How do bond yields affect fixed-rate mortgages?
Many factors affect the health of the economy such as unemployment rates, inflation, consumer confidence and real estate as just some examples.
The main factor that affects mortgage fixed rates is the Government of Canada's Bond Yields. A Bond Yield is a return an investor realizes on a bond.
Fixed-rate mortgage rates are usually in line with bond yields for the same term. For example, on Government bonds, the investor is guaranteed a certain yield or coupon for a certain amount of time. This is similar to when a borrower obtains a five-year fixed-rate mortgage and the rate stays the same for the entire five years.
The reason banks usually follow bond yields is that bonds and mortgages compete for the same investors such as those through mortgage-backed securities. Mortgages, however, usually make investors more money than bonds which is also why mortgage rates are always higher than bond yields.
When the stock market is booming, most investors do not take much interest in bonds since there are better returns elsewhere. Therefore, bonds remain cheaper and offer higher yields. In turn, banks raise their interest rates in line with rising bond yields.
When the economy is uncertain like it is today, investors flock to bonds because they are considered a safer investment vehicle. This pushes up the demand for bonds which drives the prices up and pushes yields down. In this situation, banks lower their interest rates in line with decreasing bond yields.
If you've been following the bond yield curve, you probably noticed that our bond yields have been going down lately. This is precisely the reason we have come to a time when our fixed mortgage rates are actually lower than our variable rates (which are governed by the overnight lending rate, not bond yields).
In some countries, the bond yield has moved into the negative which is why we have recently witnessed a Danish bank deposit a small interest payment into their mortgage borrowers' accounts to help pay for their mortgage.
It sure is a crazy time especially when not too long ago we were told the economy is great and interest rates will rise!
By: Sarah Colucci, Senior Mortgage Agent
Have a question? Drop a line below or call (647) 773-4849.
Do you want to be debt free? Who doesn’t, right?
There are not many Canadians who own their home outright. In fact, according to a study conducted by Stats Can in 2008, only 13% of homeowners across the country were mortgage-free. This means that out of 36.7 million people, and 63% who own homes, over 50% have mortgage debt. That's quite a lot of mortgage people. The good news: it doesn’t have to be this way.
Most people have to take out a mortgage to purchase their home as they don't have 100% of the purchase price in cash. And, although mortgage rates have been lower in the last decade, borrowers will still pay hundreds of thousands in interest over the life of their mortgage debt which is often 25 years.
Helpful suggestion: You don't need to pay your mortgage for 25 years!
Can I Pay Off My Mortgage Early?
Thankfully, in Canada, most lenders allow you to prepay your mortgage sooner through lump sum payments. When it comes to personal finance, taking an approach that will save you from making high interest payments and having a mortgage for 30 years is critical if you want to enjoy financial freedom while you're still young.
Here are the steps you should take to pay off your mortgage sooner by using privileges built into your mortgage contract:
1. Verify how much of a prepayment you are allowed. Lenders usually allow between 5 to 25% of the original mortgage balance to be prepaid without penalty each year. If you pay more than the allowed privilege within the year or pay off your mortgage completely, you will have to pay a prepayment penalty if you are still within mortgage term. Usually, the penalty is based on either three months worth of interest or the Interest Rate Differential (IRD).
2. Increase Your Mortgage Payment: Any amount of extra money you add in addition to you set principal and interest monthly payment will automatically go towards reducing your outstanding principal balance interest-free. For example, increasing your payment by $100 can reduce your amortization period up to four years or more depending on your mortgage balance. In the long term, this makes for an excellent approach to be debt free sooner than your friends and neighbours.
3. Change Your Payment Frequency: The less time in between mortgage payments, the faster you will pay your mortgage down. The best payment frequency to choose to make your regular payments, which will also shave down your amortization schedule, is both accelerated bi-weekly and weekly payments.
Bi-Weekly, Accelerated Payments mean making a payment every two weeks or 26 times a year instead of 24. This results in one extra mortgage payment going towards reducing your principal mortgage balance every year without interest.
By changing your payments to an accelerated frequency you will drastically reduce your mortgages’ amortization period.
How To Change Your Mortgage Frequency:
Contact your mortgage provider or mortgage broker to learn how to change your payment frequency. Most times, there is no fee to do so. You may have to make an interest adjustment payment prior to your mortgage frequency taking effect, however, your lender will explain this to you in more detail once you phone in.
It’s important to understand that every single payment you put towards your mortgage that is over and above your current set principal and interest payment will go towards reducing your principal balance. You don’t have to add astronomically large mortgage payments - just adding a few extra payments a year can significantly lower your principal outstanding balance.
Examples include tax refunds, $100 a month which would have gone towards purchased lunches, inheritance etc.
If your in the market to buy a home, please do not hesitate to contact me to discuss your mortgage options.
Did you know that only 4% of the population in Canada are debt-free? This means that only a very small percentage of people in this country are free from the constraints of not just record high unsecured consumer debt like credit cards and student loans but also mortgage loans.
Recently, I was presented with a graph demonstrating twenty countries and their respective debt levels. You may be surprised to learn that Canadians ranked the highest when it comes to those having household debt with a staggering liability of $1.75 for every $1.00 they earned. These numbers may signal an impending financial crisis is on the horizon.
This is simply a remarkably high percentage of debt that some argue is not sustainable in the event of a recession or job loss. I agree.
Based on the available historical data and state of the global economy, Canada will be heading into a recession soon. Some estimate it will come about in six months from now while others argue it will take one year. In any event, very few experts are opposed to the idea that a recession is coming which will directly affect the housing market.
In my opinion, consumers should always consider the predicament a recession may deliver and live accordingly. Financially planning with this mindset can act as a shelter against market calamities that, at the end of the day, are beyond anyone’s control.
Therefore, as a mortgage professional, I feel compelled to caution my clients about increasing debt levels and educate them about what a recession could mean when it comes to home prices and overall financial stability.
Canadians rely on their property’s equity when calculating total assets and this is well-recognized. In the past twenty years, it’s been an upward market with slowly decreasing interest rates and steadily increasing property prices and it’s because of this long standing price appreciation that many feel real estate is a type of investment incapable of risk. Clearly, this type of thinking can create problems since it only considers one side of the coin. Anyone investing knows that only considering the positive trend when making decisions can cause economic damages sometimes beyond repair.
The Government-implemented stress test provides evidence to suggest even minor preventative policy can have major effects on real estate. Case in point: When the stress test was enforced in 2017, properties all across Canada decreased by up to 30%. In fact, several borrowers who purchased real estate in 2015 through to 2017 currently owe more money on their mortgage than their property valuation. This means they have nothing but negative net worth. This also involuntarily binds them to their mortgage debt, creates the impossibility of refinancing to consolidate other higher interest debt that softens the blow and even makes it somewhat of an anomaly to sell since they would technically have to spend money to close the transaction due to the negative value of their property.
Keep in mind also that this national price depreciation did not happen because of an actual recession but as a result of a policy that was solely implemented to protect financial institutions from a recession and the rise of mortgage default rates.
Can you now start to imagine what the market would look like in actual recession?
This brings me to alarm bells about a recession and what it could mean for property prices. When interest rates rise, property prices will naturally decrease. As you can see, when interest rates are low, it stimulates the economy because it entices potential buyers to go out and purchase real estate since their mortgage payment is otherwise affordable on a monthly basis. So people rarely consider price (as long as they qualify) when buying a home and even fewer borrowers consider the reality of increasing interest rates and whether their house will still be affordable if interest rates go up 1-3%.
Big Debts and Renewal Time
If you have a mortgage and if interest rates rise, then at renewal time you will only be offered considerably higher rates. It’s important to be cognizant of this especially if you are currently borrowing other credit products like credit cards, student loans and unsecured lines of credit. A higher interest rate can add much bigger liabilities to your current obligations and for some, rising mortgage rates could become a financial tipping point in the wrong direction. As previously stated, in the event your property decreases in value, it may become challenging to sell or refinance since your property’s value will be much lower.
How to Plan
The good news is there are a few steps you can take now to protect yourself from the harsh environment a recession will create. Firstly, you should shorten your mortgages’ amortization period immediately. You can do this a few different ways. Firstly, you can set your payments to higher amounts which will force you to pay mortgage principal down rapidly. Secondly, your payments must be closer together to stop interest from accumulating quickly. Weekly and Bi-Weekly Accelerated payments are the best way approach mounting compounding mortgage interest.
Thirdly, you should also make a plan to utilize generous prepayment privileges that are stipulated in your mortgage contract. For example, some people pay over $15.00 a day on cafeteria lunch or frappuccinos. That’s over $400 a month they could be using towards their mortgage while adding years of financial freedom to their life span.
It may be time to quell consumerism and stop buying unnecessarily -focus on saving and growing your wealth through other investments.
I offer a complimentary debt and mortgage analysis. In a phone or in-person consultation, we will go over the following:
Call today (647) 773-4849
When the bank sets your amortization to 25 years, it’s not necessarily to help YOU.
Having a mortgage, unfortunately, is not an asset. No matter what type of house you own and no matter what type of equity you believe you have, if you have a mortgage you’re in the liability column.
And, it’s going to be the biggest liability you’ll have over your lifetime.
Unless you’ve signed up for an open mortgage product like a line of credit, for example, most mortgages in Canada are closed. This means that you are locked into whatever your interest rate is for the term of your mortgage. If you’ve amortized your mortgage over 25 years as most borrowers do, then it is safe to say With today’s interest rate climate you will pay almost double your mortgage balance in interest. That’s quite a lot of money, isn’t it?
And why is this important?
Compounding interest is one of those tools that has assisted regular borrowers with average salaries to become rich. Unfortunately, when most people are paying liabilities with the income they are generating through employment, for example, they are not giving themselves an opportunity to save and earn compounding interest through some form of investment. They are not “free” to pursue any other ventures.
That’s why if you have a mortgage, it’s essential to take steps every day to remove this liability from your life and move into the asset column.
Just because it’s amortized over 25 years does not mean your mortgage should stick around that long by any means. The 25-year number is often used as a subconscious dictation of how long someone should have a mortgage but it doesn’t necessarily serve you.
What should you do to get out of mortgage debt quickly?
If you pay your mortgage off, within the closed term, you will be subjected to penalties. However, your lender, whoever it is, most likely has provided privileges within the mortgage that act as loopholes where money becomes free to borrow.
Most commitments that I present to my clients have a very generous prepayment privilege of 20% per year. They also have double up payments which means you can increase your monthly payment without penalty. Anything you pay towards your mortgage above and beyond your set principal and interest payment will automatically go towards reducing principle only and drastically reducing your amortization period.
Most people actually don’t do this and I’m not sure why. When I meet with my clients I look at their overall financial picture and if they’re serious about paying off their mortgage, I recommend that they increase their monthly payment even by as little as $200. That couple hundred of dollars every month can mean being mortgage-free as much as five years earlier.
If they’re paying credit cards at 19.99% interest, then absolutely, of course, it makes sense to consolidate into their mortgage and use the money they would have been paying towards their credit cards to pay principal towards their mortgage at 0%. This is a no brainer.
Getting tax returns, a couple thousand here and a couple thousand there. Instead of buying a brand new TV or some other electronic, use it to buy yourself six more years of financial freedom.
Only when borrowers truly understand how to take advantage of the privileges that are set in their mortgage contracts, can they actually take steps to move towards financial freedom...
Freeing up money quickly to invest in something like compounding interest, which means building their own infrastructure in other investments, will help accelerate growth rapidly.
The alternative: being stuck in mortgage debt for a lifetime, never having any disposable income (or not as much) to live the life of their dreams.
I can help you. For a free consultation, please do not hesitate to call my office at 647-773-4849
Many borrowers wonder whether or not the interest they pay on their mortgage is tax deductible. Meaning, is there a way for them to save money on their taxes by writing off expenses related to their mortgage like interest paid as just one example.
In the United States of America, citizens are able to claim the interest they pay on their mortgages against their taxes and as a result, experience tax advantages in making their mortgage payment.
Unfortunately, in Canada taxes don't not quite work this way. Instead, if Canadians sell their principal residence they automatically become exempt from paying Capital Gains Tax. This saves them a tremendous amount of money as they don’t have to claim their sale profits as income and can sell tax-free.
The story of how interest on your home’s mortgage got banned from becoming a tax write-off goes back to 2001 when a case was brought before the Supreme Court of Canada. The court’s decision in Singleton v. The Queen (“Singleton”) changed the way Canadians are able to organize their finances, particularly mortgage debt.
As a result of the decision, while mortgages taken out for investment and business purposes can be tax deductible, mortgages for personal purchases are not. What the ruling essentially means is that as a taxpayer, you can organize your finances by claiming interest paid on your mortgage when purchasing personal assets such as a home ONLY if those mortgages (or secured lines of credit) are used to earn revenue or income from another property or business venture.
A very common example of this is to borrow to invest against your principal residence. If you use your home’s equity to purchase an investment property, then you can claim the interest you pay against your taxes.
Are mortgages on rental properties tax deductible?
If you borrow against your principal residence to purchase an investment or rental property, then you can deduct the mortgage interest on the portion you borrowed to purchase the investment. If you borrow a portion of your house for investment, for example, making the basement into a legal apartment which generates income you could also be entitled to claim your mortgage interest as an expense.
Should I convert my mortgage into being tax deductible?
In conclusion, in general, your mortgage payments against your principal residence for personal purchases are not tax deductible. Only under special circumstances could you pursue mortgage interest deduction from your taxes and possibly obtain a tax refund in some cases.
However, if you are thinking of changing your home’s primary use to mixed use as in you make a part of it revenue generating with the ability to consistently earn income, you could start deducting interest on your tax return.
This could also be a successful avenue to pursue to pay your mortgage principal down faster no matter what interest rate you have.
Therefore, no matter what, and before you do anything whether it’s finishing your basement or purchasing a rental property using your home’s equity, it’s important to check with the Canada Revenue Agency to be sure about what you can and cannot do when it comes to your mortgage loans. The rules may change depending on tax year.
Should you require any additional information, please do not hesitate to contact my office at (647) 773-4849. We would be pleased to help you and answer any questions you may have.
Sarah A. Colucci
Mortgage Agent, Lic. M14000929
Mortgage Edge, Broker 10680
Divorce and Your Mortgage: It can still be possible to buy out your spouse, consolidate debts, and most importantly, spare your credit rating but you may need help.
Divorce and Separation are extremely common in Canada. In fact, the divorce rate for legally married couples is currently more than 50% (50 couples out of every 1000). When couples get divorced or separate from each other there are many financial questions that must be addressed. One of them is what to do about dividing property...
When you have been living with someone for a very long time, it is common to have your finances interlaced with each other, sharing the responsibility in most, if not all, loan repayment. This can include mortgage payments, student and car loans, property taxes and so on. If you are currently in this situation, you may also be wondering if you should just sell the home.
There are spousal buyout mortgages available which are insured through Canada Mortgage and Housing Corporation and Genworth that would allow you to buy your spouse out of the matrimonial home and allow you to live comfortably on your own.
By applying under these programs, you will be able to qualify for a great rate, an excellent mortgage product and be able to borrow up to 95 percent of your property’s value. You will also be able to pay off joint debt and consolidate costly lines of credit that may either be secured or unsecured.
These programs ultimately offer secure mortgage options that can safeguard your financial obligations and future.
In order to qualify for the spousal buyout program, it is important you obtain legal advice and have a duly signed Separation Agreement. The agreement should outline who will be paid out and for how much along with other costs like child support, for example.
As a mortgage professional, I can help you figure out your Separation and make sense of it all right from the drawing board. I can also help you spare your credit rating which will be essential when going through the Separation process.
A mortgage broker can help simplify your life when you need simplifying the most.
Senior Mortgage Agent Lic. M14000929
Mortgage Edge Broker 10680
Direct: (647) 773-4849
One of the main aspects lenders consider when offering mortgage financing is your credit score. Your credit score displays your total financial fitness, and what type of risk you carry with respect to paying a mortgage loan and making your monthly payment.
In Canada, credit scores range between 300 and 900. I have very rarely found a credit score to be as low as 300 or as high as 900, however, if you are somewhere in the middle and can demonstrate that you pay your loans responsibly, you will be eligible for the best credit products with the best mortgage lenders.
If your score is lower than 600, for example, you may be deemed to have bad credit and may have to apply with an alternative or private lender. Your credit score is actually based on algorithms and the information provided to the two main credit reporting agencies in Canada: Equifax and Transunion.
All of your loans whether they are with financial institutions, mortgage lenders, student loans, credit card companies, etc. are reported each month to these agencies.
You may request a free copy of your credit report and credit history from Equifax or Transunion, who has also recently launched a free app called Credit Karma (www.creditkarma.ca)
When you apply for a mortgage, the rate you are offered will depend on your credit score. Here’s an example of the lenders you may qualify with gauged by your score:
What affects your score?
To keep excellent credit or improve your credit score dramatically which will help you accomplish your goals in real estate, be sure to maintain the following:
As a mortgage broker, we can help guide you through the process and offer suggestions on how to improve your score.
We can help you successfully buy a house, and get your mortgage payments where you need them to be financially. We specialize in home loans so we can be your trusted confidant when buying a home.
If your credit is not deemed satisfactory, we can help mitigate your case to prime lenders which can help you avoid paying higher interest rates.
Call today. 647-773-4849 or email me in confidence at firstname.lastname@example.org
Sarah Colucci, Mortgage Agent Lic. M14000929
Mortgage Edge, Broker 10680
There is some good news that I would like to share. The Bank of Canada has decided to decrease its 5 year benchmark rate to 5.19% from 5.34%. What this means is that the Qualifying Interest Rate for mortgage payments just got easier.
When the mortgage stress test originally came to be the mortgage rules stated that any federally regulated financial institution has to qualify home buyers and owners by using 2% more than the contract rate or the Bank of Canada’s 5 year benchmark rate, whichever is greater. Yesterday, the Bank of Canada decided to decrease this rate to 5.19% since many financial institutions have been dropping their five-year posted mortgage rates.
This is good news since it means interest rates are decreasing which helps affordability in the housing market.
As an independent mortgage professional, it’s important to note that mortgage brokers still work with lenders such as select credit unions who do not have to stress test borrowers. They are not federally regulated so therefore, they can simply use their contract rate to qualify a purchaser or existing homeowner for mortgage financing.
For all of your real estate needs, please do not hesitate to contact me.
Sarah A. Colucci
Need to consolidate credit cards? Need a low-interest line of credit? Contact us today to complete a complimentary debt consolidation analysis where we show you how much money you can save.
Many self employed people wonder how much income is required to qualify for a mortgage.
Whether you are a new business owner or have been a self-employed borrower for many years, I would like to introduce the stated income program which you can now access to obtain mortgage financing.
Here’s what you need to know…
Usually, if a borrower with good credit approaches a big bank, the bank representative will ask for their T1 Generals and Notice of Assessments for the last two years and proceed to use a two-year average of their claimed income (the income they paid taxes on) to calculate income required to qualify. Unfortunately, because many borrowers write off expenses involved in running their business, their claimed income is usually not enough to qualify for the real estate of their dreams.
Thankfully, if self-employed borrowers choose to work with a very reputable mortgage broker, they can apply under both the stated income program and the “Expanded BFS (Business For Self Program)” also insured by Genworth and Canada Mortgage and Housing Corporation (mortgage default insurers). They will have to pay a type of default insurance but will still be offered extremely competitive interest rates.
For proof of income, borrowers will have to provide their reasonable income amount on an income declaration which would be based on their professional designation and skillset. They will also have to demonstrate credit worthiness by having a solid credit history and credit score.
What you will need for this program:
Please note this program is only eligible on owner-occupied homes meaning this must be your principal place of residence.
For all of your mortgage questions, please email me email@example.com or call 647-773-4849.
Sarah A. Colucci
Senior Mortgage Agent
Mortgage Edge, Broker 10680
Debt relief can be overwhelmingly confusing for borrowers in all financial situations.
Many borrowers have lingering debt problems… in fact, if you have a standard 25-year bank mortgage loan this can be considered, in many respects, a debt problem especially if you end up paying substantially more interest than you have to.
With the right advice from experts, borrowers can definitely choose one of many well proven and effective solutions to help them finally resolve their ongoing debt problems.
Finally, they can have more deserved reign over their hard earned money instead of designating it all to pesky compounding interest.
One particular debt problem that comes up over and over again for many borrowers is credit card debt. Canadians tend to have a lot of credit card debt and they often struggle to get out of it once the balances reach the maximum credit limit.
Here are three common debt solutions borrowers pursue:
a) refinance the first mortgage to consolidate debt.
b) get a second mortgage loan like a line of credit or private mortgage loan or c) apply for a debt consolidation loan such as arranging a plan with the assistance of a third-party debt consolidation company.
To get out of credit card debt the quickest and cheapest way possible, borrowers have to follow some sort of plan that will allow them to pay their loan down much faster, with the least amount of interest involved and most importantly, in less time.
Let's look at the three most popular debt consolidation options borrowers can pursue:
Debt Consolidation Through Finance Companies
Consolidation companies will lend money to consolidate loans. The loans are usually unsecured meaning they are not registered against a property.
Their rates can be higher than secured mortgages and the terms can be very short (i.e 4 years only). As a result, scheduled monthly payments can be higher. Borrowers usually don't choose this option first since the payments can be higher on a monthly basis and therefore, not sustainable even over a shorter term.
A Second Mortgage or Line of Credit
A second mortgage can be a good option, but it depends on the interest rate a borrower receives, any additional fees involved and of course, whether or not they can manage the monthly payment.
Second mortgage loans tend to be offered at higher mortgage rates because they are considered riskier than a first mortgage.
A second mortgage loan can be offered by a financial institution, an alternative lender and a private lender.
A second mortgage offered by financial institutions, like first mortgage loans, usually has privileges built in that allows you to pay more principal faster. If the loan is a line of credit, then it is totally “open” which means it can be paid off at any time without a penalty.
Borrowers tend to fall into the "pay interest-only" trap when they take out a line of credit since, like a credit card, all that is required is a monthly minimum payment. If you don't pay more than just the lower interest payment, you may have a difficult time paying off the original balance.
It is often said that a secured line of credit can become the "credit card of the secured mortgage world."
Private loans: Expect interest rates to be much higher than banks or alternative lenders and to pay lender and broker fees which brings total cost of borrowing much higher.
Sometimes, however, borrowers choose a private mortgage as their best option because :
They can’t refinance their first mortgage because the penalty is too high or they don't qualify for whatever reason.
Pitfalls of Private Mortgages:
Borrowers pay interest-only, which is counterproductive.
Fees involved in a private loan can be very expensive.
UNDER NO CIRCUMSTANCES should a private mortgage be considered a long term debt solution.
Lastly... option three.
Mortgage refinancing will involve breaking the existing first mortgage in order to consolidate all debts. Borrowers will have one monthly payment owed to one lender.
Borrowers may or may not have to pay a penalty. If they are able to stay with the existing lender, they may be able to simply increase the mortgage balance without a penalty.
In the event they cannot stay with the same lender for whatever reason, they will be subjected to a penalty.
Refinancing is often a popular choice mainly because the interest rates are the most favourable of all the debt consolidation options.
Additionally, most lenders allow a prepayment privilege each year of up to 25 percent of the original mortgage balance which can be used either by increasing the regular payments by a certain percentage or making one lump sum payment each year.
This can be advantageous especially when paying debts down. Instead of making that monthly, interest only mortgage payment, make the prepayment to your mortgage at a lower interest rate and your money goes towards reducing principal immediately.
There are other options one can pursue to help with debt consolidation such as transferring balances to promotional offers on credits cards but chances are, if one can’t get out of the current credit card debt they are in, they will have issues with other credit cards once the promotions are over and the rates go back up.
Looking to find the best mortgage rates? "Best" can be very misleading because rates offered to borrowers depend on many factors such as loan to value, employment situation and credit scoring. Contact me today if you have questions about your mortgage or debt consolidation matters!
Have a great weekend!
Sarah A. Colucci
Sr. Mortgage Agent Lic. M14000929
Mortgage Edge, Broker 10680