How rising rates can affect your mortgage­­

The one-two-punch of supply chain issues and the war in Ukraine has pushed inflation in Canada to its highest level in 30 years and spurred the Bank of Canada to move toward a tighter monetary policy. On June 1, the Bank announced a second consecutive .5% increase to its policy rate (the third increase in 2022) and signalled its intention to continue increasing rates in the short term. 

For homeowners with variable-rate mortgages, the effects of these policy rate hikes will have an immediate impact as lenders increase their prime lending rate in response. Depending on the terms of your variable-rate mortgage, you may see an increase in your payment or find that a higher portion of your fixed payment is going toward interest rather than principal. 

After three consecutive increases, it’s natural to start considering fixed-rate mortgages more carefully. Even if you are far away from renewing, many mortgage contracts will allow you to convert your variable-rate mortgage to a fixed rate but it is vital to make an informed comparison between mortgage types. In a rising-rate environment, variable-rate mortgages still have significant advantages that are worth considering. The key question is how high rates would have to go to make it worthwhile taking the fixed rate today. 

People often prefer fixed-rate mortgages for their predictability, but this usually comes at the price of higher rates. The spread (gap) between fixed and variable rates today on 5-year terms is approximately 1%. That means that even with the Bank of Canada signalling further rate hikes, it would take several increases to make a monthly payment under the variable-rate contract equal to its fixed-rate counterpart. 

It is also uncertain whether high interest rates will persist throughout your mortgage term. Even if you are motivated to consider a fixed-rate contract because of sharply increasing interest rates, you need to keep your eyes on the horizon as you sign with a new lender. Bank of Canada policy rates have been at or near historic lows since 2008. When the Bank raised rates aggressively, as it did in 2018, these hikes have been short-lived. When the Bank raised rates in April, it also projected that inflation would begin to ease in 2023. Before locking into a fixed-rate contract, it’s worth asking yourself whether you will be paying more for security you don’t need.

If you aren’t close to the end of your mortgage term, there may be further costs to either breaking your current variable-rate contract or exercising the option to convert to a fixed rate. If you have the option to convert to a fixed rate under your existing contract, you may be charged a fee to do so. Moreover, your current lender may not offer you the best fixed rate, tempting you to shop around for a better deal. If you find one, you may pay a steep penalty for breaking your current contract to grab that deal. How much money will you save over the balance of your existing term? 

If you are in a variable-rate mortgage and anticipate higher rates, but aren’t ready to switch to a fixed rate, you can still take steps to protect yourself. Consider increasing your payments, if your current mortgage allows you, to the level they would be under a fixed-rate contract. Your larger payments will chip away at your principal, building a financial buffer against future rate increases. 

If you have a fixed-rate mortgage, the rate increases that have happened and may happen in the future largely don’t affect you other than the consideration around your renewal date. If you are renewing soon, it may be worth reaching out and having a call with me to discuss your options and consider various scenarios to make sure you’re benefiting from the best possible monthly payment.  

As always, a great way to begin navigating a higher-rate environment is a review of your situation to determine your best course. Whether you’re ready to make a change, or just want to discuss your options inside your current contract, a short conversation can give a big boost to your confidence.

The Tax Free First Home Savings Account (“FHSA”) explained

If you or someone you know is saving for a downpayment on their first home, the Federal government announced a new program aimed at first-time buyers in their recent budget. The First Home Savings Account combines the features of an RRSP and TFSA to give prospective homeowners some tax relief and a boost toward their homeownership goals.

Here are the highlights: 

• Account holders can contribute up to $8,000 annually, up to a lifetime maximum of $40,000. 
• Just like an RRSP, contributions made to an FHSA are tax deductible.
• Like a TFSA, funds can be withdrawn from an FHSA tax-free – provided the funds are used for a home purchase. 
• Funds in an FHSA can be invested in allowable (not yet disclosed by the government) investment assets such as stocks, bonds, mutual funds, etc. and any growth/income from these investments are not taxable. 
• Transfers can be made from an RRSP to an FHSA but are subject to the annual contribution limit of $8,000. However, when money is transferred from an RRSP to an FHSA there is no adjustment to available RRSP contribution room
• Transfers can be made from an FHSA to an RRSP or RRIF if not purchasing a home and this will not affect RRSP contribution room – essentially giving qualified account holders  an additional $40,000 in RRSP contribution room.

For those who are in the saving stage of their homebuying journey, there is no downside to the FHSA as a savings vehicle. You’ll get the tax deduction on contributions, like an RRSP, and the tax-free growth and withdrawal of funds when it’s time to purchase a home. If the home purchase doesn’t materialize, funds can be transferred to an RRSP or RRIF tax-free and added to a retirement nest egg. 

The FHSA does not replace the existing RRSP Home Buyer’s Plan but provides another tax-advantaged home-savings opportunity for Canadians buying their first home. The two programs cannot be used in tandem. Unlike the RRSP Home Buyer’s Plan, however, the FHSA does not require that funds withdrawn from the account be repaid.

The First Home Savings Account is expected to be up and running sometime in 2023. There are numerous eligibility requirements, and rules and conditions and I would be happy to explain the details to you – if this is something you think you’d like to take advantage of. 

Did you know?

The Bank of Canada will make their next rate announcement on June 1 and many industry experts are predicting another .5% rate hike. Let’s review your mortgage strategy now and determine the best way for you to navigate the rising rate environment. A short-term adjustment might pay off in the long run. It all starts with a conversation. Get in touch today.

Spring clean your finances

Spring finally arrived after a long winter, and with inflation and the rising cost of living on everyone’s mind, there’s never been a better time to do a little spring cleaning… of your finances. A few quick and easy adjustments can make a difference to your bottom line each month.

Here are a few items for your spring-cleaning checklist:

• Start with a self-audit. Look back over the last six months to see where your money went. Has your online spending slowly crept up? Is the food or grocery delivery service that used to be a once-in-a-while convenience now a regular staple? These little indulgences seem inconsequential but a couple of small habit ‘corrections’ could make a significant difference for your wallet. It’s important to set yourself a budget and stick to it. If living on a budget is something you’re not used to, challenge yourself to do it for a short time period – a month, or maybe over the summer – and work your lifestyle into it. It’s never too late to develop good financial habits. 
• Review all your subscriptions. It’s easy to subscribe to services or order something ‘on repeat’ with the intention of cancelling later. Before you know it, you have multiple recurring payments for goods or services you may not even be using. So, take stock of all your recurring expenses and decide if that mobile app is still useful to you; if the gym membership is necessary since you’ve gotten into a routine of working out at home during the pandemic or; do you really need 2, 3 or 4 streaming services? Trimming the excess not only saves you money, it’s a great way to declutter your finances! 
• Negotiate for the best rate. Call your internet, cellphone and cable company and ask if your current plan provides the best value for your specific needs. Very often, you can negotiate a better price for the same plan, or upgrade your plan and get more service for the same price. You may even find out that your current plan is far more than you need based on your usage. A downgraded plan could meet all your needs, and it’ll save you money each month. 
• Find out what might be hiding in your credit report. Reviewing your credit report is something everyone should do at least once a year as part of having good financial health. It’s very common and very easy to miss a bill payment and have it show up on your credit report. Ensure you don’t have any skeletons in your credit report that could prevent you from getting the best interest rates from lenders when applying for a mortgage. Here is a link to the Government of Canada website with information on how to order your free credit report. 
• Your home equity could be your best financial tool. Give me a call for a free mortgage review. We’ll take a look at the equity in your home as a possible way to save on monthly interest payments through debt consolidation. By doing something as simple as a refinance and rolling your high-interest debts into one lower monthly payment, you can create some real cash flow into your household bottom line. 

You never know, taking a few easy steps may save you money every month. Give me a call and let’s talk about how you can leverage your home equity to help you save money and take the heat off your finances this summer.

Did you know?

The Bank of Canada recently announced a rate increase and many believe that we’re in for multiple rate increases throughout the year. I can help you navigate this by locking in your rate until midsummer. If your mortgage is coming up for renewal within the next 12 months it might be advantageous to renew early. If you’re planning on refinancing, buying an additional home, or selling your home and buying another, now’s the time to have a discussion and get a rate hold. This will ensure you benefit from today’s rates no matter what the Bank of Canada does.

HIGHER INTEREST RATES ARE HERE. WHAT DOES THAT MEAN FOR YOU?

The Bank of Canada has been signaling for a while now that they will respond to inflation by raising interest rates. Sure enough, on March 2^nd they announced a hike in the overnight rate by 0.25%. Here are answers to the most commonly asked questions. 

How does this affect my current mortgage?

It depends if your mortgage is fixed or variable.  A rate hike will impact variable-rate mortgage holders immediately as more of your monthly payment will now be going to pay interest and less toward your principal. Fixed-rate mortgage holders will not be affected until it’s time to renew or refinance. 

Should I refinance now?

According to many economists, the March 2^nd rate increase was the first of several expected this year. Despite that, rates are still at near-historic lows so if you’ve been thinking about refinancing to secure a better rate or to consolidate debt, it’s a good idea to get the ball rolling before the next rate hike. An analysis of your situation will determine if it makes sense for you to stay in your current mortgage until it’s time to renew or if it’s advantageous for you to pay the penalty and break out of the mortgage, but the potential savings diminish slightly with each rate increase.

Should I convert my variable-rate mortgage to a fixed rate?

It’s natural to be tempted to lock in as soon as you see rates starting to climb but just keep in mind that it’ll take a few more rate hikes to narrow the gap between variable-rate mortgages and their fixed rate counterparts. If nothing else about your situation has changed then the reasons you chose variable over fixed still apply and you’ll still be paying less for the next several months at least.

If you can afford to, a great tactic to consider is to increase your mortgage payment to the equivalent of what you’d pay in a fixed rate. The extra payment goes directly to principal which lowers your cost of borrowing (the amount of interest you pay over the life of the mortgage) and protects you from “payment shock” when it comes time to renew your mortgage. 

If you’re still feeling uneasy, let’s have a conversation about your conversion options. 

I am thinking about a purchase in the coming months. Should I get a mortgage preapproval?

Yes! A preapproval is a smart move anytime you’re considering a purchase but especially in a rising rate environment. A preapproval will lock in your rate for up to 120 days so you’re protected from any rate increases while you shop around. 

You are unique and so are your home financing needs.  Call me so we can determine what is the best plan for you, whether you have a fixed mortgage, a variable rate mortgage or you are simply looking for advice. I am happy to put my expertise to work for you.  

IN CASE YOU MISSED IT…

If you’re applying for a mortagge in Canada, you must pass a mortgage “stress test” regardless of whether your mortgage is insured or uninsured. The test gauges your likelihood of default in the event of an interest rate hike. Stress test rates for uninsured mortgages are set by the Office of the Superintendent of Financial Institutions (OSFI), while rates for insured mortgages are set by the Minister of Finance. 

In December, OSFI announced that the stress test rate for uninsured mortgages will continue to be the higher of 5.25%, or the contract rate plus 2%. Rates for insured mortgages are currently identical.  

Sensible strategies to help you thrive in 2022

Canadians keep talking about the housing market! Are we in a housing bubble, will rates rise in 2022 and by how much, is this the right time to buy or refinance, is a lender’s renewal offer the best available, and on and on! For many, it feels like some uncertain times ahead. Often, it’s just a few sensible strategies that can help you thrive in the current climate. Here are my top tips for the year ahead:

1. Take care of your credit. It’s so important to have good credit behaviours so you always qualify for the best mortgage rate. Pay your bills on time. Don’t let your credit accounts exceed 30% of the credit available. Before you cancel any credit cards, get advice. And don’t apply for a store card just to save on your purchase that day!
2.  Get advice before locking in your variable mortgage. It will take several prime rate increases for variable rates to be on par with a fixed rate, and you are likely better off sticking with your original strategy of focusing on payment vs. rate. Get in touch if you want to discuss the best strategy for your situation. 
3. Consider a refinance if it makes sense. Whatever your need might be – paying down high-interest debt, renovations, helping a child buy a home – you may want to refinance your mortgage and take advantage of rates that likely won’t be around too much longer. I can complete an analysis to help you determine whether it makes sense for you. 
4. Speed up your mortgage pay-down. Change from monthly payments to accelerated weekly or accelerated biweekly, which increases your number of payments and takes years off your mortgage. Also consider putting found money like raises and tax refunds against your mortgage principal. Check your mortgage contract for the amount you can prepay each year. If you can increase your payment amount, you’ll be accustomed to paying the higher amount should rates be higher at renewal. 
5. Renew with your eyes open. When your lender sends out a letter suggesting you renew your mortgage at their current offer, that’s a signal to get in touch. This is your opportunity to negotiate the best possible deal!
6. Get a pre-approval. A preapproval will tell you how much you qualify for, what your mortgage payments will be, and you’ll get an interest rate that will be held for up to 120 days so you are protected should rates rise. If you are house shopping, you won’t fall in love with a home you can’t afford, and you can act quickly when you find your dream home. Pre-approvals also make sense for renewals and refinances when rates are rising. 
7. Let renters help pay your mortgage. A home with a rental suite can be a great option for homebuyers, especially if the area you love is pricey or you don’t want to buy a condo at a lower cost. It’s also a great option for existing homeowners looking to lower their mortgage payment.
8. Don’t neglect your savings. In managing debt, you want to make sure you don’t need to use credit to get you through a financial emergency when your car breaks down or your washing machine quits. Make a point of setting aside a small sum every paycheque into a special emergency fund. Having a budget can provide the discipline you need. It might not be the most thrilling task, but it’s one that will give you a clearer picture of where you stand and how much you can truly spend.

New year and a new chance to make sure your mortgage plan is helping you build wealth and thrive! Get in touch at any time for a discussion on your best mortgage strategy.