Second Mortgage or Refinance?

Mortgage Tips Trish Pigott 29 Sep

A second mortgage may be something to consider if you’ve built equity in your property and need access to a loan. Consider using this equity for refinancing, renovations, or debt consolidation.

What is a Second Mortgage?

A secondary loan taken out on a property for which you already have a mortgage. This is not the same as purchasing another property with a new mortgage. It’s very different from a traditional mortgage because you are using your existing home equity to qualify. It’s important to note that it still comes with its own interest rate, monthly payments, terms, closing costs, etc.

Second Mortgage or Refinance?

Both refinancing and second mortgages take advantage of existing home equity – So what is the difference? Refinancing is typically done when you’re at the end of your current mortgage term to avoid any penalties. The purpose is to take advantage of a lower interest rate, change your mortgage terms, or borrow against your home equity. Second mortgages are taken when you borrow a lump sum of money against the equity in your home and use it for whatever you see fit.

What Are the Advantages?

There are several advantages when it comes to taking out a second mortgage, including:

  • Have access to a large loan sum (in some cases up to 90% of your home equity, which is more than you can typically borrow on other traditional loans)
  • Better interest rate than a credit card
  • Use the money however you see fit, without any caveats

What Are the Disadvantages?

As always, when it comes to taking out an additional loan, there are a couple things to consider:

  • Interest rates tend to be higher
  • Additional financial pressure from carrying a second loan and another set of monthly bills

Before looking into any additional loans, be sure to reach out and speak with us. It’s always a good idea to review your current financial situation and determine if this is the best solution before proceeding.

Insurance 101

General Trish Pigott 22 Sep

Not all insurance products are created equal. One of the most common mistakes people make is assuming they have coverage when they don’t. While you may have one kind of insurance, it won’t cover everything. It is important to understand all of the different products to ensure you are properly covered. To help you have a better understanding, there are four main options below.

Default Insurance

This is mandatory for home purchases when the buyer puts less than 20% down. In fact, this is how lenders accept lower down payments, such as 5%. It actually helps buyers access comparable interest rates offered with larger down payments.

Default insurance typically requires a premium, which is based on the loan-to-value ratio (mortgage loan amount divided by the purchase price). This premium can be paid in a single lump sum, or it can be added to your monthly mortgage payments. In Canada, most homeowners know of the Canada Mortgage and Housing Corporation (CMHC), which is run by the federal government.  We also have two private companies, Sagen Financial and Canada Guaranty, who provide this insurance.

Home Insurance

Next, is another mandatory insurance option that MUST be in place before you close the mortgage. This type of insurance protects your home against things like fire damage, as well as the contents in your home. Flood and earthquake coverage can also be an option, but it is not always included. Depending on your location, protection from a natural disaster can be added as well. Please note that not all homes or properties are insurable, so you will want to review this sooner rather than later.

If you are insuring a condo or townhouse, the strata’s insurance will typically protect the building and common areas, but you are responsible for the inside of your unit, including your contents. You should also ensure your policy covers the difference in the strata’s deductible, should a claim arise.

Title Insurance

Another policy that potential homeowners may encounter is title insurance. Every single lender in Canada requires you to purchase title insurance on their behalf. You also have the option of purchasing this for yourself as a homeowner, to protect you from existing liens and fraud. Title fraud typically involves someone using stolen personal information, or forged documents, to transfer your home’s title to him or herself – without your knowledge.

Similar to default insurance, title insurance is charged as a one-time fee or a premium with the cost based on the value of your property.

Mortgage Protection Plan

Lastly, we have our mortgage protection plan coverage. This is an optional coverage, but one that is extremely important as it protects you and your family, should something happen. Think of it as a life and disability policy for your mortgage. For instance, if someone on the mortgage is no longer able to contribute due to disability or death, your mortgage payments will be covered.

Retirement Options As a Canadian

General Trish Pigott 20 Sep

Have you been thinking of retirement? People over the age of 55 currently represent 33.09% of the total Canadian population. This part of the population knows what they want in order to live a fulfilling life as they enter retirement. However, they do not always have the financial means available to them to support their ideal lifestyles. So what options are available? We’ve listed them below.

Credit Cards

Credit cards may be the perfect financial option for you if you are retired and have an income source, with short-term financial needs. They give you easy access to credit but do carry a high-interest debt. It is always best to pay off the borrowed amount before the deadline.

Private Loans

Private loans are another option if you have an income source and short-term financial needs. Like credit cards, they give you easy access to credit but have required monthly payments. Furthermore, having a reasonable repayment plan is important as they charge very high interest and repayment terms are very rigid.

Home Equity Line of Credit (HELOC)

If you are a retired homeowner that has an income source and needs a large sum of money, it may be worth exploring a Home Equity Line of Credit (HELOC). However, it is important to consider the monthly payments. The qualification for the loan can change based on changes to your income or home value, and you may be asked to repay the loan at any time.

Downsizing for Retirement

Another option may be to downsize. It is a popular financial option and may be great for you if you are a homeowner willing to transition into a smaller home. Downsizing allows you to access the value of your home’s equity to meet your financing needs in retirement. It is important to note that there will be fees associated with this such as property transfer taxes, commissions, closing costs, etc.

Now, before revealing the final option for Canadians in retirement, you may find this interesting. A study from the National Institute of Ageing showed that 91% of all Canadians want to remain in their own homes for as long as possible after retirement. Furthermore, 95% of Canadians 45+ say that being able to retire in their own homes would give them the independence, comfort, and dignity they need as they age. However, due to costs associated with in-home care, many individuals cannot afford to remain in their homes. If you are among these Canadians, then this next option may be the most suitable for you.

CHIP Reverse Mortgage

The last option applies to homeowners who wish to remain in their homes while maintaining their current lifestyle. To do this, they should consider the CHIP Reverse Mortgage. This finance option allows you to access up to 55% of your home’s equity value. Then you can choose to receive your money in a tax-free lump sum or tax-free monthly payments. Furthermore, you are not required to make any monthly mortgage payments but instead, pay back the loan through the value of your home when you sell it or move out.

These are just some of the financial options that Canadians can utilize to enjoy retired life. If you’re finding yourself or a parent at this stage of life, contact us to find out how we can help make the best of your retirement!

Time For a Mortgage Transfer?

General Trish Pigott 16 Sep

You may be thinking of a mortgage transfer or change because you want to take advantage of a better interest rate. Or perhaps you’d like to switch to a mortgage product with terms that better suit your needs. Either way, there are a few different scenarios you could find yourself in.

Up for renewal?

If you’re approaching renewal and are considering a mortgage transfer or switch – great news! You won’t be charged a penalty. However, depending on whether you make any changes, you may be required to re-qualify at the current rate.

Collateral charge mortgage?

Collateral charge mortgages secure your loan against collateral, such as the property. These loans cannot be switched, they can only be registered or discharged. This means that you would need to discharge the mortgage from your current lender before registering it with a new lender.

Locked in?

If it’s the middle of your term and you’re considering a mortgage transfer or switch, you will likely incur a penalty for breaking it. Typically, a mortgage transfer or switch is done to take advantage of a lower interest rate and lower monthly payments. But, you want to be confident that the penalty doesn’t outweigh the potential savings.

Things to consider before a mortgage transfer or switch:

  1. Associated fees
  2. Requalifying at current rates
  3. The following documents:
    • Application and credit bureau
    • Verification of income and employment
    • Renewal or annual statement indicating mortgage number
    • Pre-authorized payment form with VOID cheque
    • Signed commitment
    • Confirmation of fire insurance
    • Confirmation of valid CMHC, Sagen or Canada Guaranty insurance (if required)
    • Appraisal
    • Payout authorization form
    • Property tax bill

If your mortgage is currently up for renewal or you’d like to make a change, please reach out to us. We can advise you of any penalties or fees that may be associated and shop the market for you to find the best options. Our extensive network of lenders will ensure that you are getting the best rate, with the most suitable terms. When you’re ready, simply fill out the form here to get the process started!

Overnight Rate Gets Hiked Again

General Trish Pigott 9 Sep

The Bank of Canada Hiked Rates Again And Isn’t Finished Yet

On Wednesday, the Bank of Canada raised its target for the overnight rate by 75 basis points to 3.25% and signaled that the policy rate would rise further. The Bank is also continuing its policy of quantitative tightening (QT), reducing its holdings of Government of Canada bonds. This puts upward pressure on longer-term interest rates.

While some Bay Street analysts believed this would be the last tightening move this cycle, the central bank’s press release has dissuaded them of this notion. There has been a misconception regarding the so-called neutral range for the overnight policy rate. With inflation at 2%, the Bank of Canada economists estimated some time ago that the neutral range for the policy rate was 2%-to-3%, leading some to believe that the Bank would only need to raise their policy target to just above 3%. However, the neutral range is considerably higher, with overall inflation at 7.6% and core inflation measures rising to 5.0%-to-5.5%. In other words, 3.25% is no longer sufficiently restrictive to temper domestic demand to levels consistent with the 2% inflation target.

Canadian Growth

As the Bank points out in Wednesday’s statement, though Q2 GDP growth in Canada was slower than expected at 3.3%, domestic demand indicators were robust – “consumption grew by about 9.5%, and business investment was up by close to 12%. With higher mortgage rates, the housing market is pulling back as anticipated, following unsustainable growth during the pandemic.”

Wage rates continue to rise, and labour markets are exceptionally tight, with job vacancies at record levels. We will know more on the labour front with the release of the August jobs report this Friday. But the Bank is concerned that rising inflation expectations risk embedding wage and price gains. To forestall this, the policy interest rate will need to rise further.

Traders are now betting that another 50-bps rate hike is likely when the Governing Council meets again on October 25th. There is another meeting this year on December 6th. I expect the policy rate to end the year at 4%.

Bottom Line

The implications of Wednesday’s overnight rate hike are considerable for the housing market. The prime rate will now quickly rise to 5.45%, increasing the variable mortgage interest rate another 75 bps, which will likely take the qualifying rate to roughly 7%.

Fixed mortgage rates, tied to the 5-year government of Canada bond yield, will also rise, but not nearly as much. The 5-year yield has reversed some of its immediate post-announcement spike and remains at about 3.27% (see charts below). Expectations of an economic slowdown have muted the impact of higher short-term interest rates on longer-term bond yields. This inversion of the yield curve is consistent with the expectation of a mild recession next year. It is noteworthy that the Bank omitted the usual comment on a soft landing in the economy in today’s press release. Bank economists realize that the price paid for inflation control might well be at least a mild recession.

Another implication of Wednesday’s policy rate hike is the prospect of fixed-payment variable-rate mortgages taken at the meager yields of 2021 and 2022, hitting their trigger rate. There is a good deal of uncertainty around how many these will be, as the terms vary from loan to loan, but it is another factor that will overhang the economy in the next year.

We maintain the view that the economy will slow considerably in the second half of this year and through much of 2023. The Bank of Canada will hold the target policy rate at its ultimate high point– at least one or two hikes away– through much of 2023, if not beyond. A return to 2% inflation will not occur until at least 2024, and (as Governor Macklem says) the Bank’s job is not finished until then.

Financial Stress Management

General Trish Pigott 6 Sep

Let’s talk about financial stress. If you lost your job tomorrow, would you be okay? Having financial knowledge allows you to better assess your options and create a plan without getting overwhelmed. However, even with the best plans and all the financial literacy in the world, it’s impossible to completely eliminate financial stress. So, how do you cope? We’ve created a short list of suggestions below.

Have a clear picture of your financial situation.

What is your average monthly spend? Do you know how much you owe, the interest rate on your debts, and how much you pay each month in interest charges? Have you ever tracked and categorized your expenses to identify areas where you could cut back if required (ie. car payments, dining out, home improvements, etc.)? Avoiding these questions is understandable because the answers may lead to some hard lifestyle choices. However, turning a blind eye will only lead to never-ending financial stress.

Accept your mistakes.

Move on from any emotional reaction and learn to live with poor financial decisions from your past. Regret and anger won’t make that beach vacation you booked on your credit card disappear! It’s time to start paying for it.

If you need to pass on a night out with the gang to put $75 towards your card instead, then do it. More than 50% of Canadians live paycheque-to-paycheque so you won’t be the only one!

Set small, achievable financial goals to bolster confidence and measure progress.

If you have credit card debt, try adding $100 to your monthly minimum credit card payment. If you have no credit card debt, open a TFSA and contribute $100 a month towards that instead. A hundred bucks might seem like a modest amount, but it is a realistic goal that will get you started and will help a lot more than you think. Let’s take a look at the numbers.

  • $100/month deposited into your TFSA ($1200/year) from age 18 to 65 will grow to almost $400,000 based on historical stock market returns
  • Adding $100 monthly to the minimum 3% payment on a $5000 credit card will cut the time required to pay off the balance from 251 months down to 38 months and save you $4500 in interest charges

Get inspired and stay motivated.

Follow a personal finance YouTuber or blogger, hang a goal chart or progress tracker, talk with a friend or relative who has the same issues and work together — there are lots of methods and resources available to help you, even with a limited budget.  It’s critical to maintain a positive attitude and don’t beat yourself up — there are plenty of others in the same boat!

Achieving the goal of eliminating financial stress will take time, but learn to cope and stay focused on your goals! It will be worth it in the end.

How Rising Interest Rates Affect Your Debts

General Trish Pigott 1 Sep

Rising inflation combined with a strengthening post-pandemic economy, gives both reason and opportunity for the Bank of Canada (BOC) to further raise interest rates through to the end of 2022 and beyond.

The 1% increase to the benchmark overnight rate in early July was a wake-up call. Unfortunately, they were not bluffing and are prepared to act aggressively. Depending on how inflation trends, we could be looking at interest rates that are 1% or 2% higher within the next year.

Before jumping into the effects of higher interest rates, we should clarify one common point of misunderstanding about the prime rate and the BOC overnight rate. The prime rate is the basis for most variable rate loans, including mortgages and lines of credit. It is determined by the major banks and currently sits at 4.7%; 2.2% higher than the BOC overnight rate. Although these two rates are different, the key takeaway is that the prime rate moves in lockstep with any changes to the BOC rate, usually within a few days.

Now that we have that out of the way, just how will future interest rate hikes affect your debts?

Variable Rate Mortgages

Canadians holding a variable rate mortgage surged in 2021 and now stands at about 50%. Any rise in the BOC rate is met by an equal rise in variable rate mortgages. The impact is very clear and takes effect quickly. A 1% increase will add around $200 to the monthly payment on a $500K mortgage. Keep in mind that the interest rate has already risen 2.25% since the beginning of 2022!

Home Equity Lines of Credit (HELOC)

HELOCs usually have a variable interest rate that will rise in conjunction with any BOC rate hikes. A $100,000 balance carried on your HELOC will cost you about $20 more in interest each month for every 0.25% increase by the BOC.

Credit Card Debt

The interest rate on your credit card and how it can be adjusted are outlined in your cardholder agreement. There is usually little correlation between credit card rates and the rates set by the central bank. However, credit card rates are already so astronomically high that it is unlikely you would even notice a 1% increase! Our advice is to attack any outstanding credit card balance ASAP.

Personal Lines of Credit

There are fixed and variable rate options out there. If you selected the lower variable rate when you signed your agreement, expect to pay more going forward on any outstanding balance.

Car Loans

Most car loans in Canada are fixed, but the average fixed rate is rising quickly and now sits at about 5.25%. While not common, variable rate car loans are available and your payment could be affected by interest rate hikes.

Student Loans

There are provincial and federal student loan programs with different interest options so the effect of rate hikes will vary. The default choice for Government of Canada student loans is variable interest “at prime”. There is also a fixed rate option at “prime + 2%”. The point is mute right now as interest charges are currently suspended, but variable rate student loan holders will see a significantly higher payment when interest charges resume in April of 2023.

Most of us will be paying more interest as we move through 2022 and into 2023. A mortgage or some other debt may be inevitable and not all debt is bad. It’s important to understand your interest expense and adjust your repayment priorities accordingly.