and become more favourable with a lower LTV ratio. This may provide the borrower a good opportunity to switch, or transfer, their existing mortgage to a new lender at the end of their term, to find a lower rate at the time of mortgage renewal. Uninsurable Mortgage The final mortgage to consider is the uninsurable mortgage which doesnt fit any of the above criteria, such as a purchase with an amortization of over 25 years or property value in excess of $1 million. In addition, should the borrower decide to either refinance or extend the amortization period of an existing insured or insurable mortgage, either or both actions would make the new mortgage uninsurable under current guidelines. A refinance, also referred to as an equity take out (ETO), occurs when a borrower withdraws equity from their property and increases the remaining principal of their mortgage. This differs from the definition of a switch/transfer mentioned above, where there is no material change to the mortgage amount or repayment duration. In summary, it is important to seek the counsel of a mortgage professional who is best positioned to assess the specific needs of your circumstances and will help to advise you on the best course of action for both your initial mortgage, as well as subsequent mortgage renewals and overall debt considerations for the lifetime of the remaining loan.

By Nick Holloway Following anannouncementby the Bank of Canada, the Mortgage Qualification Rate (MQR) will be reduced by 0.15% from 5.34% to 5.19%, or 2% above contract mortgage rate (whichever isgreater). This is the first reduction we have seen in the MQR since it was last increased in May 2018. To provide a brief recap, the MQR was introduced as part of the B20 guidelines with the express intention of diminishing the amount home buyers can qualify for in respect of mortgage financing. This was initially rolled out for high ratio mortgages (down payments less than 20%) effective from October 17, 2016, and later revised to include conventional mortgages (down payment more than 20%) effective from January 1, 2018. The net effect of these changes for all federally licenced lenders was widely reported to reduce purchasers buying abilities by approximately 20%, in comparison with previous qualification rates - which would have been based on the mortgage contract rate at the time of securing the borrowers mortgage commitment. How is the Mortgage Qualification Rate calculated? The Bank of Canada release the benchmark posted 5-year rate every Wednesday, which is based on the mode average of the big 6 (chartered) banks posted 5-year fixed mortgage rates. Whilst the mode average is currently split equally at 5.19% and 5.34% respectively, the Bank of Canada took a view on the overall asset changes in aggregate and determined the 5.19% was a more appropriate rate to prevail. Why does it seem the chartered banks are permitted to determine the mortgage qualification rates? This isan interesting question as towhy the regulators decided to use these rates to determine a qualification benchmark at the outset of setting the new mortgage rules. First we should look to understand the reasons why the chartered banks require a 5-year posted rate in the first place, when the reality of what most borrowers receive byway of a closed 5-year fixed mortgage rate is generally far lower than the comparable 5-year posted mortgage rate. We should consider that often the first time a borrower is likely tosee their chartered banks posted rateis when they find they needto break their closed fixed rate term mortgage early for whatever reason.The borrower is then required to pay apre-payment penalty based on an Interest Rate Differential (IRD) calculation, which is generally not calculated from the borrowers actual mortgage rate, butthe elevated posted rate (or using the discount received from the banks posted rate) which typically has the effect of amplifying the penalty the borrower must bear in favour of the chartered bank. What isthe effect of a 0.15% reduction in MQR for mortgage qualification? For borrowers who find themselves at the limit of qualifying, this will increase the amount they can qualify for. In the same way that the 2% increase in mortgage qualification mentioned earlier had the net effect of reducing a borrowers purchasing power by around 20%, here we can apply the same logic in reverse. Areduction in the MQR of 0.15% translates to an increase of a borrowers purchasing power of1.5% -in other words, home buyerscan qualify for around 1.5% more property.However, it poses the questionwhether this goes far enough considering we have recently seen far greater decreases in rates offered on fixed term mortgages, which have not been reflected equally in the chartered banks posted rates. Nevertheless, a small victory is a victory after all.

By Nick Holloway As had been widely expected, the Bank of Canadas latest monetary policy statement was released today with no change to the overnight lending rate. The overnight rate remains at 1.75% after Canadas central bank last made an increase in October 2018 from 1.5%. The Bank also lowered the neutral overnight rate from 2.5%-3.5% to 2.25%-3.25%. Accompanying the announcement, the Monetary Policy Report was issued which provides some of the key figures the Bank of Canada is tracking. The first being inflation, which remains close to the target of 2%, with a dip in CPI inflation predicted for the 3rd Quarter. The Real GDP figures forecast growth in 2019 of 1.2%, and around 2% in 2020 and 2021. So, whats causing this pause in interest rate increases, and is there any scope based on the current figures for the Bank of Canada to increase stimulus to the economy by making a cut in the overnight rate. One area to monitor is the Overnight Index Swap Futures which is traded on the Montreal Options Exchange. This is a tradable instrument and by way of its pricing, it provides an indication in real time of what the probability is for an increase or hold decision of the overnight rate at the next Bank of Canada meeting. Having watched this market for some time, the indications have remained at zero for some time now, and this seems to be a broadly shared sentiment by many of the other global central banks which we should take the time to observe. Arguably the most important central bank for the interests of the global economy is the US Federal Reserve Bank, primarily due to the nature of the US dollar being the largest reserve currency in the world. The Federal Reserve have indicated that they dont foresee any further increases in 2019, as they are looking for the global economy to be firing on all cylinders to justify removing monetary policy stimulus by way of increasing the Federal Funds Rate from its current level of 2.5%. Why is the Federal Reserve Bank so important in respect of the global economy? We need to take some time to understand the impact of increasing interest rates in the US in respect of debt and currency held by emerging economies. A number of emerging economies rely on debt denominated in US dollars, so the increase of interest rates in the US can have the effect of increasing the cost of carry for this debt, and this can also be further compounded by the currency effect of an increase in the exchange rate, as a higher interest rate tends to have the effect of strengthen the home currency which can in turn make it harder for emerging economies to repay this debt based on a stronger US Dollar. To look at other developed economies, they tend to be more reliant on their own central banks to provide guidance on investment decisions as any debt instruments tend to be denomination in their respective currencies. The Bank of England currently maintain the official bank rate at 0.75% after increasing from 0.5% in March 2018, while the European Central Bank (ECB) key interest rate is currently at 0.00% where it has remained since March 2016. There are many factors which are paring back growth prospects in Europe which are causing these low interest rates, but it is worth noting a significant divergence from the North American economies who have over the past couple of years found a greater opportunity to exert a level of tightening by way of increases to their overnight rate up to now. In conclusion, it is worth keeping all these factors in mind when you are making investment decisions as individuals or collectively. For many households, the biggest investment they will make in their lifetime is real estate and its important that they are able to make an informed decision with all the tools that are available to them at the time.

By Nick Holloway To a casual observer, it is fair to say that we can reflect on 2017 and 2018 as being an increasing rate environment, but now I want to take a moment to summarise where we stand up to now, and what the outlook might look like going forward given some of the latest available macro-economic figures and forecasts. The base-line to understand what is moving mortgage rates is by reviewing the Bank of Canada overnight rate, as well as government bond yields. I will look to examine some of the key features of these underlying rates and some of the reasons behind the changes we have observed. Lets start with the Bank of Canada, which started to increase, or tighten, its target for the overnight rate, also known as the key policy interest rate, from its low point of 0.5% in July 2017, with the final increase up to now during their October 2018 meeting to 1.75%. In turn, the Bank of Canada overnight rate is directly correlated to the prime lending rate which banks and lending institutions use in calculating interest payments on variable rate mortgages and lines of credit. It should be noted the Bank of Canada conducts 8 interest rate announcements each year, where the Banks committee decides whether to increase or decrease the overnight rate in line with its monetary policy objectives, and based on the last 13 meetings, we see 5 instances where the interest rate has been increased by a quarter percentage point. The Bank of Canada had indicated as part of their forward guidance, they consider a neutral nominal policy rate, which it describes as a medium to long term equilibrium concept, to be somewhere between 2.5% and 3.5%. This range is largely driven by a desire by the bank that they have spare capacity to manoeuvre should a significant downturn occur, or in other words, they have the capacity to cut, or loosen, interest rates if needed to stimulate the economy. The Bank remain cognizant that by increasing the overnight rate too quickly, there is a possibility this may act as a catalyst which causes the economy to contract, so they continue to iterate that any future increases will need to be gradual and are very much data dependant. The Bank of Canada has many aggregate data points at their disposal which they evaluate before deciding on changes to their monetary policy actions, some of which are outside the scope of this article. However, we can look at two of the main areas the Bank of Canada focuses on, being that of consumer price inflation (CPI) and real gross domestic product (GDP). Firstly, one of the banks key objectives is to keep inflation at or around 2% per annum, because it is widely accepted that the economy benefits from a small amount of inflation, whilst also looking to avoid deflationary conditions. According to the Monetary Policy Report which the Bank released following their January 2019 meeting, it confirms in Q3 2018, we saw year-over-year inflation peak at 2.7%, but this has since receded to 2.0% for Q4 2018; the projections going forward for Q4 2019 and Q4 2020 remain at the 2% target. Secondly, the Bank of Canada will consider the GDP number, expressed as a percentage, to understand if the economy is growing, as in a positive figure, or contracting, if the percentage falls below zero. For the Q4 2018 reported figures, the GDP year-over year increased by 2%, and is projected to dip slightly to 1.9% for Q4 2019 and increase for Q4 2020 to 2.1%. The report goes into more detail about some of the specific headwinds the Canadian economy is facing that may negatively affect inflation and growth going forward, noting financial market volatility, oil price declines and the slowing in growth in several key markets such as US and Europe, as well as emerging economies such as China. These headwinds might be temporary, but they are areas nevertheless the Bank is concerned about and will continue to monitor these risks on an ongoing basis. To complete our picture, we want to look at changes in government bond yields, which is one of the key driving factors behind what rates are offered on fixed rate mortgages. To provide some context based on economic theory, a government bond, or more importantly, its yield, is considered the risk-free rate of return for a given dollar amount expressed as a percentage. In a sense, it provides a yardstick for investors to determine their required rate of return in relation to the specific risk profile of a given investment. To use an example, an investor can choose to accept the rate of return from a government issued bond knowing that their investment is virtually risk free, whilst a different investor may choose to invest in a mortgage backed bond, which by its nature is considered a relatively low risk investment, however the achievable rate of return from the mortgage bond should inherently be higher than the government bond in order to compensate the investor for assuming the increase in capital risk. What we can see by looking at recent changes in the bond yields, these have increased over 2017 and 2018 period which is somewhat in-line with the changes observed in the overnight rate, with the bond yield peaking around October 2018, and has come off this high towards the tail-end of 2018. Historically, bond yields provide one of many key indicators of future inflation expectations that are effectively being priced into a tradable market. So as bond yields move higher, there is an expectation of higher inflation, which is a function of the demand by investors for an increasing rate of return, in real terms, which allows them to offset the capital erosion brought about by higher inflation. The same holds true in reverse, meaning as expectations of future inflation are decreased, the bond yields will typically respond by moving lower. So, what should we expect in 2019? That is indeed the $64 million-dollar question and it is important to recognize that some of these figures are based on projections, given it would be impossible to offer a definitive answer as to what the future holds with so many different moving parts that make up the economy. This does however help to illustrate some of the keys areas to keep an eye on in order to interpret, at least with an increased probability, what direction the economy may take going forward. As the proverb says, to be forewarned is to be forearmed.

By Nick Holloway When you are reviewing your mortgage options, it is important to understand the terms and conditions which are contained in the mortgage being offered. Within the mortgage industry in Canada, there is a wide variety of choices when it comes to selecting lenders and products. As a mortgage professional, it is an important stepto understand and review all the options available to us prior to providing lender suggestions to our clients, and then taking the time to explain all the details which are contained within the terms of the suggested mortgage. We are frequently moderating these choices for our clients based not solely on rate, but also by looking at what restrictive terms might be included within the mortgage contract. What is a No-Frills mortage? A No-Frills or Low Rate mortgage typically indicates the mortgage contract has certain restrictions which you would not typically expect to see in a standard mortgage contract. Certain examples include that full repayment of the mortgage prior to the end of term is not permitted apart from by the sale of your property in good faith to an arms length buyer, or commonly referred to as a Bona-Fide sales clause. Other restrictions which may accompany this same clause might state that once you reach the end of your initial mortgage term, you are only permitted to renew your mortgage to a new mortgage term with the same lender. As you can see, both of these clauses in place systematically restrict the borrower from securing a more competitive rate from the wider mortgage market should they so choose. What are the benefit of going with a No-Frills option? One benefit you are likely to receive is that the rate offered on your initial term is typically lower when opting for a No-Frills mortgage. To put this in perspective, you want to understand what a difference a rate reduction is going to make to what you pay on a monthly basis. So lets say we are looking at a 0.05% reduction (5 basis points) on a standard mortgage rate per $100,000 of borrowed funds, and want a quick way of understanding this change as reflected on your monthly payment. The reduction per your monthly payment in this scenario is a total of $2.64, so around the same cost of a cup of coffee. With this in mind, you can convert this figure accordingly based on the amount of borrowed funds, then multiplying by each 0.05% change in rate to ascertain the full ongoing cost increase. It can sometimes be helpful to think of what this additional cost is in the same way as how an insurance policy works, which is a premium to protect you for lifes unexpected twists and turns. Is the trade-off ever worth it? In most cases, the trade-off for being in a restrictive mortgage will typically not outweigh the rate reduction you might obtain on the initial term, however there might be specific circumstances where the benefit is sufficient to at least have some consideration assuming a full comparison is made. It is important to note that by working with a mortgage professional, we want to understand what our clients real estate goals are now and going forward. We are here to put in place for our clients a comprehensive mortgage plan which covers all your available options,and also to act as a guide afterclosing so that we may help our clients in the future. So in conclusion, if you want to pick up from the grocery store a No-Frills tin of baked beans then you do not need to give this much thought, in fact as my business professor told me once, the tin probably comes from the very same factory as the branded variety. If you want a No-Frills mortgage, always remember, Caveat Emptor. If you have any questions and want to discuss your own mortgage goals with me, please let me know, I would be happy to be your guide.

By Nick Holloway As had been widely anticipated, we saw the Bank of Canada last Wednesday increase the overnight borrowing rate from 1.5% to 1.75%. The resulting change in the bank prime rate which most variable mortgages and line of credits are determined by, increased by the same quarter percent from 3.7% to 3.95%. It should be noted that fixed rate mortgages are largely derived by underlying government bond yields, the increases of which have largely been priced into fixed rate mortgages following rises in bond yields over the last 6 to 12 months. The question I wish to address here is the proportional effect of a quarter percent increase on a mortgage rate in relation to a typical household budget. To find a baseline for my case study, I have decided to take the average household income and average house price level in the Ottawa region from the 2016 census figures, which are $102,000 and $394,000 respectively, and setting our rate parameters at near current levels. What is the households take-home pay per month? I want to be conservative with my figures, so I will establish the actual take home pay, opposed to gross pay when household income is set at $102,000. By assuming a single Ontario salaried tax payer in the household with no other incomes such as investment returns, tax refunds, tax credits and the like, results in an annual net figure of $73,272, or $6,106 per month which we shall call the overall household monthly budget. What is the households mortgage payment per month? At a typical current mortgage rate of 3.5%, for every $100,000 of mortgage on a 25 year repayment schedule, the principal and interest mortgage payment is $499.27 per month, increasing by $13.29 to $512.56 at a 3.75% rate. I again take a conservative approach in my assumption on the current remaining mortgage balance, and for the equity built into the home of 20%, provides a mortgage balance of $315,200. We plug in using the same mortgage rates and the monthly repayment amount initially was $1,573.70, and increases by $41.88 per month to $1,615.58. In percentage terms, the mortgage payment has increased by a factor of 2.6%. It should be noted the percentage increase is the same whether you consider the timeframe on a monthly, yearly, or lifetime basis of the mortgage. In other words, the way an amortization schedule for a decreasing balance works, this percentage change does not compound year over year, it is simply the overall cost of the mortgage, or the sum of each and all outstanding principal and interest payments will increase by this factor and this factor alone. What is the share of shelter costs against take home income, and by how much is the overall household budget reduced by this change? From the above, we divide the mortgage payment of $1,615.58 by the net income of $6,106 to provide a percentage of take home pay devoted to shelter of 26%, in other words a little over a quarter of the household budget being used for the mortgage payment. We also want to work out in percentage terms how much the monthly mortgage payment increase of $41.88 will reduce the overall household monthly budget of $6,106, which equates to a decrease of around 0.7%. How does this 0.7% decrease in overall household budget compare to projected inflation rates and wage growth? According to the accompanying Bank of Canadas October 2018 Monetary Policy Report, the projection for CPI (Consumer Price Index) inflation (year over year) for Q4 2018, Q4 2019 and Q4 2020 are 2.3%, 2%, 2% respectively, which is roughly aligned with the target annual inflation rate of 2% which the Bank of Canada has mandated for. When you compare the increased compounding effect of these projected inflationary figures which are in turn closely aligned to the Bank of Canada projections for annualized wage growth over a similar period, you can see a single quarter percent change is significantly less than the projected wage increases one should expect to realise. The report also indicates the Bank of Canada expect rates to increase gradually to a neutral rate of between 2.5% and 3.5%, we currently stand at 1.75% and are three quarter percentage point increases from reaching the lower end of this range. If the economy continues to operate at full capacity which is a condition required by the Bank of Canada to support further rate increases, it is reasonable to expect that employment gains and corresponding wage growth will continue to increase as projected. By this analysis alone, one could say the effect of this increase in mortgage payment might be largely negated by the virtue of annualized and compounding wage growth over a corresponding time period, and potentiallyfor subsequent increases as well. On balance, I expect the reality of a somewhat marginal change in household budgets might be less spectacular than the mainstream media headlines would have us believe. If you have any questions and want to discuss your mortgage or how your own numbers are affected by these changes, I would be happy to help.

By Nick Holloway Receive independent advice for your home financing options As independent mortgage professionals, we are not beholden to any one lender. We will start by getting to know you and your home ownership goals. Our aim is to help our clients to successfully secure financing for your home with the best available product and at the lowest cost. We negotiate on your behalf, so you can save time to focus on whats important to you It could take weeks for you to organize appointments with competing mortgage lenders, and we know youd rather be spending your time house hunting! We work directly with over 30 mortgage lenders and we are able to quickly narrow down a list of those that suit you best, so you can rest assured that we will source the best options for your financing needs. Be assured that youre getting the best rates and terms Even if you have been pre-approved for a mortgage by your bank, youre not necessarily obliged to stop shopping. The mortgage market is changing frequently and we often have access to promotional rates or offers which we can investigate and run the numbers to see if you can save money. We will always take the time to fully explain in plain language the various mortgage terms and conditions so you can choose with confidence. Our job is not complete until your mortgage closes We offer a personalized service for our clients which means we remain your named contact and liaison from start to finish. We will work tirelessly for you behind the scenes with all the parties involved, including realtors, appraisers and lawyers, to ensure your mortgage transaction takes place on time and to your satisfaction. No cost to you for our service Typically for most residential mortgages, there is no charge for our service. How are we able to do that? As with many other professional services, mortgage brokers are typically paid a finders fee once we have introduced trustworthy, dependable customers to a financial institution. These fees are quite standard across the industry so our focus remains on finding the best outcome for you, the customer. Ongoing support and consultation What motivates us more than anything is delighting our customers and to remain your trusted advisor and mortgage expert for all future needs. So even once your mortgage paperwork is signed and paperwork is complete, we are available for any further advice you need. In addition, that you trust in our expertize to offer assistance for the needs of your family and friends in securing their own home financing.

By Nick Holloway Canada has always been recognised as very welcoming to newcomers and prides itself on its wide diversity of population. According to the 2016 Census, 7.5 million foreign-born people have arrived in Canada through the immigration process, representing over 1 in 5 persons in Canada. Having personally emigrated from the UK to Canada in 2014, I am proud to be included within that statistic! When it comes to sourcing mortgage financing, one of the challenges newcomers think about is the fact they have a limited history in Canada for lenders to review for a credit application. However, there are many options open for new to Canada applicants which are designed for newcomers who have landed in Canada within the last 5 years which assist in overcoming some of these challenges. A mortgage application between a borrower and lender is primarily built on 3 main pillars, being employment income, credit history and down payment. I will cover in more detail each of these pillars from the perspective of new to Canada applicants. Employment income Typically a lender will accept a 3 month full time employment position in Canada as sufficient to verify income, or if they arrive on a corporate relocation program, the 3 month period may be waived. If the applicant is self-employed or business for self, the income verification might be overcome by increasing the down payment amount. Credit history As a credit score is required for determining mortgage applications, a newcomer may not have a significant history with the major Canadian credit agencies such as Equifax or Trans-union. In lieu of a mature credit score in Canada, the lenders may consider a strong international credit report to support the application, alternatively they might look for a 12 month history in Canada of responsibly paying rent as well as utility billing in the applicants name. Down Payment Depending on the income and credit factors above, the down payment can start from as low as 5% of the purchase price, assuming these funds are from the applicants own resources and held in accounts in their name for longer than 90 days. For any down payment which is less than 20%, this is called a high ratio mortgage which requires mortgage default insurance to be paid which can be added to the mortgage total. It is important to note that high ratio mortgages in Canada provide the borrower access to some of the most competitive mortgage rates available to the market. Once the default insurance has been paid on the initial purchase, it can often be ported to any subsequent property purchases so the borrower might be able to benefit from these competitive rates for any following mortgages they hold. There are many factors which go into a mortgage application which differ depending on your individual circumstances. For an accurate assessment of your specific mortgage needs, it is best to discuss your options with a licenced Mortgage Agent who can review all the components which go into creating your mortgage application and will help to set up a plan for you to achieve home ownership here in Canada. If you have any questions and want to discuss your mortgage with me, I would be glad to help. script type=text/javascript src=https://cdn.ywxi.net/js/1.js async/script

By Nick Holloway I would like to discuss an important aspectofmortgage lending which the big banks have done a fine job of convincing manyborrowers that they have the right mortgage for you. Two words Posted Rate. It is common for home ownersto consider themortgage rate they need to concern themselves with is the 5 year closed fixed rate mortgage. If you are looking to purchase or thinking about renewing, you think this will be a simple matter of checking your banks website to see what therate is, maybe have a quick look what the other big banks are offering too and youll be good to go. The reality is this rate is often hidden from view,instead you are met with the banks posted rate and you expect that your actual mortgage rate will not be calculated anywhere near this rate, so you prepare yourself to negotiate with your bank to obtain the best rate and you set out with one goal, achieve the biggest discount you can from the posted rate. There is nothing wrong with negotiating, some people love it, some people hate it, and if you are familiar with buying a new car from a showroom, it is common that the recommended retail price tends not to be the price the car will be sold at, you may need to make your salesman have a wordwith his manager, his manager with head office, on and on it goes until you have negotiated your discount from the recommended retail price. The price of your mortgage is important, but one should never lose sightthatnot all mortgages are born equal, and an investment in your home should be considered a significant part of a financial plan which protects the best interests of you and your family. So Nick, what is the advantage of having a posted rate? For the borrower, there is no advantageto the posted rate.For the bank, well that is a different matter. After having the back and forth with the bank representative, their manager, their head office, you now have a 5 year fixed rate at a set discount from the posted rate, and this will be neatly outlined within your mortgage commitment and terms. So how does the posted rate provide an advantage to your bank? The 5 year fixed term is important here, as not all of these mortgages will last 5 years, some may need to be broken early by the borrower for a multitude of different reasons. In fact in Canada, it is common across the industry that around 65% of 5 year fixed rate mortgages will not reach the end of term and this almost certainly triggers a pre-payment penalty for the borrower. This is where the posted rate becomes important for the bank as they tend to work out the penalty in the form of an Interest Rate Differential (IRD) which is a calculation primarily based on the elevated posted rate, not your actual mortgage rate, resulting in a substantially higher penalty that you have little choice but to pay and likely no room for negotiation here! The result of these penalties can be significant, and can vary on a number of different factors based on time to maturity and what movement in the posted rates have occurred since taking out the mortgage, but as a general rule of thumb, you should account for around 4.5% of the remaining mortgage balance to be paid on this type of IRD penalty. On a $400,000 mortgage amount, that amounts to a penalty payment of around $18,000. Wow, those penalties seem rather steep! Is there a way I can protect myself? There are many ways to protect yourself from these penalties, the best way is to engage in a licensed mortgage agent or broker who is impartial and can review your application and select the right mortgage products which haveyour best interests in mind. We have access to multiple mortgage lenders and products within our channel and continually negotiate for the best rate on your behalf. Wework hard to make a plan and find tailored solutions that meet each borrowers individual needs. Wetake the time to explain the benefits and associated costs for each and every mortgage so our clients can make an informed decision to proceed with one of the biggest investments youmight make in your lifetime your home. If you have any questions and want to discuss your mortgage plans in more details, I would be more than happy to help.

By Nick Holloway There has been a lot of talk recently about the new qualification rules in effect which are reducing mortgage affordability by around 20%. The effects of these new rules has largely affected first time home-buyers the most while they are looking to enter the housing market. How do lenders determine a borrowers qualification? Lets start with a brief overview of the qualifying ratios, which are worked out as a percentage of the applicants gross income. Firstly, there is the Gross Debt Ratio (GDR) which accounts for mortgage payment, property taxes and heat. Secondly, the Total Debt Ratio (TDS), which accounts for the same as GDR, but also includes all other debts. Note the actual mortgage payment used in these calculations is determined by the qualifying rate, currently 5.34% or 2% above offered rate (whichever is higher), and not by your actual mortgage payment. As an example of the ratios lenders typically use for determining affordability, we can look to current insurer guidelines in Canada which state that if a borrower has a down payment of less than 20%, the highest these ratios are allowed to go is 39% for the GDR and 44% for the TDS. OK Nick, is there anything I can do to improve my TDS ratios? Glad you asked, yes there is! To focus on the TDS, we have to know the impact of each kind of debt in the calculations. Currently with credit card debt, its considered a revolving credit line and a monthly payment of 3% of the overall balance is assumed. As an example, if your credit card balance is $2,000, the lenders will assume a $60 monthly payment. With a car or auto loan, the balance is not used in the same way but the monthly payment is looked at instead. For example, lets say your car loan has a remaining balance of $2,000, but you will continue to pay $600 each month until this loan is paid off, so its the $600 payment that will be used in the calculation. So as we have in the above example for the car payment, we see the same amount of debt has a ten-fold increase in respect of affordability calculations. To put this in terms of how much less affordability this car payment makes to what you can qualify for in dollar terms, we need to look back to the qualifying rate. If we use the 5.34% rate for this example, with a 25 year amortization on say a $100,000 mortgage, then we have a qualifying mortgage payment which equals $601.11. Now we can determine that the car loan under the TDS ratio is reducing the borrowers affordability by roughly $100,000, which might make the difference between qualifying or not for the property you are looking at. If this is the case, my suggestion would be to see if you can settle the car loan early which will decrease the TDS and potentially bring the ratios in-line with the constraint. If you have any questions and want to discuss your mortgage or this strategy in more details, I would be more than happy to help.

ByNick Holloway As some of you may have noticed in the media, a number of chartered banks in Canada are running a promotional rate on variable rate mortgages to 2.45%. This has resulted in a spread between the offered variable rate and fixed rate mortgages of around 1% which is an important distinction to make. Why is this important? We have to look back at the last ten years and know that we have experienced unprecedented times since the credit crunch and Lehman Brothers going bankrupt in 2008. The result of this turmoil for major central banks across the world has been to implement monetary policy levers, some of which have never been seen before in such a grand scale. The normal levers available are interest rates, the abnormal, if you will, is quantitative easing. The lowering of interest rates provide the first lever for central banks as a way of increasing liquidity and to prop up economies in times of distress by lowering the cost of borrowing directly and encourage investment and spending. Once this firepower is used up (aside of negative interest rates but that is another topic entirely), the central banks have to find more accommodative ways to stimulate the economy, and the main way they achieved this is through quantitative easing, which is the method of central banks buying government debt (bonds) in massive quantities which drives up bond prices, and as bond yields have an inverse relationship to bond prices, the yields in the bond markets were lowered substantially as a result of the increased buying activity by the central banks. These actions have a similar simulative effect to the economy by lowering borrowing costs and providing increased liquidity to the financial markets. What does this mean for my mortgage? Well, there is an important distinction to make in regards to how the rate offered by a variable or fixed rate mortgage is derived. The variable rate is derived as a function of the prime rate, which is in turn directly affected by the central banks interest rate, for the Bank of Canada, this currently stands at 1.25% following the last 3 increases since July 2017. The (5 year) fixed rate mortgages are derived from the bond yields available in the market, and as we are beginning to see the end of the central banks role of buying government debt and with more conventional monetary policy taking over with the rising interest rates, these bond yields have been steadily increasing over the past year or so and the rock bottom fixed rate mortgages we have seen in the past are evaporating. What should I do? In my opinion and while I think interest rates are likely to go higher, this is a really good time to take advantage of these low variable rates and if you want to see why, please read part 2 of this article which will give you some analysis on what the numbers might look like and how we can take a view to potential changes over a 5 year time horizon. If you have any questions and want to discuss your mortgage, I would be more than happy to help.

By Nick Holloway As I mentioned in my previous article, the discount on variable rate vs fixed rate mortgage is around 1%, so the question is, how can I take advantage of this? The best way is to look at the numbers, and also take a forward looking approach to what might happen to monetary policy in the next 5 years, but also a side note to remember is that the variable rate typically has a substantially lower prepayment penalty than the fixed rate product which is another good reason to be in a variable rate. Where are the current Bank of Canada rates again? Good idea, lets take a look at where monetary policy is today. Currently, the Bank of Canada has raised the lending rate 3 times since July 2017 and we are currently at 1.25%. It is expected that we will have further raises coming, but its important to think about how many and how quickly this might happen. The general consensus amongst economists is between two or three 0.25% rises in 2018. We already had one in January, and the May or June meeting is in the balance at this point, but certainly the central bank have indicated that Canada faces a lot of headwind and slowing growth figures, so they may wait to see what effect the last 3 moves actually has on the economy as these changes always have a lagging effect. If they raise too fast, this may send the economy backwards or they may have to reverse their decision and revert to a lower rate to accommodate. So Nick, did I hear the Bank of Canada stated they consider a neutral interest rate of between 2.5%-3.5%? You are right, they did say that! So based on the 5 year term as our time horizon, so lets look at interest rates reaching the lower end of this bracket. If we see an increase of 1.25% in the context of having a 1% discount on the variable rate, this is clearly a win as the rate will inevitably take time to reach, by which time you will have money left over by paying at the lower rate. Or better still, you would increase your payment amount now while the rate is low. The simplest way of doing this is by opting for an accelerated payment schedule, and right now this translates to a smaller payment compared to the fixed rate, with the added bonus of paying your 25 year mortgage down in less than 22.5 years. Now what if the interest rates go to the 3.5%, well the numbers would have to be looked at but if you opted for the accelerated route, the numbers suggest you are still going to be ahead given you paid down a greater share of the principal before rates increased. If you find your budget is stretched for the increased amounts and above what you might have been paying for the fixed rate, you do have the option to revert your accelerated payment back to the normal payment schedule, or you may be in a variable fixed product, which means your payment amount is fixed for the full term, but the amortization period is increased to reflect the increase in rates. What if the rates overshoot 3.5%, well for starters I would call this an outlier, but you have to consider the business cycle, it is 10 years since the 2008 crash, and the business cycle is beginning to display expansionary characteristics, but the question is for how long will it continue to expand and will this generate higher inflation which typically results in rates going higher. What will rates look like in 5 years, well the mortgage you enter today will need to be renewed at this time, and the rates on offer then no-one can truly tell you with certainty. With that said, if you see fixed rates come down between now and then, maybe the best option is speak to me and we can look to see if moving to a fixed rate is a good idea. If you have any questions and want to discuss your mortgage or this strategy in more details, I would be more than happy to help.