Five-year fixed mortgage rates continued their upward march last week as the five-year Government of Canada (GoC) bond yield they are priced on hit its highest level in seven years. Meanwhile, five-year variable-rate discounts deepened, further widening the gap between five-year fixed and variable rates.

When I started working in the mortgage industry in 2005, variable rate mortgages saved you more money than fixed-rate mortgages 95 out of the past 100 years. First time home buyers were worried about what their home costs would be and avoided variable rate mortgages (VRM’s) because of the risk of rates going up higher than the fixed rate, but experienced homeowners often took a VRM at mortgage renewal time.

However, in the past 5 years, most people have gravitated towards fixed rates because the gap between fixed and variable rates was small enough that the cost of uncertainty outweighed the potential reward for most borrowers.

Once again, the gap is widening. While fixed-rate mortgages are going up due to the bond yield, variable rate mortgages have moved in the other direction.  Two years ago a VRM would be offered at Prime rate +.20%,  but later it reverted to Prime -.30%. In recent months, rates have dropped even further with some lenders offering Prime -1.0%!  You now have a choice between a 5-year fixed rate of 3.44-3.59% depending on the lender and a variable rate with a discount that calculates out to 2.45%. With a gap this large, it’s worth considering if you are risk tolerant enough to have a VRM.

Even if you are skittish, you can ask your Dominion Lending Centres mortgage broker to notify you if rates are going up and switch you to a fixed rate if they go above a certain percentage. Will your bank do that for you? I don’t think so. Be sure to have this discussion with your broker when your mortgage comes up for renewal or if you are considering a home purchase.

You may be seeing and hearing a lot more about the Reverse Mortgage in today’s marketplace. I have taken the time to get familiar with the program here in Canada and have been quite surprised by how it’s changed, how different it is to its counterpart in the U.S., and how relevant it has become given our ageing population in Canada.

Who are they best suited for? People aged 55+ that own a house, townhouse, or condo and want to either increase their cash flow or access equity without making a monthly payment. The older the client, the higher the approved limit.

Here is a list of PROS and CONS of the Reverse Mortgage.

Pros

• Funds can be advanced as needed, saving you interest cost as you would only need to start paying interest on the amount that is advanced.
• No income debt servicing like other ‘standard’ mortgages. Retirees with fixed incomes can qualify for much more money as our approvals are based on age and property.
• No payments required. The borrower can retain more of their income and never worry about default or foreclosure.
• Changes in interest rates don’t affect the client’s monthly cash flow since there are no payments required.
• Clients can pay up to 10% towards the loan if they choose each year, but there is no obligation.
• Prepayment penalties are waived upon death and reduced by 50% if the borrower(s) are moving into a care home.
• Borrowers will never owe more than the fair market value of the home at the time it is sold.
• There are no changes to the mortgage amount and no payments required if one spouse passes or moves into a care home.
• With a conservative estimation of house appreciation at just 2.5% to 3% per year, the interest cost of a reverse mortgage will typically end up being recovered over time. This leaves clients with plenty of leftover equity in the end.

Cons

• Clients are choosing to have more income/cash flow TODAY, in return for having fewer savings in the home TOMORROW.
• All clients are required to obtain independent legal advice, which is a good thing. But there is a small extra cost. Total one-time setup and legal fees come to approximately $2,500.
• Rates are approximately 1.5% to 2% higher than the best rate secured line of credit.
• If the housing market never goes up, and the client lives in the home long enough, there is a chance the client could exhaust all the equity in the home to fund their retirement.

If you, a family member, or a contact of yours could benefit from a reverse mortgage or want to learn more, please contact a Dominion Lending Centres mortgage professional who can walk you through the entire process.

Why are the terms more important than the rate when it comes to a mortgage?

It’s simple – 7 out of 10 Canadians break their mortgages prior to the renewal date.
Accepting a mortgage from the wrong lender when you could have qualified for a better one is a very costly mistake.

The biggest mistake anyone can make is thinking that they’re the 3 in 10 that won’t break their mortgage.

For those people, I give you a short list of potential reasons why you might need to get out of a mortgage early.

1. Sale and purchase – maybe you get an offer you can’t refuse – work or real estate related. Maybe the zoning has changed, your neighbours or strata are unmanageable or maybe you just want to grow your family.
2. Take Equity out – maybe you need to get some renovations done, help family members, purchase another investment, pay CRA or assessments on the property.
3. Pay off debt – maybe you are like over 60% of Canadians living paycheque to paycheque and paying over 5% on credit cards or lines of credit. There are much more savings in interest and cash flow when utilizing your equity.
4. Relationship changes – divorce is at a 50% rate these days or maybe you’re on the more positive side and getting married or moving in together. Having children could also require more space (oops we’re having twins!).
5. Health or life challenges – major illness, unemployment or death of someone on title can be a burden enough.
6. Removing someone from title – a co-signer (3/10 homebuyers get help from a family member) or an ex-spouse.
7. Save money with a lower rate – the market is always changing. It may make sense to break early and go with a different term as the market changes. Having the flexibility to do so is a major advantage.
8. Pay it off – maybe you won the lottery or got an inheritance.

Some of the above are not avoidable but the one thing you totally can control is who you align yourself with when shopping for a mortgage. A Dominion Lending Centres mortgage broker will always be looking at all the factors involved in a mortgage without bias to help you make an educated decision on what best suits you.

Not surprisingly, mortgage borrowers often go straight to their own Banker. And why not? It’s an established and comfortable relationship. Perhaps it’s viewed as the path of least resistance. But is it the right lender for the borrower’s current specific needs? Perhaps not.

Aren’t all Lenders pretty much the same?
Borrowers may think that all institutional lenders are pretty much the same, offering comparable rates and standardized borrowing terms. This is rarely the case. Lenders often prefer one asset class over another. They may have a particular need for one type of loan. A specific length of loan term may be desirable for funds matching purposes. Real Estate risk is a fact for real estate lenders. How they mitigate this risk differs, however. It may be stress testing interest rates during the approval process. Sophisticated risk pricing models may be used, having regard to previous loss experiences. The lender may rely significantly on collateral value or guarantees. The conditions precedent to funding will often differ from lender to lender.

A real-world example
I had the pleasure last year in advising a client who had 3 sizable real estate assets in 3 quite distinct asset classes. The borrower’s loan amount requirements were significant, however, they were flexible on loan structure. Accordingly, I sought out competitive yet differing deal structures. My goal was to provide a competitive array of options. A number of “A” class lenders were approached, several/most of whom this particular borrower had no previous experience with. I shortened the list to 5 lenders and received Term Sheets from each.

Each Offer was competitive on a stand-alone basis but they differed quite substantially in the following ways:

• Loans were either stand-alone, blanket loans or some combination.
• Length of terms offered differed by asset class.
• There was as much as a 75 bps rate difference from highest to lowest Offer.
• The amortization period depending upon asset class ranged from 15 to 25 years.
• Loan amounts on individual assets differed as much as 20%.
• Third party reporting requirements differed between lenders.
• There was a combination of fixed vs. floating rate loan structures.
• Recourse was limited by some lenders on select assets or waived entirely upon a higher rate structure.

Leverage Your Knowledge
These variances are striking yet each of the 5 lenders was considering the same asset at the same time with common supporting information from which to base their analysis. How was the borrower to know which offer to exercise? As a Broker, I can add value by helping the borrower to consider both their immediate and longer-term strategic requirements in the context of their overall real estate portfolio needs. This was precisely how this borrower landed on the most appropriate Offer for their particular circumstances. In this particular case, we presented different yet competitive and uniquely structured options for the borrower’s consideration.

Consider a Dominion Lending Centres Mortgage Broker when next in the market for financing. Leveraging a Broker’s knowledge is a tremendous value proposition.