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Why you Need to Unlock the Equity in Your Home

 May 24, 2019 9:15 AM

By: Ian Mucignat

I enjoy simplicity. Here is an easy answer to the question: What exactly is “Equity”?

House Value minus Mortgage Balance = Equity

Many Canadians have been fortunate to have entered the real estate market over ten years ago -before the sharp rise in real estate prices. For these lucky homeowners, the value of their property has increased significantly while they were paying down their mortgage loans at ultra-low interest rates. These homeowners have generated some serious equity that is locked up in their property! This is equity that doesn’t have to be stuck in their house value and can be unlocked for use today. This is something that can be done with a financial product called a HELOC (a Home Equity Line of Credit).

Naturally, we might ask ourselves, why would anyone want to unlock this equity in their home?

Here are six good reasons why homeowners may want to unlock this equity:

  1. Purchase an investment property

Equity can be used for a down payment or to finance the entire purchase. An investment property can generate income for retirement and cover its costs. Vacancy rates are very low, close to 1% in Toronto, and many economists see this being a persistent issue for renters, and opportunity for property owners. Furthermore, the interest on the loan is tax deductible.

  1. Buy for kids – “do your givin’ while your livin’ so your knowin’ where it goin’”

Ever wonder how your kids are going to be able to purchase their first property when prices keep rising? Many parents are providing down payment support to their kids today to help them get a leg up. This is different from the traditional model where the wealth passes down through a will/estate.

  1. Build an Emergency fund

Life happens! When an emergency arises and you need money, this is when it’s most challenging to be approved. It’s always better to seek credit when you don’t need it and have it ready on standby.

  1. Fund a Cottage or Vacation property

This is similar to purchasing an investment property except that the property is for personal use. For the best of both worlds, your personal use property can also be rented out. Many owners enjoy some offsetting income earned through companies who help make this turnkey like Airbnb.

  1. Pay for Renovations

Have you ever walked through an open house on a property that hasn’t had renovations for decades? Putting money back into the property helps improve the value of the property, and you get to enjoy those improvements for as long as you stay in the house.

  1. Consolidate higher interest debts

Smart personal finance says to pay down your debts with the highest interest rate first. The rates on any debts that are unsecured, such as credit cards or term loans, are going to have higher interest rates than a loan secured by your home.

Smart finance also says you should spend below your means. If you are borrowing to pay for general spending, such as vacations, cars, dinners out, etc. then you are on a very slippery slope. Doing this with credit cards will have creditors knocking at your door quickly. Doing this with the equity in your home will “eat your house”.

Am I setting myself back?

When you first purchased your home, you made a down payment from your savings and financed the remainder with a mortgage. Your goal is to pay this mortgage off before you hit retirement. You might be asking yourself, “If I unlock the value of my property with a HELOC, am I setting myself back again?”

YES, if you are using the money to spend above your means or purchasing assets that lose value over time, such as a new car or boat.

YES, if you don’t have a plan for repaying the principal back and are stuck in a world of interest only payments.

NO, if you are using the money for investments like second properties. There is an expectation that these will gain in value. They can be sold in the future to repay the amount borrowed fully. This is much different than your principal residence where if you sell it, you still have to find a place to live/rent. For example, it’s highly likely that a cottage you purchase today can be sold for at least the same value, or more, in 5-10 years.

So, in cases like this, you are not setting yourself back in time financially with a mortgage. You are merely using your best asset (your home) as collateral for a loan to receive the lowest rates possible.

Cautions

Further to the risks of borrowing to spend mentioned above, it should be noted that not all investments are created equal. Borrowing to invest in the stock market can be a much riskier proposition as the stock market can turn more quickly. By March of 2009, the Dow Jones Industrial average had dropped 54% from its peak in 2007. Ouch!

Work needs to be done to ensure that borrowing is done responsibly and address questions such as:

  • How am I expecting to make payments?
  • What are my expected returns and risks?
  • What is my time horizon?
  • What is my exit strategy?

Bottom line, if you have equity in your home and are financially responsible, then you might be a great candidate for a loan.

Keep calm and mortgage on!

 

About the Author:

Ian Mucignat, CFA, is an independent mortgage agent at TMG The Mortgage Group. He graduated from Wilfrid Laurier University with a Bachelor of Business Administration, minoring in Economics, and is a CFA Charterholder. Ian has worked in the mortgage industry since 2000 at lenders, banks, and brokerages. If you are purchasing, renewing, or refinancing your mortgage, don’t hesitate to contact Ian directly for a free consultation.

  

All Sizzle, No Steak – The Federal Budget’s plan for First Time Buyers

 Mar 22, 2019 2:00 PM

By: Ian Mucignat

You know a Federal Budget in an election year is going to be juicy. This year, the Liberal government announced $22.8 billion of new spending over the next year. The expected deficit will be almost $20 billion and will continue past 2022.

With housing prices running away and rule changes that make it harder to qualify for a mortgage, the mortgage industry had been lobbying for months now to introduce some changes to help millennials and first-time buyers. On March 19, the budget announced two changes:

  1. CMHC First Time Buyer Incentive
  2. Home Buyer Plan (HBP) limit increase

Perhaps the purpose was to make a splash in an election year. Unfortunately, the changes will not be effective at all. Honestly, I’m pretty sure they didn’t consult with any mortgage professional. They didn’t even look at the experience of British Columbia, whom tried a very similar program that flopped tremendously and is now closed.

CMHC First Time Buyer Incentive

First, let’s look at the new incentive. On the surface it sounds great.

First-time homebuyers whose household income is under $120,000 may qualify for an interest- free loan from Canada Mortgage and Housing Corporation of 10% for a new home purchase and 5% for existing homes. Theoretically, this should allow the buyer to put more money down and borrow less for the mortgage. However, a key limitation of the programs is that the purchase price of the home cannot be more than four times the buyers’ household income.

The incentive is scheduled to go into effect in September of 2019.

Let’s consider an example:

  • Household income is $100,000
  • Maximum house price allowed is $400,000 (4 times income)
  • Minimum down payment is 5% or $20,000
  • Purchasing an “existing” house with property taxes at 0.5% the value
  • CMHC First Time Buyer Incentive is $20,000

$400,000 Purchase price
($20,000) Down Payment
($20,000) CMHC Incentive
-------------
$360,000 Gross Mortgage Amount
$14,400 CMHC Insurance Premium (4% premium with 5% down payment)
-------------
$374,000 Actual Mortgage Amount
$1,820 Monthly mortgage payment at 3.25%, 25-year amortization

Looks great, right? CMHC is giving me $20K and helping me reduce my mortgage. No, they are taking an equity portion of your home to protect their investment. When you go to sell your home years later, they expect to get repaid! What happens when your property doubles in value? Are they going to ask for some of your gains? These details are unknown because they’re being worked out between now and the September implementation date.

Now, let’s consider the same First Time Buyer not using incentive plan. This buyer is not limited to a maximum four times income purchase price. After all, who can find a house for $400,000 in today’s market? Below is an example that meets the debt servicing ratio requirements:

$495,000 Purchase price
($24,750) Down Payment
-------------
$470,250 Gross Mortgage Amount
$18,810 CMHC Insurance Premium (4% premium with 5% down payment)
-------------
$489,060 Actual Mortgage Amount
$2,377 Monthly mortgage payment at 3.25%, 25-year amortization

As we can see, the scenario without the incentive allows the buyer to purchase more than four times their purchase price. Furthermore, they don’t have to worry about CMHC being on title and wondering what their equity is going to be when they sell the property years later.

Lastly, what about regular tax payers? Should we be happy with this incentive plan? CMHC is a crown corporation and they’re using our money to purchase real estate? What if there were major job losses, arrears and defaults increase, and housing prices go down… why are we putting our capital at risk?

Instead, the policy makers should have made special concessions in the lending rules for First Time Buyers to have an increased amortization to say 30 or 35 years. This would drastically improve their qualification ability while not transferring the risk to Canadian tax payers.

Why not? First Time Buyers are generally younger and can still pay off the mortgage in their normal working lives. A simple rule change would have been much easier to implement, far more effective, and not have to worry about how they are going to collect their incentive once the homeowner sells the house.

Home Buyer Plan (HBP) limit increase

The other change from the budget might help some first time buyers but it will also strain them a bit more too in the years after they purchase.

The Federal budget increased the amount first time buyers can withdraw from their RRSP to $35,000 from $25,000. Furthermore, they are also making the program more available to individuals recovering from a marriage or common-law break-up.

The general rules of the program still apply. Users must repay the money back to their RRSP’s over 15 years or be subject to full income taxation on the withdrawal.

Keep calm and mortgage on.

 

About the Author:

Ian Mucignat, CFA, is an independent mortgage agent at TMG The Mortgage Group. He graduated from Wilfrid Laurier University with a Bachelor of Business Administration, minoring in Economics, and is a CFA Charterholder. Ian has worked in the mortgage industry since 2000 at lenders, banks, and brokerages. If you are purchasing, renewing, or refinancing your mortgage, don’t hesitate to contact Ian directly for a free consultation.

 

Approval qualifications, Industry Issues, First Time buyers  
  

Buying a Home versus Renting

 Oct 15, 2018 9:30 AM

By: Ian Mucignat

We all need a place to live. Let’s assume our parents have kicked us out of the house, and living rent free is not an option. We are faced with the choice of renting a home or buying a place and making mortgage payments.

However, it’s not that simple because, for most people, buying a place requires a down payment investment and closing costs. It’s also going to require taking care of the property and doing our own maintenance.

At 40,000 Feet

Intuitively speaking, buying a place makes a great deal of sense. Instead of your rent payment going to someone else, a mortgage payment goes to you by paying down a loan. A portion of every mortgage payment pays for the interest cost but also amortizes the loan. Over time, 25-30 years later, you’ve paid off the mortgage loan and now own a giant asset. You can sell the asset or live there without the burden of paying a mortgage or rent payment.

Renting

When you rent, you pay the landlord a monthly rental amount. In most cases, the rent amount will go up each year by at least the cost of inflation. Aside from making rental payments, renters are usually responsible for the utilities they use. Pretty simple.

From the landlord’s perspective, the owner of the property will want the rent to cover their mortgage payment and ongoing costs. If they don’t, then they are losing money and basing their investment on the expected returns from the property increasing in value. Overall, you can expect the rental amount to be somewhat close to a mortgage payment.

Purchasing a Home

When purchasing a home, there are other considerations and transaction costs. The down payment is the obvious one. With mortgage insurance, a home can be bought with as little as 5% down, or you can put 20% down and avoid the insurance cost. For some lucky people, they receive gifts from parents, but for others, it means disciplined saving to build the down payment. The down payment isn’t so much a cost as it is an investment in an asset.

The next biggest cost is the land transfer cost. The cost is based on a graduated scale, so the higher the value of the property, the higher the calculated tax will be. If you’re a first-time buyer, you also get a rebate, which can help significantly.

Furthermore, one must qualify for a mortgage. Assuming you have a decent credit score and employment income, then you can qualify for something. Mortgage qualifying rules have changed in recent years to make it more difficult, so you’ll want to speak to an experienced mortgage broker that can help you assess your qualifications.

Ongoing costs

Obviously, there are utilities to pay, such as heating and electricity; however, you’re likely to have to pay this when renting too.

When you own home, you’ll need to worry about property taxes to the local municipality and the upkeep costs. Ball park, the property tax is about 0.45% of the value of the home. The upkeep costs are things like repairs and maintenance. Over time, things such as the roof and HVAC system need to be replaced or repaired.

It’s hard to know what repair costs will be in the long run because they can be lumpy. The roof and furnace might break in the same year, while others have very minimal expenses. Based on my experience, I’d peg a 1.0% cost each year. For example, a 900k home might require about 9k of repairs annually. A condo will be different and less because condo fees go towards a reserve fund for all shared items, such as the exterior and parking garage.

Furthermore, home owners are required to carry home fire insurance. The cost of this is relatively inexpensive, but it should be mentioned.

Pride of Ownership

This might be priceless in a sense. For many people, it’s the dream of owning your own home and doing what you want with it.

Cash Flow and Saving Money

In all likelihood, renting will produce a slightly better cash flow. In a rational economical model, one might take that excess cash flow and invest it into something, such as the stock market, which can produce a higher rate of return. If the rate of return is greater than the return with owning real estate, then you could be ahead. This saving can be imperative because renters need to ensure they have money to pay rent after they retire.

However, we are far from being rational people. It’s common that, when people earn more money, they spend more money. We get used to earning more money. I don’t know the psychological term for it, but it’s simply something we all do. It’s therefore unlikely that you’re going to be disciplined to take all the excess cash flow and invest it.

With a mortgage, however, we are forced to make payments towards the loan. For many people who are debt adverse, having a mortgage loan is terrific because it’s a goal to pay off quickly. These “forced savings” are put towards a debt that reduces interest costs at a guaranteed rate (the rate on the mortgage loan) and doesn’t carry risk the same way the stock market does. Remember 2008 when portfolios went down 40%?

Leverage

Buying an asset (the home) with only 5-20% initial investment is leverage. When the asset goes up in value, it’s going up on the whole home. For example, let’s say you put $100k down on a $500k house. If the property goes up 20% in 1 year to $600k, then you’ve earned $100k on a $100k investment, which is a 100% return. Many people have benefited from this in recent years and seen their personal wealth increase.

Number Analysis

Anyone that knows me knows I love spreadsheets and numbers. It’s a big reason I completed my CFA designation. So, I started to build a spreadsheet to compare the financial results of the two options. It amazed me how I can produce wildly different results based on small changes to the assumptions because of the compounding effects over time. For example, I can change the rate of inflation a little bit and have renting be more favourable or home ownership more favourable. The assumptions make big differences. Therefore, I think the question of whether it’s better to rent or buy should be a higher plane decision.

Bottom line

At the end of the day, I would ask higher level questions:

  • Do I believe in the long-term real estate market?
  • Do I prefer to have pride of ownership?
  • Do I like the idea of forced savings?
  • Am I disciplined enough to sock away money for rent costs at retirement?
  • Do I have the upfront money needed to enter the real estate market?

Owning your own home has worked well for many people and families. Maybe it can work for you, too.

Keep calm and mortgage on.

 

About the Author:

Ian Mucignat, CFA, is an independent mortgage agent at TMG The Mortgage Group. He graduated from Wilfrid Laurier University with a Bachelor of Business Administration, minoring in Economics, and is a CFA Charterholder. Ian has worked in the mortgage industry since 2000 at lenders, banks, and brokerages. If you are purchasing, renewing, or refinancing your mortgage, don’t hesitate to contact Ian directly for a free consultation.

 

  

Fixed vs. Variable: what do the numbers say?

 May 25, 2018 9:00 AM

By: Ian Mucignat

A few years ago, I wrote about the “great debate”, whether it makes sense to choose fixed rate or variable rate – read here.

Empirically speaking, studies have shown that variable rate clients win about 85%. A win means they paid less interest over the term of the mortgage. However, it’s important to note that not everyone is cut out to be a variable rate client. Specifically, there is the risk that the rate and mortgage payment will increase suddenly. Therefore, you need to be comfortable with this risk and be able to sleep knowing your payment can increase.

Given a normal positively sloped yield curve, a variable rate mortgage will have an interest rate that is lower at inception. Variable rate mortgages are linked to the institution’s Prime Rate and are usually given a discount. For example, if the Prime Rate is 3.45% and the discount is 1.00%, then the mortgage rate is 2.45%. Two months from now, the Prime rate might increase to 3.70% because the Bank of Canada increased its overnight rate, so the rate on your mortgage increases to 2.70%.

A fixed mortgage rate is set at the beginning and doesn’t change during the course of the term.

Putting personal risk tolerances and biases aside, what do the numbers say today? Let’s take a look at a predictive model I use with my clients:

Assumptions

$500,000 mortgage, 25-year amortization, 5 year term

  1. Fixed choice: 3.39%
  2. Variable choice: Prime minus 1.00% = 2.45% today

So, who wins? To answer this question, we need a viewpoint of Prime Rate.

Prime rate History

First, below is a graph of the prime rate from 1937 to today. This much history is not very useful because of how our currency and inflation were pegged early on. Then, in the 70’s and 80’s, the central banks let inflation ride wild. Starting in the early 90’s, the policy makers realized a low, stable inflation rate is ideal for economic growth.

Today, the Bank of Canada’s website states: “The objective of monetary policy is to preserve the value of money by keeping inflation low, stable and predictable.” Therefore, let’s look at the graph of the early 90’s to today and make some observations.

It’s interesting to note that movements in the prime rate tend to look like a staircase. Once they start moving in a set direction, they tend to keep moving in the same direction.

Down movements

During periods of economic turmoil, we see the rates drop quickly by about 3.75%. As a variable rate mortgage holder, you would like this!

  • The staircase down from November 2000 to March 2002 took less than 2 years, and the rate moved 3.75% total.
  • The staircase down from November 2007 to June 2009 took less than 2 years and moved 3.75%. This was after the major credit crisis.

Up movements

During periods of growth, we see rates ratchet up by about 2.6% over the course of 3 years. This is when variable rate mortgagors lose!

  • The staircase up from 1997 to mid-2000 took about 3 years and went up 2.75%.
  • The staircase up from August 2004 to November 2007 took another 3 years and went up 2.5%.

Flat

From June 2009 to July 2017, a period of 8 years, we have seen rates rise and fall a little but basically stay flat. After the “great recession”, as some call it, the economy stumbled, and it took a long time to recover. Variable rate mortgage holders would have done well during this period!

Moving forward from today

As the joke goes, did you know economists have predicted nine out of the last five recessions? Seriously. Economists are notorious for being wrong.

There are actually two laws of economists. The First Law of Economists: For every economist, there exists an equal and opposite economist. The Second Law of Economists: They're both wrong.

That being said, let’s look at three scenarios that I think could potentially happen:

  1. Flat Rate Scenario– Trumponics puts us into a recession soon. Yes, this can actually happen. In fact, there are well-respected economists predicting this will happen in the next 12 months! See this articlefrom the Globe and Mail.
     
  2. Increasing prime rate slowly Scenario– This seems to be the most realistic scenario. The Bank of Canada has quite openly communicated its concern about raising rates too quickly and shown real concern for the debt load of Canadians. They are worried about the sensitivity of rates rising too quickly.
     
  3. Increasing quickly staircase– From a historical graph standpoint, we know rates can rise fairly quickly. We saw this earlier in this article. Let’s say we have continuous upwards rate hikes of 00% total from the time they started, July 2017, which is more aggressive than our historical graph. In this case, we can expect rates to rise another 2.25%.

Summary of Results

Running the numbers shows that a flat or slowly increasing prime rate leads to variable rate mortgage holders paying less interest by 22K and 6K. However, a scenario also exists where rates might rise more quickly, and variable rate clients pay 18K extra.

Not to bash on economists too much, but I have seen economists make wrong predictions many times. I have seen the head of mortgages at a major Canadian bank take a fixed rate on his own mortgage in 2011 because the head economist advised him that rates were going up. Even the Bank of Canada acknowledges that any change they make today can take years to develop.

Bottom line, nothing has changed. In all likelihood, you will save more money with a variable rate mortgage. Empirically speaking, we know this too. However, it’s important that you can absorb the payment increases and sleep well at night because a scenario does exist where you are worse off. Furthermore, you need to be able to make your payment on time every month. This is the risk-reward relationship.

Keep calm and mortgage on.

 

About the Author:

Ian Mucignat, CFA, is an independent mortgage agent at TMG The Mortgage Group. He graduated from Wilfrid Laurier University with a Bachelor of Business Administration, minoring in Economics, and is a CFA Charterholder. Ian has worked in the mortgage industry since 2000 at lenders, banks, and brokerages. If you are purchasing, renewing, or refinancing your mortgage, don’t hesitate to contact Ian directly for a free consultation.

 

  

Factors to Improve your Mortgage Qualification Amount

 May 15, 2018 12:00 PM

By: Ian Mucignat

Last week, the Bank of Canada (BoC) increased its mortgage qualification rate. You can see it directly on the BoC website by clicking here and scrolling down to the Conventional Mortgage – 5 year. Note the increase from 5.14% to 5.34%.

If you recall from one of my previous articles, this isn’t a well-thought-out rate decision by our usual pensive BoC brain trust. It’s simply the average of the 5-year posted rates for the big-6 Canadian banks. In my opinion, it’s ridiculous that the big banks effectively engineer this rate. You can read about my disdain for it in “The tail that wags the dog. Why are the big banks dictating the Bank of Canada qualifying rate?

Regardless of my whining, the rates did go up. So, what is the impact to the qualification amount for Canadians? This particular change reduced everyone’s eligible mortgage amount by 2.2%.

Let’s say you are on the bubble for qualifying for a particular mortgage amount. Aside from credit score and other paperwork, etc., what are the key factors influencing whether your application is approved or declined?

Gross Income Amount

This is simple — the higher the income the more you can qualify for!

If you are salaried, then its your T4 income. If you are self-employed and are applying for a mortgage at an AAA lender, then you need to show your tax returns for the past two years. The lender will be assessing your “net business income” — the amount after all your write-downs. Bottom line, if you are self-employed, then you will want to do some income planning.

Some applicants may turn to parents who become co-applicants and co-owners. This is affectionately known as the “Bank of Mom and Dad”.

Other times, friends may purchase a multi-unit home together with, perhaps, one couple upstairs and the other downstairs.

For a quick and dirty calculation in today’s environment, your mortgage qualifying amount is approximately five times your annual income. For example, an income of $100K generally results in a mortgage qualification amount of about $500K.

Debt/Liability Payments

Another factor impacting your Total Debt Servicing Ratio is your other debt(s). Some such liability payments are weighted more heavily and treated as higher costs than others. For example, let’s suppose you have an unsecured open line of credit with a balance of $30,000. Even though the interest-only payment is only about $150 per month, the mortgage lender is required to assess it as a payment of 3% of the balance or $900 — a huge effect on your qualification amount.

Maybe you own another property with a separate mortgage payment. The higher this payment, the lower you can qualify for on the new mortgage. Suppose you have increased your mortgage payment on that property above the required minimum. You might be able to reduce it or refinance it to improve your qualification amount.

Bottom line, look at each liability payment for opportunities to reduce the monthly carrying cost.

Down Payment

Your down payment can have two impacts:

  1. The obvious reduction of the mortgage amount. As you increase your down payment, the required mortgage needed to finance the purchase is decreased.
  2. A down payment of 20% or more will make your mortgage “conventional”. This means you are allowed to qualify using a 30-year term instead of 25 years.

Note, having a “conventional” mortgage also means you now need to qualify at the greater of the BoC qualifying rate (5.34% at time of writing) or the actual mortgage rate plus 2%. So, if the 5-year fixed rate is 3.50%, then the qualifying rate must be 5.50% because it’s greater than the BoC qualifying rate. As a result, applicants will look for the term/product that has a rate that allows them to use the BoC qualifying rate. These are typically short-term offerings such as adjustable-rate mortgages or ones with 1 to 2-year terms.

Amortization Period

The amortization is the time it takes to fully pay off the mortgage. The longest amortization period we have in Canada is 25 years for down payments of less than 20%. For down payments greater than 20%, there is more flexibility but the vast majority of A lenders limit the maximum to 30 years.

The longer the amortization period, the lower the mortgage payment and the more you can qualify for! All else being equal, a 30-year amortization has the impact of increasing your qualifying amount by 8.1%.

Property specific: Condo fees, Heat, Property taxes

The greater the condo fees, heat, and property taxes are, the less your qualification amount will be. Some municipalities don’t have strong sources of income so have to charge higher property taxes. Some condo boards have poorly funded reserve funds and may have to catch up by raising their condo fees.

All else equal, introducing a condo fee of $500 will reduce your mortgage qualifying amount by 10 to 13%. (The actual amount heavily depends on the purchase price.)

Qualifying Rate

Every bank or trust company in Canada, big or small, must adhere to the rules of the regulator, OSFI. In particular, updates to their B-20 rules require all of these lenders to qualify all conventional mortgages at the greater of the Bank of Canada qualifying rate (currently 5.34%) or the mortgage rate plus 2%. This change was implemented on January 1, 2018 and had a big impact of about 20% to everyone’s qualifying amount.

Any high-ratio insured mortgage must qualify at the Bank of Canada qualifying rate (currently 5.34%) regardless of the rate on the mortgage.

This can be an important consideration for pre-construction purchasers who do not know what the BoC qualifying rate will be at time of closing which could be years from now.

 

About the Author:

Ian Mucignat, CFA, is an independent mortgage agent at TMG The Mortgage Group. He graduated from Wilfrid Laurier University with a Bachelor of Business Administration degree, minoring in Economics, and is a CFA Charterholder. Ian has worked in the mortgage industry since 2000 at lenders, banks, and brokerages. If you are purchasing, renewing, or refinancing your mortgage, don’t hesitate to contact Ian directly for a free consultation.

Mortgage Strategy, Approval qualifications, Interest Rate, Mortgage Basics, First Time buyers  
  

GTA Housing: The Sky is Not Falling

 May 8, 2018 9:00 AM

By: Ian Mucignat

It’s a simple fact that every good news story needs a headline. If it doesn’t, then people won’t read it. If they don’t read it, then the newspaper doesn’t make money. Here is a great example from Maclean’s magazine about their bold prediction for a housing crash in 2013. Umm, yeah. You might have missed that one.

With all the sensational news stories on the housing market going around lately, I thought it might be good to get some perspective.

By the way, let’s not confuse this with “clickbait,” which is aimed to exploit everyone’s curiosity. The content behind clickbait isn’t really meant to be journalism, anyhow. I’m talking about what are supposed to be reputable news agencies.

One headline from a well-known newspaper in Toronto stated the following on April 4th, 2018:

“Toronto home prices see biggest drop in almost 30 years

March sales down 40% from a year ago, the lowest since 2009”

The problem with this title is it looks like Toronto’s housing prices are down an astounding 40%. However, the 40% is in reference to a year-over-year number of units sold, not the price. The price is down 14% from the dizzying heights of 2017.

If you recall, the real estate market was going bonkers from January to April 2017 at a break-neck pace that everyone knew was unsustainable. The provincial government threw a bucket of water on the party with their Ontario Fair Housing Plan. It didn’t have super sharp teeth, but it was enough to signal an end to the speculation. Buyers started to get skittish and retreat from the multiple bid offers.

Then, in October of 2017, the regulator for the vast majority of all mortgage banks in Canada, OSFI, introduced new legislation, called B-20. This legislation requires mortgage lenders to qualify all mortgages at a higher rate – the greater of the BoC benchmark rate or the mortgage rate plus 2%. The effect of this change reduced the amount people qualify for by about 20%, which is very significant. This was more than a bucket of water thrown on the party. This was a bucket of ice cold water. The new rules took effect on January 1st.

Prices: Where are we today?

Let’s look at the following chart. I pulled this data directly from The Canadian Real Estate Association (CREA) website (www.crea.ca), made a graph in Excel, and added a straight trendline.

I pulled the data starting with January 2011.

There are a few interesting observations I can make from this chart:

  1. The long-term trend line adds some much-needed perspective. For single family detached, in particular, the housing prices got ahead of themselves starting around September 2016 and peaked. With all seriousness, you have to respect the concept of reversion to the mean.
  2. As mortgage rules changed, mortgage applicants were unable to qualify for larger mortgage balances required for single family detached homes. As a result, there has been a shift in demand for lower priced condos.
  3. Prices appear to be stabilizing. The impacts of the mortgage rule changes are being absorbed, and the rules did not send housing into a tailspin. In the future, pressures on lower housing prices will come from higher interest rates but will be balanced by a lack of supply and pent-up demand.
  4. MacLean’s magazine was way off the mark. There was no bubble crash in 2013.

Sales Volumes are Down

The chart below, from CREA’s website, shows the number of homes sold in 2018 is down.

As you can see, the 10-year average is about 9K transactions per month in the GTA. In 2017, we were in a hyper mode that was about 33% higher than the average. Everyone was excited about buying and selling homes!

In 2018, however, the sales activity slowed to about 7K units/homes, which is about 22% lower than the average. So, when a newspaper reports that sales are down 40% (!!!), it appears exaggerated. The fact is that sales are down about 22% from the average. It’s likely that people are simply waiting to see what happens to the market.

Maybe the biggest sufferer of the decline in the number of units sold is the City of Toronto, which charges an additional Land Transfer Tax.

Final Say

Don’t pay too much attention to the sensational headlines. The market was too hot for a while, but now it’s cooled down. The number of units sold (sales activity) is down because the market is catching its breath from mortgage regulations, higher rates, and a period of unnatural growth and activity.

Keep calm and mortgage on my friends.

 

About the Author:

Ian Mucignat, CFA, is an independent mortgage agent at TMG The Mortgage Group. He graduated from Wilfrid Laurier University with a Bachelor of Business Administration, minoring in Economics, and is a CFA Charterholder. Ian has worked in the mortgage industry since 2000 at lenders, banks, and brokerages. If you are purchasing, renewing, or refinancing your mortgage, don’t hesitate to contact Ian directly for a free consultation.

 

  

Blame the clouds for rain: Why the BoC will Stand Pat

 Apr 11, 2018 9:00 AM

By: Ian Mucignat

For many people, Friday the 13thbrings memories of Halloween and the super villain, Jason. The scary hockey mask, the hatchet, the relentless attacks…yikes! However, did you know the first Friday the 13this also another memorable date? Yes, it is called National Blame Someone Else Day.

However, if you’re Donald Trump, every day is a Blame Someone Else Day. It doesn’t matter. Just remember, whatever you complain about, put #BlameSomeoneElseDay. And remember the words of the great poetic geniuses, Fab Morvan and Rob Pilatus: “Cause the rain don't mind. And the rain don't care. You got to blame it on something.”

Interest Rates

The next Bank of Canada interest rate announcement is scheduled for April 18. For those of you unfamiliar with how the Bank operates, they have a predetermined schedule for which they make announcements. In the past, they surprised people, which caused unnecessary volatility in the market. Now, bond traders and others can speculate and plan their vacations around the key dates. For 2018, the BoC’s scheduled dates are:

  • January 17 *increased the key rate by 0.25% to 1.25%.

  • March 7 *stood even
  • April 18
  • May 30
  • July 11
  • September 5
  • October 24
  • December 5

So, there are six more opportunities for the BoC to move interest rates this year. Between the rate announcements, the market and economists love to speculate on what might happen next. Everyone watches the reports from Stats Canada to figure out what direction the economy is moving.

BoC Theory

When the economy is showing signs of life, it means inflation will likely need to be controlled by a rate increase. The BoC might make comments and have a bias towards raising rates or decreasing rates. When they have a bias towards raising rates and controlling inflation, it’s called Hawkish. The opposite is called Dovish.

The job of an economist is to read the tea leaves and speculate on where they might go. Even the highest paid economist at our major Canadian banks get it wrong with great frequency. I can recall, in 2011, speaking with a senior vice president at a major Bank responsible for the entire mortgage department. He was advised by the head of economics at the bank to convert to fixed rate because variable was going up. Not only did rates go down further, but they hit ultra-lows and stayed there for longer than the term of the mortgage (5 years).

My point of this story is that predicting interest rates is brutally difficult, especially over 6 months. The economic reports hitting the market change people’s opinions from dovish to hawkish all the time.

That being said, it still shouldn’t stop us from looking at the market. When there is uncertainty, cloudiness, and risks, it bodes well for rates staying pat.

Recap

In 2015, low oil prices were killing the Canadian economy overall. As a result, the BoC remained dovish and cut the key overnight interest rate by 0.50% to 0.50%. The Prime Rate, which is the rate set by banks, dropped to 2.70% from 3.0%. They could have moved to 2.5%, but they decided to keep a bit of extra rate for themselves. That’s another story. #BlameItOnGreed

As the economy recovered over time, Canadians took advantage and borrowed crazy amounts at ultra-low rates. Much of our growth was spurred by consumer spending from borrowing. Simply look at the housing market growth over the last 5 years for an example. As the slack started to come out of the economy, the BoC turned more hawkish. They removed the two oil-price emergency cuts and started to “pump the breaks” in anticipation of higher inflation.

Today

However, the reports coming out now and the sentiment are neither hawkish or dovish. It’s more wait and see. In my opinion, the three major things keeping rates in check for the short term are:

  1. NAFTA uncertainty and Tariffs

Specifically, what is going to happen “afta nafta” should a deal not be reached. One economist called it Zombie nafta, where nothing really happens. Renewed and increased tariffs will hurt Ontario the most. Even if a deal is reached, it might be less favourable than we are used to.

The other important tariff war is being fought by the U.S. and China. One thing that will help keep this in check, I think, is the stock market. As we’ve seen from the State of the Union Address, Donald uses the stock market performance as a score card. So, if new tariffs are announced, the markets tank and Trump better understands that it’s a bad idea. Regardless, the whole protectionist mentality is part of his psyche and voting platform – see my post on Trumponics.

  1. Debt levels and Housing Markets

The BoC needs more time to assess how the mortgage rules (B-20) have reduced qualifying amounts. The debt levels have ticked down recently, but there is real concern that renewing mortgage debt might cause a housing retraction.

A softening in housing is okay, but a deep drop in prices has serious undesired impacts in an economy. The BoC will be cautious in pulling the trigger and raising rates too quickly again.

Wait and see.

  1. Economy Slowing

In the first half of 2017, the economy grew at an impressive rate. The first and second quarter’s GDP numbers were 4% and 4.4% growth, respectively. Since then, the economy has cooled considerably, with the last two quarters showing growth rates of 1.5% and 1.7%, accordingly.

The federal budget is predicting a growth rate of 2.2% for the year. Time will tell. Some of the reports coming out are positive, such as the BoC’s survey of business sentiment or unemployment numbers beating the estimates. Other numbers, such as a last week’s growing trade deficit, suggests the economy has a sluggish first quarter.

All we can do is watch the indicators, tune into the comments of the BoC, and Blame It On The Economist.

 

About the Author:

Ian Mucignat, CFA, is an independent mortgage agent at TMG The Mortgage Group. He graduated from Wilfrid Laurier University with a Bachelor of Business Administration, minoring in Economics, and is a CFA Charterholder. Ian has worked in the mortgage industry since 2000 at lenders, banks, and brokerages. If you are purchasing, renewing, or refinancing your mortgage, don’t hesitate to contact Ian directly for a free consultation.

Interest Rate, Economy  
  

What keeps the Bank of Canada up at night: Cyberattacks

 Apr 4, 2018 1:00 PM

By: Ian Mucignat

There are plenty of recent headlines in the news about Russian hackers, Chinese hackers, AggregateIQ, election tampering etc. Furthermore, a new cold war seems to be developing between Russia and the West, with the attempted assassination of a double agent using a military grade nerve agent. Russian diplomats are being expelled in Canada and the West. Russia is doing likewise.

On March 22nd, the Senior Deputy Governor of the Bank of Canada, Carolyn Wilkins, gave a speech at the Rotman School of Management. She was speaking at a conference, a speech called, “Are We Ready for the Next Financial Crisis?” In her speech, she told the audience,

“A couple of areas worry me right now, and they need concerted attention. Both relate to interconnectedness and trust in the system. My first concern is …: cyber risk.”

Traditionally, when we think of Cyberattacks, we tend to think of some nerdy guy hacking into a computer for fun. Think Matthew Broderick in WarGames. A kid hacks into a system to have fun and ends up raising the def-con level. Other movies might show a kid hacking into his school system to change his grade from C to B+.

However, today’s cyber-attacks are different. They are being led by nation-states, organized groups, organizations, and are using increasingly sophisticated methods to steal or undermine. These cyberattacks can have a specific purpose to destroy the infrastructure of a nation. The battlefield might be behind a computer.

When you consider our use of and reliance on technology, it’s not surprising. I think my kids have a conniption fit when the internet goes down and the iPads aren’t streaming. On a larger scale, Banks and the financial system rely on the operational efficiencies gained from connected computer systems.

Imagine if the cloud got smoked. Wait, what is the cloud, anyway? Okay, forget that thought.

Going back to the Bank of Canada, Wilkins said the risk is heightened because “…of an increasing number of points of access to core parts of the financial system and the growing sophistication of those launching cyber-attacks.” Furthermore, “The systems that underpin all financial transactions in our economy are highly interconnected, and a cyber-attack on one could quickly propagate and cause major disruptions.”

Two years ago, it was reported that Chinese hackers stole $100 million from the Bangladesh central bank.

In 2017, the Ukraine faced a series of powerful cyberattacks. The attack affected many Ukrainian organizations, banks, ministries, newspapers, and electricity companies. The attack caused Chernobyl’s radiation monitoring system to go offline! The launch of the attack came on the eve of Ukraine’s public holiday to celebrate their constitution. Analysts today see the cyberattack as an attempt to cripple the government, and many point to Russia as the source of the attack.

Financial systems may be the hardest hit in years to come by cyberterrorism. Money is constantly being exchanged, traded, and recorded by institutions. We don’t think of these systems often, but we enjoy their benefits from online banking, POS debit transactions, credit card payment systems, and interbank wire transfers. All this happens so smoothly behind the scenes.

However, a well-coordinated attack on our financial systems might cause us to lose our belief in our system. It could be an attack on our personal information or theft of our assets. Imagine if it was reported that Royal Bank’s login and password information for all its clients were compromised?! If the response is not handled properly, Canadians lose faith in the financial system.

Final Say

A financial crisis causes problems, bail outs, bankruptcies, job losses etc. It happens quickly, and it hits hard. A cyberattack causing a financial crisis will be no exception. Should this happen on a large scale, we’ll see the economy take a major hit, and a recession will likely follow. A recession brings in a period of lower interest rates to stimulate. Lower rates will bring lower mortgage rates.

The fact that the Bank of Canada is worried about it and having trouble sleeping at night is good news for me. The fact that they are concerned and taking action is helping me sleep better.

 

About the Author:

Ian Mucignat, CFA, is an independent mortgage agent at TMG The Mortgage Group. He graduated from Wilfrid Laurier University with a Bachelor of Business Administration, minoring in Economics, and is a CFA Charterholder. Ian has worked in the mortgage industry since 2000 at lenders, banks, and brokerages. If you are purchasing, renewing, or refinancing your mortgage, don’t hesitate to contact Ian directly for a free consultation.

  

9 Myths and Facts about Mortgages (Part 2)

 Mar 27, 2018 8:00 AM

By: Ian Mucignat

Myth: If you are pre-approved for a mortgage, then you definitely get the mortgage loan.

Please do not think of pre-approval as a guaranteed approval but rather as a great starting point that says, “everything looks great” today. Many people have a misconception that a pre-approval is a bulletproof approval.

However, with every bank/lender, a final formal approval is only granted when the Agreement of Purchase is signed on a certain property. It’s also important that the value of the property is confirmed, usually by an independent appraisal.

Furthermore, while you go out and shop for a property, please be mindful that you must keep your overall credit in check (read more: 8 tips to keep your pre-approval safe). After a mortgage funds, a borrower can do whatever they want, such as take lease on a Porsche or even quit your job, and the lender can’t stop it.

Myth: Mortgages are commodities distinguished only by Interest Rate.

Perhaps, if I hadn’t worked in mortgages for the last 18 years, I would believe this too. However, my experience working at banks and lenders in Treasury and Product Development, as well as working on the front lines with consumers, has taught me differently.

Let me point out a few key differences in the “mice type” of a mortgage:

Penalty Calculations

Mortgages have better interest rates when they are closed terms. With a closed term comes a penalty for breaking it. The calculation for breaking a mortgage early can vary from lender to lender. The interest penalty on fixed rate mortgages, called the interest rate differential (IRD), is much worse at a big bank. I can show you how it’s 5-10 times higher.

You may think it won’t apply to you, that you don’t intend to break your mortgage, but neither does anyone else. Look at the public mortgage data on CMHC’s website. They report monthly the performance of all 975 mortgage backed pools. You can see from it that about 45% of mortgages hit their maturity date.

Furthermore, there are mortgage products that have even lower rates in return for a blatantly bad interest penalty. This is fine if you accept the risk-reward of it.

All else equal, why subject yourself to a mortgage with worse small print that might bite you later?

To illustrate this point further, you can read more by clicking here.

Collateral Charges

Mortgages are simply loans secured against your home. There are two methods of registering this lien against your home in the land titles office – a standard charge term or a collateral charge.

It may seem trivial, but there are a few key differences that make a collateral charge disadvantageous.

First, unlike a standard charge, a collateral mortgage cannot be transferred to another institution easily at renewal. It will cost more in legal fees and appraisal costs. The existing lender/bank will not offer you a compelling rate on renewal because they know you will not pay the costs to move it.

Second, collateral charges are registered for 100-125% of the value of the home and stay there throughout. This renders the equity useless to you and hamstrings you in the future, should you ever want or need to access it.

Third, a collateral charge allows the bank to change your interest rate if they ever wanted to. It’s unlikely, but why give them the ability?

Fourth, a collateral charge allows the bank to access your equity to pay any unpaid debts without your consent.

Again, all else equal, why subject yourself to a mortgage with worse small print that might bite you later?

Pre-Payment Privileges

A closed term mortgage is, as its name implies, closed. If you break it, then a penalty applies. However, it’s common for a mortgage to have some ability to prepay a portion early without penalty.

For the majority of lenders, it’s quoted something like this: 10-10, 15-15, or 20-20. These numbers are quoting the percentage payment increase allowed and the percentage of lump sum available. For example, RBC allows borrowers to prepay:

  1. 10% lump sum payment of the original balance each year
  2. 10% payment increase each year

Another lender, such as MCAP or RMG, will allow 20% for payment increase and lump sum. Other lenders may have a special product that doesn’t allow for any prepayment privileges.

Again, all else equal, why subject yourself to a mortgage with worse small print that might bite you later?

Intangibles

Some lenders offer additional services, such as Home Warranty free for 1 year. This may be important if you have purchased an existing home and are unsure of the condition of the furnace. All else equal, if it’s thrown in free, why not take advantage of the free coverage?

Furthermore, some lenders have customer portals for online access and self-managed changes. Having a line of sight into your mortgage can help you pay it down faster and save you time and energy. For example, a simple payment frequency change at a Bank will require an appointment set up in the branch, a pile of paperwork, and you have to be mentally prepared to fight off the cross-sell for whatever they are pushing – overdraft coverage, creditor insurance, credit cards etc.

Myth: The risk of variable rate mortgages can easily be mitigated by converting to a fixed rate.

It is true that variable rate mortgages can be converted into a fixed rate mortgage at any time. The usual rule is it must be done such that the term elapsed plus the new fixed rate term is equal to or greater than the original variable rate mortgage term. For example, let’s say we are 1 year into a 5-year variable rate mortgage. It can be converted into a fixed rate mortgage term of 4 years or more.

However, variable rate mortgages must be the converted at whatever the fixed rate is at the time of conversion. So, for a variable rate mortgage holder, they are going to look at converting at a time when short-term prime rates are rising. When does this happen? When it’s too late.

When the economy is heating up and the central bank, the Bank of Canada, is worried about too much growth and inflation, they will raise rates. As soon as they turn, their language turns hawkish (meaning an aggressive tone towards inflation), the long-term bonds sell off, and yields go up. Mortgage rates are priced on government of Canada bond yields, so fixed mortgage rates rise quickly. So, at this point, it’s too late; the upcoming rise in short-term rates has been priced into the longer term fixed rate. The opportunity is lost.

Myth: You need perfect credit to be approved for a mortgage.

In a perfect world, we all have perfect credit ratings. However, life happens for many people, and their credit score can be ‘bruised’. I call it bruised because bruises heal, and so do credit scores. Credit bureaus can be bruised for a multitude of reasons, such as marriage separation, income interruption, a large unplanned repair/expense, high credit utilization etc.

Luckily, there are lenders that understand this and specialize in helping these borrowers. They understand the story behind the scenes and can price a fair mortgage situation accordingly.

If you wish to read more about this, please read here: “The Bank rejected me. Now what?

 

[Note: Last week we looked at Part 1 - click here]

 

About the Author:

Ian Mucignat, CFA, is an independent mortgage agent at TMG The Mortgage Group. He graduated from Wilfrid Laurier University with a Bachelor of Business Administration, minoring in Economics, and is a CFA Charterholder. Ian has worked in the mortgage industry since 2000 at lenders, banks, and brokerages. If you are purchasing, renewing, or refinancing your mortgage, don’t hesitate to contact Ian directly for a free consultation.

Mortgage Basics, First Time buyers  
  

9 Myths and Facts about Mortgages (Part 1)

 Mar 22, 2018 10:00 AM

By: Ian Mucignat

Myth: I don’t need a mortgage broker because I can be approved by a big 5 bank.

This myth can be phrased in other ways, such as:

“Doesn’t everyone go to the bank?” (the herd mentality)

“Mortgage brokers are only for people with poor credit rating.”

“Mortgage broker rates are not as good because the people they serve are riskier.”

Absolutely anyone can go to a branch of a big 5 bank directly and get serviced by friendly, warm greeting staff. You’ll have to visit a few banks to ensure you’re getting the best rate offered. It’s too bad they don’t offer independent advice, even though they know of a better product across the street.

The truth is, the broker channel model does it a little better. The non-big bank lenders offer better mortgage features and often better interest rates than offered by a big bank. It’s estimated that 30% of people will use a broker, and the number is growing.

Brokers are able to place mortgage applicants with big banks and mid-sized banks, small banks, prime A lenders that only originate through the broker channel, credit unions, trust companies, banks of insurance companies, financial corporation, B-lenders, and private lenders.

All the banks/lenders are competing for a mortgage broker’s attention by offering the best rates and products up-front! This means one stop shopping. No haggling required. It also means you can be provided with a mortgage that has better small print than a bank, which can save you thousands on penalties and interest in years to come.

Myth: I can trust my bank to give me the reliable and best advice to take care of my interests.

Banks are so big today they feel like a government service. Waiting in line at a branch feels eerily like waiting for a driver’s license photo at Service Ontario. I don’t know why this is the case, but it can lead one to believe it’s an unwieldy institution. The bank tells us the rate and we simply have to deal with it.

The truth is, the bank is actually competing against you. Nowhere can this be seen clearer than by the slew of whistleblowing branch staff that came forward in the last 12 months. Many of these employees are torn and experiencing great anxiety at the requirements put on them for selling products they know people don’t need.

In reality, it is like a telecomm company that is overcharging you for a cell phone, cable, or internet. Are they going to inform you that you are now overpaying? No way! The onus is on you for identifying a better rate, product, service, and then fighting for it. Oftentimes, you need to speak to the special retention group to get real results.

Bottom line, a bank’s advice is biased, non-independent, and driven for maximum profits.

A mortgage broker, however, has his/her interests aligned with yours. A mortgage broker gets paid a commission amount based on the size of the mortgage. The bigger the mortgage, the bigger the commission. Smart mortgage brokers work hard at delivering excellent funding ratios (ratio mortgage application that actually fund) because banks/lenders will pay bonuses, making efficient use of their underwriter’s time.

Because of this, brokers advice is unbiased and independent. They can and will present you a better rate/product across the street.

Do you use a financial planner for your investments? Why not use a mortgage broker to advise you on your largest financial product?

Trust your largest financial product with someone that does one thing only - mortgages.

Myth: Mortgages at a big bank are safer.

This myth can be stated in similar ways:

“Don't you get a mortgage from a bank? Isn't that normal?”
“I prefer to use a bank. Banks are more stable.”
“Will ‘they’ – whoever they are – demand my mortgage loan?”
“I don’t recognize these other lenders. I’ve banked with my bank for 20 years.”

Yes, big banks in Canada are safe and stable institutions and able to withstand the “great depression” of 2009. However, this only matters if your money is on deposit! The reason we have maximum capital ratios is to ensure those who have money on deposit can get it back. A run on the bank can cause massive problems for an economy, as we witnessed in the U.S.

The truth is, it doesn’t matter how safe and stable a bank is because they are lending you the money. Banks only care how safe and stable you are. They are underwriting your financial strength and safety. Who’s underwriting who?

Think about it; let’s say someone lends you money, and they implode and declare bankruptcy. What happens to your loan? The best-case scenario is it’s lost, and you never have to repay it. This will never happen because your property will always have a lien on it that can only be discharged by that institution. So, what happens is another institution will buy the loans, and they’ll get serviced by the new institution. These mortgages are assets, and banks and financial institutions are always hungry for assets. A good example of this is Scotiabank buying all assets of ING Direct.

In terms of name recognition, it’s is true that many lenders lack common name recognition. But, it doesn’t make them any less safe to have your mortgage funded with them. I worked for one of these lenders for 10 years, so I understand it well. They purposely do not advertise nationally because they concentrate on attracting brokers and offering products and services that are more compelling. Furthermore, for most non-bank lenders, they are a selling the mortgage assets to a big bank’s balance sheet or to a bank’s investment dealer division. Remember, banks love assets and market share!

Final thought, did you know the rules and training placed on mortgage brokers is more stringent than the training given to bank staff? Mortgage brokers and agents are required to be re-licensed every two years through the provincial regulator. In Ontario, it is the Financial Services Commission of Ontario (FSCO). Banks, on the other hand, are outsourcing major components, such as income confirmation and documentation, to countries such as India. Do you really want your paperwork flying all over the world?

Myth: Changing my mortgage lender requires me to change all my banking.

No, this is illegal and is called tied selling. A mortgage payment is set up like a pre-authorized payment to be debited from whatever bank account you choose.

Some people will argue it’s better to have this separation of your assets (bank accounts) from your liabilities (mortgage) because of how banks can seize your assets under the terms of a collateral charge.

Myth: Mortgage brokers are another layer in the process and will add to the cost.

For the customer, there is no cost in either case. A customer does not pay a bank, and they do not pay a broker.

The truth is, a mortgage broker works directly with the underwriting department of a bank/lender the same way a branch person at a bank does. There are no extra layers.

The difference is the mortgage broker is more mindful of their own expenses. Banks commonly have fancy branches on prime real estate corners. These bricks and mortar premises need to be paid for.

The huge advantage of mortgage brokers being able to originate a mortgage with less cost is in better interest rates. To capture a greater share of the mortgage broker market, lenders are forced to offer products with the tightest possible profit spreads possible. A better interest rate means more savings to the mortgagor.

Next week: Part 2

About the Author:

Ian Mucignat, CFA, is an independent mortgage agent at TMG The Mortgage Group. He graduated from Wilfrid Laurier University with a Bachelor of Business Administration, minoring in Economics, and is a CFA Charterholder. Ian has worked in the mortgage industry since 2000 at lenders, banks, and brokerages. If you are purchasing, renewing, or refinancing your mortgage, don’t hesitate to contact Ian directly for a free consultation.

 

  
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