Mortgage Broker, Owner
The Mortgage Group
Mark – We’re talking about interest rates, and what a great topic, because interest rates just went up yesterday, right?
Deb – again, yes.
Mark – can you tell us a little bit about that? It went up how much?
Deb – Well, basically it went up 1%, the Bank of Canada raised their rates and usually that means, rates may increase. Variables will for sure, because they’re based on the prime rate, but fixed rates, sometimes they will take a while. I know that pretty well across the board, the banks and the monoline lenders, the lenders that just do mortgages in the brokerage channels, have raised their prime to 3.2%.
Mark – I heard the banks jumped on board pretty quick with it this time.
Deb – yes, they do. Usually with their prime rates, because now, with those new stress tests, that’s the bench mark rate to qualify people now, so it’s going to get higher and higher unless these lenders and banks look at it and say ‘you know what, it’s too high’, they may cut it back a bit, because it’s really putting people out of the marketability to buy a home.
Mark – some people have pre-approvals, would you recommend they quickly get a mortgage before that pre-approval runs out, because maybe they’re locked in at a special interest rates for now, or what do you say?
Deb – well pre-approvals are usually the standard 5-year fixed, and right now, for 5-year fixed, and 5-year variables, there’s probably 12 different rates with every lender we have, because it depends on what type of property, owner occupied, rental, second home, vacation home, or if it’s purchase, refinance, it depends even on credit score, determines if I can go to the lender with that rate, if it’s a quick close on a purchase, it can be a better rate, if it’s a refinance, meaning we can only go to 80% loan to value, then those rates are generally higher than someone that has less down payment on a purchase.
Mark – it’s not as straight forward was it used to be, people used to be able to call in and say what’s my fixed rate for 5 years…
Deb – Definitely, since October 17, 2016, everything’s changed.
Mark -that’s when that stress test came in.
Deb – exactly, and that’s when we had to qualify on the bench mark rate. At that time it was 4.64 and then it went up to 4.84, I’m expecting it to go up again, but maybe the lenders will hold it, I don’t know.
Mark – So that means that you have to qualify at that higher interest rate even though that’s not the interest rate that you’re probably going to end up paying.
Deb – Exactly. Your contract rate will be your 5-year fixed at 2.99 or 2.89 for a purchase, any where from 3.09 to 3.39 for a refinance.
Mark – I heard, one of the market responses is the bond yield… maybe go into bonds a little bit now, is the bank going to be less interested now in mortgages?
Deb – Everyone starts to get a little paranoid when the Bank of Canada starts to say it’s going to raise rates, and specifically, the Bank of Canada really controls the variable rate. The variable rates are based on the Bank of Canada rate minus a discount; .8, .35, depending on what your contract rate is, and fixed rates are determined by the bond yield, and they usually have to keep a spread of about 1.2%, so for example, your bond yield is say 3%, then fixed rates might be 4.2% for a 5 year fixed. That’s not what the rates are now, but it give you a little bit of an example, so once bond yields get going, and they’re performing good, meaning the economy is good, your investments are going to do great, and I’m happy about that, but the mortgage rates are going to go up.
Mark – because banks may be a little less interested in mortgages because they can get these bond rates.
Deb – Well, everyone wants to do mortgages. Banks want to do business with people, you know, they’re priority is getting dollars and sense out of your and I. They have their volumes and activities they have to keep up with and that’s usually on a monthly basis.
Mark – what’s a monoline?
Deb – A monoline is a lender that is through the mortgage channel, and that’s all they do is mortgages, or secure lines of credit. Not into the RSPs, the loans, the credit cards, or the RESPs
Mark – that’s one advantage to going to a mortgage broker, such as yourself, where you have access to… maybe if I worked for a specific bank, I might be able to just offer you a mortgage based on what that bank will offer, but you can reach out to a lot more lenders.
Deb – Oh definitely. Most definitely. Banks have appetites for certain types of clients, certain types of properties, and our monolines are the same way. So we have specialties where people deal with, well everyone does traditional deals with just a purchase and you have a pay stub and a proof of down payment and a letter of employment, but different lenders will do different things, and also, there are three insurers in Canada. There’s CMHC, Genworth, and Canada Guarantee, and they have different appetites for what they will do.
Mark – one will say no, the other will say yes?
Deb – exactly.
Mark – I have a client right now, they’ve been pre-approved at a specific percentage, and for a certain amount, but now he’s starting to work a lot more, so interest rates have gone up, if he goes back and says he’d like to get more money now, I’d like to be approved for a higher dollar, that’s a go and he is approved for the higher amount, will he be under the new higher interest rate, or do you think he will be at the same interest rate?
Deb – That’s two different questions. So for employment, if he’s working more hours and it’s overtime and he’s not been with that employer for a history of time, like a year or two years, and most lenders like at least two years before they use overtime, but if he’s getting an increase in his salary or guaranteed income, then we can look at raising what he will qualify for. So it’s not the amount of hours, it’s guaranteed income, and the traditional hours people work in a week is 40 hours. So someone comes in and says they’re working 50 hours in a work week, we have to determine if it’s a guarantee, is it a guaranteed rotation, and does he get overtime for any thing over and above the 40 hours.
Mark – Last question, say I’m coming in and getting a loan for $300,000, less CMHC fees, what is the difference this interest rate is going to make to my mortgage [for qualifying].
Deb – well I know we did this exercise when we first started having to qualify on the benchmark rate and I know on a $400,000 purchase, someone came through our doors and got a pre-approval for $400,000 prior to October 17 , and everything else stayed the same, employment, income, and credit. Then they would actually qualify for $320,000. So about a 20% deduction in home price.