By: Sarah Colucci
Senior Mortgage Agent, Lic. M14000929
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Bridge funds are an excellent option for those purchasers who need flexibility in a super-competitive real estate market. With bridge funds, you can rely on the equity in your existing home to close your purchase earlier. Additionally, if you haven't sold your property yet, knowing you can obtain bridge funds will enable you to create better offers, which go a long way in a world of multiple bid scenarios.
One aspect of bridge funds that doesn't often get discussed is what could go wrong. Sure, the concept of obtaining a temporary loan to close on a purchase sounds lovely, but it helps to know the risks as well.
First, you cannot obtain bridge funds unless your sale is firm, meaning there must be zero conditions outstanding like financing or an inspection, for example. Some lenders will also require that the bridge loan be registered on the new property purchased and the existing property sold.
When The Sale Doesn't Close
In rare situations, a sale property may not close after all, even if the agreement to purchase is firm. Some people forget that a purchaser must follow through on their commitment to purchase, and if for some reason that doesn't happen, you may get stuck with both the bridge loan AND the new mortgage loan.
This conundrum would require a refinance of the mortgage on the existing property or even the new property to consolidate the bridge loan into a conventional mortgage if the property does not sell again within a reasonable time frame.
Remember that bridge loans are short-term loans, so eventually, they will expire, and you will need to figure out alternative options if you can't resell.
One way to help mitigate the risks of this happening is to ensure the person that bought your property is pre-approved for mortgage financing when they submit their offer. Most transactions that fall apart in real estate are often due to the purchaser's failure to obtain adequate funding.
Secondly, consider whether the person buying your house needs to sell to buy regardless of whether or not they put this in the offer. If they have a home to sell––even if they go in "firm"–– this can pose a problem if the market turns or they don't sell, or if they don't sell for what they want.
The best course of action is to speak to a real estate agent and determine ways to mitigate your risks of bridge funds going sideways.
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A new report from Teranet reveals that over 25 percent of the people purchasing properties in 2021 already owned their principal residence.
The Bank of Canada recently explained that investors (who can quickly refinance or cash out money from their existing properties) drive up the cost of property in Canada’s largest cities.
As a result, BoC expects that property prices will remain elevated and may even rise for the next little while; however, it also warns that home prices that rise this fast can expose the market to an abrupt correction.
Market corrections are suitable for house hunters, but they are bad for people who need enough equity in their property to refinance or obtain a second mortgage. Refinancing is the gold standard for things like debt consolidation or, as mentioned, tapping into equity to purchase additional property. It has also been a mitigating factor for those who experience unemployment or require a high-interest debt solution.
One of Canada’s significant issues with real estate and inflation is that market corrections can increase the risk of insolvencies. So while increasing property value is excellent for existing homeowners, it also fuels considerably more household debt that creates financial difficulties when and if the market is corrected.
Teranet’s new report shows that recent real estate purchases were made by those who owned at least one other property, increasing from just 10 percent of total buyers in 2011 to 25 percent in 2021.
On the contrary, the number of first-time homebuyers getting into the market is declining, especially since 2016 when the Mortgage Stress Test was introduced.
Concern Over Rising Interest Rates
While property prices are continuing to increase, so is the size of mortgage debt. A fundamental concern is payment shock if interest rates spike higher, which would leave borrowers vulnerable to bankruptcy or, worst case, requiring a power of sale.
There are also issues like rising unemployment rates and what that could mean if there are future waves of the coronavirus, which would create considerable ongoing financial instability.
Since many Canadian mortgage borrowers have increased their mortgages and have taken on secured lines of credit with larger credit limits, sudden corrections in the market may have severe consequences for some.
Currently, fixed mortgage rates are rising, and markets predict that variable rates will also begin to increase early next year.
Do you have a mortgage question?
Please feel free to call or write.
To book a one-on-one consultation, please visit https://calendly.com/sarahcoluccimortgage
Sarah A. Colucci, Mortgage Edge Lic. M14000929
Mortgage Edge, Broker 10680
Direct: (647) 773-4849
Sarah Colucci is a senior mortgage professional with Mortgage Edge, Ontario's leading independent broker house.
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By: Sarah Colucci, Sr. Mortgage Agent
The solution to rising real estate prices is to build a new supply of homes that would alleviate the inventory shortage currently tormenting potential buyers.
Red tape and extraordinarily long timeframes (try 9 to 21 months) to get construction off the ground significantly impede the creation of new homes, which inadvertently cause an imbalance of excess buyers and a limited number of properties for sale, thus artificially elevating prices.
New-home construction is under the control of both the provincial and municipal governments; therefore, the federal government can only act to create policies that help with affordability instead of getting to the heart of the matter, which involves expediting the creation of a healthy supply of residential homes.
The Liberals want to increase the maximum insured mortgage amount, presently capped at $999,999, to $1.25 Million.
Currently, any purchase price over $1 Million is not eligible for high-ratio mortgage insurance and would require more than the minimum downpayment (5% on the first $500,000 and 10% on the remaining balance not exceeding $999,999).
The proposed changes mean purchasers would only be required to put the minimum down payment on a purchase price of up to $1.25 Million, which is good news for those finding it difficult to save a downpayment of twenty percent or more.
However, instead of creating more opportunities for people to afford real estate, increasing the insurable mortgage amount may accidentally cause a further surge in prices since now, instead of requiring a downpayment of $250,000, purchasers will only need $100,000 if they are purchasing a home for $1,249,999.
The Liberals also promised to build 1.4 million "affordable" homes to mitigate the risks to Canadians that materialize when there isn't enough supply.
Does this change benefit Canadians?
The problem may not be the down payment per se but the purchase price and the payments associated with large mortgages. A more expensive house does not help with affordability but rather, may expose purchasers like first-time-home buyers to payment shock in the event interest rates rise.
On the other hand, those who previously couldn't get into the market for property priced between $1 and 1.25 Million may have a window of opportunity to finally do so while also getting the perks of insurable mortgage rates.
In theory, Liberals are helping with affordability, but they are also going to drive up the cost of the property, which may not add much-needed balance to the market over the long run.
Why Property Prices Will Continue Rising.
The market is still ultra-competitive. Even though fixed mortgage rates are set to rise, the variable rate is still historically low. If the maximum insurable mortgage limit suddenly increases, more buyers will flood the market, adding to the rivalry. And naturally, prices will increase.
Have a mortgage question?
Call or write.
Sarah A. Colucci, Sr. Mortgage Agent
Mortgage Edge, Broker 10680
Direct: (647) 773-4849
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I often get asked whether the variable rate is better than the fixed rate and vice versa. The answer to this question depends on a person's appetite for risk and whether they can afford a 1-2 percent increase in their interest rate.
Recently, variable mortgage rates have been historically low. Consider RMG Mortgages, offered exclusively through the broker channel, is offering a five-year variable as low as 1 percent.
Variable mortgage rates also come with less risk of forking out huge, unexpected and dreadful prepayment penalties down the road, often seen when breaking fixed-rate mortgages.
When exiting or breaking a variable-rate mortgage contract, the penalty is just three months' worth of interest. On the other hand, breaking mortgage contracts with fixed rates usually amounts to more because of the Interest-Rate-Differential calculation. "An interest rate differential (IRD) weighs the contrast in interest rates between two similar interest-bearing assets. Most often, it is the difference between two interest rates."
Also, consider that you can always lock your variable rate into a fixed rate. It's important to realize, however, that although you may lock into a fixed rate at any time, you will only qualify for what the fixed rates are at the time you lock in and not what they were when you originally signed your mortgage contract. This means their may be a risk of taking on a higher rate in the future.
If you still have questions about taking on a variable rate mortgage vs. choosing a fixed-rate, please do not hesitate to call or write.
Send us an email at email@example.com or call 647-773-4849.
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Photo Courtesy of Bank of Canada
Fixed Rates On The Rise. Variable Rates Will Probably Rise By April 2022
On Wednesday of last week, the Bank of Canada (BoC) held its key interest rate at 0.25 percent, where it's been since March 2020. But experts warn that interest rates will soon climb as the economy is now recovering from the Covid-19 pandemic.
The BoC overnight lending rate directly affects variable rates, so if the overnight rate has increased, so will all variable rate products like mortgages and line of credit products.
Fixed mortgage rates work a little differently.
Unlike variable rates, fixed mortgage rates correspond to bond yields, which are defined as a loan agreement entered into by an investor and a bond issuer.
The BoC buys bonds to manipulate short-term interest rates, especially during major economic disruptions like a pandemic. When the federal government buys bonds in an open market, this acts as a way to increase the money supply in the economy because bonds get exchanged for cash. When the central bank buys government bonds, it raises their price and lowers their returns (the interest paid back to bondholders). This also gets reflected on five-year fixed-rate mortgages, making it cheaper to borrow money to buy a house or refinance a mortgage, for example.
Unfortunately, when the fed purchases bond yields, it fuels inflation (higher home prices and costs for goods and services). Eventually, this must get counterbalanced with the easing of bond purchases (known as ending quantitative easing QE). During the pandemic, the BoC purchased $5 billion worth of government bonds, which has led to exceptional mortgage interest rates. However, now that the economy is recovering from the pandemic, BoC will being to ease its buying of bond yields, which means fixed mortgage rates will rise and likely a lot faster than we have seen before.
Consider fixed rates have already increased by approximately 30-50 basis points in the past month. Although this slight rate hike has not stopped bidding wars, continuous increases in fixed mortgage rates will probably start a cooling effect, which will lead to a real estate market correction.
Since July 2021, 51 percent of mortgage borrowers have chosen variable rate mortgage products because of the record low discounts, which are anywhere from 75 to 95 basis points off the prime rate (2.45%). Because variable rates are almost 1 percent cheaper than fixed rates, they currently are a more favourable mortgage option.
What To Consider When Mulling Over A Variable Rate Mortgage
Some borrowers wonder whether variable interest rates may leave them vulnerable to rate increases. This can be true since variable rates depend on the Bank of Canada's overnight lending rate that could change (increase or decrease) throughout the year.
Keep in mind; variable-rate mortgages can also stay the same if the overnight lending rate does not change (which has been the case since March 2020). Nevertheless, fluctuations in variable rates can mean a borrower's monthly mortgage payment may increase or decrease without notice, which doesn't appeal to everyone. Statistically, variable rates are cheaper than fixed rates despite the fluctuations in interest rates considering the last 30 years of variable/fixed rate comparisons.
The general rule of thumb when choosing between a variable and a fixed-rate mortgage is whether you can afford a 2 percent increase in the interest rate. If the answer is yes, a variable rate is likely the better option.
Suppose you're currently in a fixed-rate mortgage and have a much higher rate or are concerned about rising rates shortly. Here, you can also consider breaking your existing mortgage and switching to a variable mortgage to experience more savings.
Here are some advantages of choosing a variable rate mortgage:
Do you want to book a one-on-one consultation to discuss your mortgage options?