What You Can Expect When Locking in a Variable Rate

Matt Chan • Jul 08, 2020

If you have a variable rate mortgage, and recent economic news has you thinking about locking into a fixed rate, here is what you can expect will happen.

Firstly, your lender will be very happy as they will now make considerably more money off you. Not only will your interest rate increase, but the cost of breaking your mortgage will increase as well.

Now, each lender has a different way of handling this process, but it’s very safe to say that regardless of which lender you are with, you will end up paying more money in interest, and potentially way more money if you have to break your mortgage.

Higher Rates

Fixed rates are always higher than variable rates. If you’re a variable rate mortgage holder, this is most likely the reason you went variable in the first place. The perception is that fixed rates are somewhat “safe” while variable rates are “uncertain”. It is true, as the variable rate is tied to prime, it can increase (or decrease) within your term. However, there are controls in place in Canada to ensure that rates don’t take a roller coaster ride. As the Bank of Canada has scheduled rate announcements, 8 times per year, and they rarely move more than 0.25% per move, it’s impossible for your variable rate to double overnight.

Increased Penalty

Obviously each lender has a different way of calculating the cost to break a mortgage, with the Big Banks being absolutely the worst, but a general rule of thumb is that breaking a variable rate mortgage will cost roughly 3 months interest or roughly 0.5% of the total mortgage balance, while breaking a 5 year fixed rate mortgage will roughly cost 4% of the total mortgage balance. So on a $500k mortgage balance, the cost to break your variable rate would be roughly $2500, while the cost to break your fixed rate mortgage could be as high as $20,000, eight times more.

Reasons People Break Mortgages

Did you know that 6 out of 10 Canadians will break their current mortgage at an average of 38 months? As we’ve discussed, locking in your variable rate to a fixed rate will increase the cost of breaking your mortgage. Despite our best intentions, sometimes life happens, and we need flexibility.

So here is a list of potential reasons you might need to break your mortgage.

Sale of your home (you have to move).
Purchase of a new home.
Access equity from your home.
Refinance your home to pay off consumer debt.
Refinance your home to fund a new business.
Because you got married (you combine assets and want to live together in a new home)
Because you got divorced. (you need to split up your assets and access the equity in your home)
Because you (or someone close to you) got sick.
Because you lost your job or because you got a new one.
Because you got relocated for work.
You want to remove someone from the title.
You want to pay off your mortgage before the maturity date.

Essentially, locking your variable rate mortgage into a fixed rate is voluntarily paying more interest to the bank, while giving up some of the flexibility to break your mortgage.

If you would like to discuss your personal financial situation, regardless if you have a mortgage or not, we’d love to talk with you. Please contact us anytime!

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Credit and Mortgage Financing

By Matthew Chan • 24 Apr, 2024

Credit. The ability of a customer to obtain goods or services before payment, based on the trust that you will make payments in the future. When you borrow money to buy a property, you’ll be required to prove that you have a good history of managing your credit. That is, making good on all your payments. But what exactly is a “good history of managing credit”? What are lenders looking at when they assess your credit report? If you’re new to managing your credit, an easy way to remember the minimum credit requirements for mortgage financing is the 2/2/2 rule. Two active trade lines established over a minimum period of two years, with a minimum limit of two thousand dollars, is what lenders are looking for. A trade line could be a credit card, an instalment loan, a car loan, or a line of credit; basically, anytime a lender extends credit to you. Your repayment history is kept on your credit report and generates a credit score. For a tradeline to be considered active, you must have used it for at least one month and then once every three months. To build a good credit history, both of your tradelines need to be used for at least two years. This history gives the lender confidence that you’ve established good credit habits over a decent length of time. Two thousand dollars is the bare minimum limit required on your trade lines. So if you have a credit card with a $1000 limit and a line of credit with a $2500 limit, you would be okay as your limit would be $3500. If you’re managing your credit well, chances are you will be offered a limit increase. It’s a good idea to take it. Mortgage Lenders want to know that you can handle borrowing money. Now, don’t confuse the limit with the balance. You don’t have to carry a balance on your trade lines for them to be considered active. To build credit, it’s best to use your tradelines but pay them off in full every month in the case of credit cards and make all your loan payments on time. A great way to use your credit is to pay your bills via direct withdrawal from your credit card, then set up a regular transfer from your bank account to pay off the credit card in full every month. Automation becomes your best friend. Just make sure you keep on top of your banking to ensure everything works as it should. Now, you might be thinking, what about my credit score, isn’t that important when talking about building a credit profile to secure a mortgage? Well, your credit score is important, but if you have two tradelines, reporting for two years, with a minimum limit of two thousand dollars, without missing any payments, your credit score will take care of itself, and you should have no worries. With that said, it never hurts to take a look at your credit every once and a while to ensure no errors are reported on your credit bureau. So, if you’re thinking about buying a property in the next couple of years and want to make sure that you have good enough credit to qualify, let’s talk. Connect anytime; it would be a pleasure to work with you and help you to understand better how your credit impacts mortgage qualification.

Notes on the Federal Budget

By Mortgage Plan • 19 Apr, 2024

Sherry Cooper has done a great analysis of the upcoming Federal Budget. You can see it here: Sherry Cooper Federal Budget 2024 One of the key themes of the budget is to tax the wealthy namely through increase taxes on capital gains. Currently, 50% of capital gains are taxed. Under new proposal, 50% capital gains tax will still apply for the first $250,000 but will rise to 66.6% on income above $250,000. Implications to real estate investors: - the tax is targeted to the wealthiest Canadians BUT there will be impact to the middle class real estate investors and can lead to higher taxes for middle class Canadians. - disincentive for Canadians to buy investment properties - disincentive for Canadians to buy under a corporation as corporations and trusts are taxed for entire capital gains at 66% rather than just the gains over $250,000 for individuals. With these changes, it is important to work with a team of professionals (mortgage broker, realtor, financial advisor and accountant) that can properly advise and help you navigate the intricacies of buying and selling investment properties. Be sure to consult with a great team of knowledgeable professionals when looking to buy and sell real estate. The other changes: - increase amortization to 30 years for new builds Likely minimal effect on affordability as it likely will increase demand - increase in RRSP withdrawal limit to $60,000 from $35,000 In my career, I rarely see a first time buyer with over $25,000 in RRSPs so likely a very minimal impact on actual first time buyers Reach out to me if you have any comments or questions.

Understanding the Recent Housing Affordability Measures in Canada

By Matthew Chan • 18 Apr, 2024

In recent years, housing affordability has become a significant concern for many Canadians, particularly for first-time homebuyers facing soaring prices and strict mortgage qualification criteria. To address these challenges, the Canadian government has introduced several housing affordability measures. In this blog post, we'll examine these measures and their potential implications for homebuyers. Increased Home Buyer's Plan (HBP) Withdrawal Limit Effective April 16, the Home Buyer's Plan (HBP) withdrawal limit will be raised from $35,000 to $60,000. The HBP allows first-time homebuyers to withdraw funds from their Registered Retirement Savings Plan (RRSP) to use towards a down payment on a home. By increasing the withdrawal limit, the government aims to provide young Canadians with more flexibility in saving for their down payments, recognizing the growing challenges of entering the housing market. Extended Repayment Period for HBP Withdrawals In addition to increasing the withdrawal limit, the government has extended the repayment period for HBP withdrawals. Individuals who made withdrawals between January 1, 2022, and December 31, 2025, will now have five years instead of two to begin repayment. This extension provides borrowers with more time to manage their finances and repay the withdrawn amounts, alleviating some of the immediate financial pressures associated with using RRSP funds for a down payment. 30-Year Mortgage Amortizations for Newly Built Homes Starting August 1, 2024, first-time homebuyers purchasing newly built homes will be eligible for 30-year mortgage amortizations. This change extends the maximum mortgage repayment period from 25 years to 30 years, resulting in lower monthly mortgage payments. By offering longer amortization periods, the government aims to increase affordability and assist homebuyers in managing their housing expenses more effectively. Changes to the Canadian Mortgage Charter The government has also introduced changes to the Canadian Mortgage Charter to provide relief to homeowners facing financial challenges. These changes include early mortgage renewal notifications and permanent amortization relief for eligible homeowners. By implementing these measures, the government seeks to support homeowners in maintaining affordable mortgage payments and mitigating the risk of default during times of financial hardship. The recent housing affordability measures announced by the Canadian government are aimed at addressing the challenges faced by homebuyers in today's market. These measures include increasing withdrawal limits, extending repayment periods, and offering longer mortgage amortizations. The goal is to make homeownership more accessible and affordable for Canadians across the country. As these measures come into effect, it's crucial for homebuyers to stay informed about the changes and their implications. Consulting with a mortgage professional can help individuals explore their options and make informed decisions about their housing finances. If you're interested in learning more about these changes and how they may affect you, please don't hesitate to connect with us. We're here to walk you through the process and help you consider all your options and find the one that makes the most sense for you.