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Minister Morneau Announces New Benchmark Rate for Qualifying For Insured Mortgages

The new qualifying rate will be the mortgage contract rate or a newly created benchmark very close to it plus 200 basis points, in either case. The News Release from the Department of Finance Canada states, "the Government of Canada has introduced measures to help more Canadians achieve their housing needs while also taking measured actions to contain risks in the housing market. A stable and healthy housing market is part of a strong economy, which is vital to building and supporting a strong middle class."

These changes will come into effect on April 6, 2020. The new benchmark rate will be the weekly median 5-year fixed insured mortgage rate from mortgage insurance applications, plus 2%.

This follows a recent review by federal financial agencies, which concluded that the minimum qualifying rate should be more dynamic to reflect the evolution of market conditions better. Overall, the review concluded that the mortgage stress test is working to ensure that home buyers are able to afford their homes even if interest rates rise, incomes change, or families are faced with unforeseen expenses.

This adjustment to the stress test will allow it to be more representative of the mortgage rates offered by lenders and more responsive to market conditions.

The Office of the Superintendent of Financial Institutions (OSFI) also announced today that it is considering the same new benchmark rate to determine the minimum qualifying rate for uninsured mortgages.

The existing qualification rule, which was introduced in 2016 for insured mortgages and in 2018 for uninsured mortgages, wasn't responsive enough to the recent drop in lending interest rates -- effectively making the stress test too tight. The earlier rule established the big-six bank posted rate plus 2 percentage points as the qualifying rate. Banks have increasingly held back from adjusting their posted rates when 5-year market yields moved downward. With rates falling sharply in recent weeks, especially since the coronavirus scare, the gap between posted and contract mortgage rates has widened even more than what was already evident in the past two years. 

This move, effective April 6, should reduce the qualifying rate by about 30 basis points if contract rates remain at roughly today's levels. According to a Department of Finance official, "As of February 18, 2020, based on the weekly median 5-year fixed insured mortgage rate from insured mortgage applications received by the Canada Mortgage and Housing Corporation, the new benchmark rate would be roughly 4.89%."  That's 30 basis points less than today's benchmark rate of 5.19%.

The Bank of Canada will calculate this new benchmark weekly, based on actual rates from mortgage insurance applications, as underwritten by Canada's three default insurers.

OSFI confirmed today that it, too, is considering the new benchmark rate for its minimum stress test rate on uninsured mortgages (mortgages with at least 20% equity).

"The proposed new benchmark for uninsured mortgages is based on rates from mortgage applications submitted by a wide variety of lenders, which makes it more representative of both the broader market and fluctuations in actual contract rates," OSFI said in its release.

"In addition to introducing a more accurate floor, OSFI's proposal maintains cohesion between the benchmarks used to qualify both uninsured and insured mortgages." (Thank goodness, as the last thing the mortgage market needs is more complexity.)

The new rules will certainly add to what was already likely to be a buoyant spring housing market. While it might boost buying power by just 3% (depending on what the new benchmark turns out to be on April 6), the psychological boost will be positive. Homebuyers—particularly first-time buyers—are already worried about affordability, given the double-digit gains of the last 12 months.

 

Five Tips on How to Increase Your Credit Score Quickly

In order to qualify for certain mortgage and loan products, a minimum credit score is essential. Even if your score is sufficient to qualify, you might find the rates being offered will be lower than if you had a higher score.

Having worked with thousands of personal credit histories over the years, we have developed some strategies that sometimes give you that much needed quick score boostsort of like jumper cables for credit!

tips to improve your credit scoreHere are a few scenarios this might help with:

  • You are being pre-approved for a mortgage, but your bank or broker remark your score is too low and you don’t qualify.
  • You want to qualify for a mortgage AND a home equity line of credit (HELOC), but your lender says you need a higher score to get both.
  • You are working with a mortgage broker who is arranging a mortgage with a B-lender for you. She tells you that your interest rate will be lower if your Equifax Fico score is over 680.

And it’s not just about homeownership…

  • You are preparing your pitch to prospective landlords. These days, that often includes your credit report. Your chances will be better if your score is in the 700s or even 800s.
  • You want to apply for a personal line of credit or a high-end personal credit card, but your score is too low.

1. Use The Optimal Utilization Strategy

When maximizing your personal credit score, you should look at your utilization of available credit for each individual credit facility. By this I mean what percentage of your available credit is the balance being reported?

Percentage utilization can have a significant impact on your personal credit score. Equifax Canada states utilization has a 30% weighting on your personal credit score.

Optimal Utilization Strategy for credit scoreOne scenario: maybe a furniture store or a home improvement store offered you “don’t pay for one year.” The balance you are carrying on this card might be relatively small, but if it’s at or over the actual card limit, this is dragging down your personal credit score. Consider paying it off now!

Another scenario: suppose you have three credit cards, each with a limit of $10,000.

And let’s say one card has a balance owing of $9,900 and the other two have zero balances. This might happen because you are trying to earn rewards on one particular card, or maybe you said yes to a balance transfer promotional offer.

Chances are your credit score is lower than if the usage was spread across the three cards equallyi.e., each with a balance owing of $3,300, or 33% of the limit.

Overall, your usage remains unchanged, but now you no longer have an individual card reporting at 99% utilization.

If you can afford to cover or reduce the balance owing on the one with a balance of $9,900, you should see a nice little score boost.

2. Use the Statement Date Strategy

It may be that the best thing for you to do is simply reduce balances owing on your credit facilities. If time is of the essence, you should plan this carefully and do it in the correct order.

Gather up your most recent available statements for all relevant credit facilities. And note the day of the month when the statement was printed. Most of the time it’s the balance on that statement date that is being reported to the credit bureau.

And give or take a day, it is safe to assume that same day of the following month is when the next statement will be issued.

So, plan your payments accordingly. And allow several business days for online payments to process in time. If you are paying a credit card issued by your own bank, you should see transfer payments being processed either instantly or overnight.

3. Pay It Down and Keep It Down

pay down your debtThis is especially important when your limits are not very large. Suppose you are a model citizen who uses her credit card frequently, and pays the balance in full every month after receiving the monthly statement, and before the due date.

That is the “correct way” to manage your credittaking advantage of the grace period you are given by all card issuers.

But these days, there is little benefit to trying to use up the entire grace period because current account interest rates are so low they are pretty much negligible. It’s far better to pay your balance in full before your statements come out. You are even more of a model citizen, and now the balance being reported to the credit bureau will always be extremely small, if anything.

4. Exercise All Dormant Credit Cards and Lines of Credit

Some people have credit facilities they never use. People tend to favour one particular credit card (maybe we like their rewards program) and we might neglect our other cards. And most of the time we don’t even need our personal line of credit.

If you are trying to maximize your credit score, it is good to use all available credit fairly regularly, even if it’s just for a nanosecond.

It will rarely be correct to close these older credit facilities since they are contributing ‘score juice.’ Equifax Canada states your history can have a 15% weighting on your personal credit score.

These credit facilities can become stale and may not be not pulling their weight on your personal credit history. Update the DLA (date of last activity) with a modest transaction and then pay it online immediately. If it’s a personal line of credit, just transfer $10 to yourself and the next day transfer back $10.50.

If you notice you have credit cards that have not seen daylight for months or years, take them to the supermarket or gas station, use them just once, and pay online right away. After the next statement these cards will report the date of last activity as the current month and year, and that may give you some much-needed points.

5. Scour & Clean All Reporting Errors

There might be some incorrect information in your personal credit history that’s needlessly dragging down your score.

A few examples include:

  • You have two or more personal profiles with the credit bureau and your information is scattered and diffused. Combining it all into one credit report could well increase your score and strengthen your look. (This often happens to people whose name is hard to spell, or who have legally changed their name).
  • Late payments being reported when it’s not you. Maybe you have a relative with the exact same name.
  • That router you returned to the cable company is showing as a collection; but in fact you returned it to the local store.
  • You completed a consumer proposal and all the debts included in the proposal should be reporting zero balances and should not carry an “R9” rating. This generally means an account has been placed for collection or is considered un-collectible.
  • There may be incorrect late payments. Equifax Canada states payment history has a 35% weighting on your personal credit score.

Mortgage brokers can fast track an investigation with Equifax Canada for you. What might take you two months, we can get done in a few days. Keep that in mind if time is of the essence.

improving your financial healthThe Takeaway

This overview is a fairly simplistic way of looking at your personal credit report and highlights initiatives specifically intended to give your credit score a quick boost. These tips are not necessarily the same as when you are managing for optimal credit health or interest-expense minimization.

Ideally, you are working with someone who understands all the nuances and who can help you determine what your priorities should be. Simply give us a call if you would like a professional assessment of your current credit status, we can help tailor a plan specific to your needs and help you succeed!


   

When it comes to mortgage break penalties, big banks are often the worst!

 

Image result for fingers on mortgage calculator

Committing to a mortgage for five long years exposes people to the most insidious aspect of residential financing: prepayment charges.

And when it comes to such charges – the penalties you pay come when you back out of your mortgage early – some lenders take a greater toll on your bank balance than others.

Big banks are usually the worst. Mortgage finance companies are often the best.

And these bank competitors want you to know it. More and more, smaller lenders are using their preferential penalty calculations as a selling point, as well they should.

This year I’ve seen lenders such as Equitable Bank, Manulife Bank of Canada, XMC Mortgage Corp., Merix Financial, CMLS Financial Ltd., RFA Mortgage Corp., First National Financial LP, and MCAP all go out of their way to step up marketing and educate consumers on how bad penalties from major banks can be. (Mind you, a few of these lenders also have “no-frills” mortgages with high penalties – for example, 3 per cent of principal. So watch out for those.)

What is a ‘fair-penalty lender?'

A fair-penalty lender calculates its standard prepayment charges, for lack of a better word, “fairly.”

It does so by comparing your actual mortgage rate to a rate equal to (or close to) what it charges new customers for a time frame similar to your remaining term.

Unlike Big Six banks, fair-penalty lenders don’t use arbitrarily inflated rates (“posted rates”) in their calculations. That only serves to drive up penalties.

So why doesn’t everyone get a mortgage with a fair penalty lender?

Well, because most people are conditioned to pay more for big bank financing. Among other things, they trust the brand, like the convenience or like knowing they can walk into a branch to talk to someone if there’s ever a problem (although, for most people, mortgage problems after closing aren’t too common). And the cost of that convenience is steep.

A simple example

Suppose you’re a major bank customer with a regular 3.19 per cent $300,000 five-year fixed mortgage that you got one year ago.

Now imagine you:

  • Need to consolidate debt into your mortgage;
  • Just found a new job in a different city and must sell and rent;
  • Want to break and renegotiate to a lower rate;
  • Have to break the loan early for some other reason – maybe because of a loss of income, divorce, inability to get a fair rate from your bank on a “port and increase” (that’s where you move your mortgage to a new property and increase the loan size), or inability to qualify for a port.

In these scenarios, one popular bank would charge you an interest rate differential (IRD) penalty of roughly $16,800 to exit your existing mortgage.

Compare that with just three months’ interest (about $2,400) at a 'fair party lender'

To put that another way, the extra $14,400 you’d fork over to the “less fair” lender would be like paying an 8.19-per-cent interest rate versus the 3.19 per cent. That’s astronomical. These days, determined mortgage shoppers do backflips to save even a 10th of a percentage point off their rate, let alone five whole points.

Ways around penalties

Some big banks are kinder than others when it comes to helping you avoid prepayment pain. The better ones let you add money to your mortgage without penalty, offer early renewal options and have flexible portability rules.

But more often than not, you can find a similar mortgage from a fair-penalty lender for a comparable price or better – without the penalty shackles.

If you’re dead-set on a big-bank mortgage and want to lower your exposure to heinous fixed-rate penalties, consider a short-term fixed or variable rate instead – if it’s suitable for you. By suitable, I mean you have a tolerance for potentially higher rates sooner than five years and you have no problems getting approved for a mortgage.

These days, with so many people taking fixed rates because they’re cheaper than variable rates, banks stand to make a killing on prepayment charges. That’ll be especially true if recession hits and rates fall further. We come across people almost every week who’d love to refinance at today’s lower rates, but they can’t because their bank penalty is too harsh.

The time has come to heed this lesson as borrowers. Big-bank IRD penalties clearly overcompensate banks for the legitimate expenses they incur when a customer backs out of a mortgage early. The more that people demand fair penalties, the more pressure it’ll put on Canada’s six biggest lenders to change their methods.

Rob Mclister

 

 

   

Mortgage-free or diversity?

Image result for dollar scales

Canadians put a high priority on paying off their mortgage debt – sometimes maybe a little too high.

Paying off debt is always a good move.  Wanting to be mortgage free is a laudable goal.  Making it your only goal may not be as sound.

Traditionally paying off your mortgage as quickly as possible has been seen as one of the best routes to financial success.  Interest rates used to be higher.  Some will remember that nasty period in the ‘80s and ‘90s when they were in double digits.  Even the 5% and 6% rates in place just before the Great Recession make today’s rates seem cheap.  So it can make more sense to take your focus off of your home and mortgage and view them as part of a more diversified investment strategy.

Over the past 10 years stock markets have tended to deliver rates of return that are markedly higher than mortgage interest rates.  By diverting some money away from your mortgage you could invest through RSPs or TFSAs.  It has been shown that people who start investing when they are young end up wealthier later in life.

Of course markets do fluctuate and some people prefer the stability of the “guaranteed return” that comes with paying down a mortgage.  It is a form of enforced saving.  There is also a sense of security that comes with mortgage free home ownership in the case of job loss or a sudden drop in income.

There is also protection in diversification.  Because you have expenses that go beyond your mortgage, having a collection of smaller assets can be useful.  If money gets tight you could sell a lesser investment in order to pay other bills.

While it is never a bad plan to pay down your mortgage faster, it is always a good plan to diversify and spread around your assets and your risks.  As the old expression says, “Don’t put all your eggs in one basket.”

   

Bank of Canada Holds Policy Rate Steady Amid Global Uncertainty

It is rare for the Bank of Canada and the US Federal Reserve to announce rate decisions on the same day, but today's announcements highlight the stark differences in policy in the two countries. The Bank this morning announced they would maintain their target for the overnight rate at 1.75% for the eighth straight meeting. The Fed is widely expected to cut its target for the fed funds rate by another 25 basis points, taking it below the key rate in Canada for the first time since 2016. More than 30 central banks have cut interest rates in the past year and the Bank of Canada in today's Policy Statement highlighted the weakening in the global economic outlook since the release of its July Monetary Policy Report (MPR).

In today's MPR, the Bank revised down its forecast for global economic growth this year to below 3.0%, reflecting a downward revision in growth in the United States to 2.3% (from 2.5%), the Euro area (to 1.1% from 1.2%), oil-importing emerging market economies and the rest of the world. China's growth pace remains at a 30-year low of 6.1%.

Trade conflicts and uncertainty are weakening the world economy to its slowest pace since the 2007-09 economic and financial crisis. The slowdown has been most pronounced in business investment and the manufacturing sector and has coincided with a contraction in global trade (Chart 1). Despite the manufacturing slowdown, unemployment rates continue to be near historic lows in many advanced economies, as growth in employment in service sectors has remained resilient.

Growth is projected to strengthen modestly to around 3.25% by 2021, with a pickup in some emerging-market economies (EMEs) more than offsetting slower growth in the United States and China.

   

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