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Mortgage news

The Bank of Canada cuts key interest rate

The Bank of Canada cuts key interest rate 1015 600 Lenderoo

For the first time since 2015, the Bank of Canada announced that it will be lowering the overnight rate target, its key interest rate, to 1.25%. This announcement follows the United States Federal Reserve cutting its benchmark interest rate the day before.

Similar to the Federal Reserve, the BoC states the spread of COVID-19 as the primary reason for the rate cut. According to BoC Governor Stephen Poloz, “the COVID-19 virus is a material negative shock to the Canadian and global outlooks”. The virus’s health threat has led to decreased business activity in certain countries, impacting the global market. Analysts predict that as the virus spreads, business and consumer confidence will continue to deteriorate, decreasing market activity.

Before the outbreak, the global market was showing signs of stabilizing. However, it’s reported now that the economy is likely to be weaker than expected. This is partly due to decreased trade, weak business investments, rail line blockades, strikes by Ontario teachers, and winter storms.

The BoC states that it is monitoring the economic situation closely and that its ready to adjust the key interest rate further if necessary.

The next announcement will take place on April 15, 2020.

 

How does this affect home owners and buyers?

By lowering the key interest rate, Canadian households will benefit from some debt relief. It will also increase demand for mortgages, support first time buyers entering the real estate market, and help home owners with a variable rate mortgage make larger payments towards the principal.

It’s likely that this, along with the new mortgage stress test rules, will fuel the already hot real estate market as we head into the busy spring season.

 

Our advice

With the decreased interest rates, now’s the perfect time to take proactive steps towards financial security.

Although interest rates are currently low, they will go back up, so it’s best to be prepared for when they do. Our advice is to start paying off more of your principal with accelerated payments or shop for lower mortgage rates.

It’s also important to be careful with the additional incentives to borrow money. Remember to always refer to your personal budget, as well as home buying budget, and never take on more credit than you can handle.

 

 

Five things to know about the new mortgage stress test rules

Five things to know about the new mortgage stress test rules 1015 677 Lenderoo

Last week, the Department of Finance announced new mortgage stress test rules that will come into force on April 6. In the short-term, these new rules will lower the bar to qualify, making it easier for borrowers to get a mortgage.

 

A quick recap on the mortgage stress test

In 2018, the Office of the Superintendent of Financial Institutions introduced the mortgage stress test. To qualify, a borrower must prove they could afford to pay their mortgage if the interest rates increased. Federally regulated lenders, such as banks, can only provide a mortgage to applicants who pass this mandatory test.

 

What are the changes?

One of the major criticisms of the stress test is that the rate is set arbitrarily high and does not move with the market. A review of the stress test concluded that the qualifying rate should be dynamic to reflect market conditions.

The stress test currently uses the Bank of Canada’s benchmark five-year rate or the borrower’s lender’s rate plus 2%, whichever is higher. The new rules will use “the weekly median 5-year fixed insured mortgage rate from mortgage insurance applications plus 2%” as the qualifying rate.

 If the new stress test rate was used today, it would be around 4.89% – 30 basis points lower than the current Bank of Canada’s benchmark five-year rate of 5.19%.

 

How does this affect me?

Overall, the new rules will benefit home buyers and owners who are shopping for a mortgage. To help you get ready for this upcoming change, here are five things to know.

1.    It will reduce the gap

Lately, the gap between the average mortgage rate (2.89%) and the benchmark rate (5.19%) has been widening. This is because the average mortgage rates have been decreasing while the benchmark rate remains the same. Once the new rule is in place, the qualify rate will fluctuate with the average mortgage rate narrowing the gap to a 2% difference.

2.    It will make it easier to pass

In the short term, the new rules should make it easier to pass the stress test and buy a home. Since the average mortgage rate is more than 2% lower than the benchmark rate, the new rules will lower the bar to qualify.

With the new rules, it is possible for the new qualifying rate to be higher than the current one. However, it won’t be set too high relative to the market average since it will fluctuate along with the market.

3.    Big banks will have less power

The BoC’s benchmark five-year rate is based on the posted five-year rates of the Big Six Banks. Typically, the posted mortgage rates of the big banks are higher than rates being offered by other lenders.

With the new rules, the big banks will have less control over the qualifying rate as it will use the average weekly median rates. In other words, it will adjust itself to reflect the entire market.

4.    It will help home buyers and home owners

Mortgage shoppers who were close to passing the stress test will be able to qualify for a mortgage once the new rules are implemented. Whether they are a home buyer looking to finance a new home or a homeowner renewing or refinancing their mortgage.

As well, first-time homeowners will benefit the most from the new rules as they typically carry more debt, such as student debt. The new rules will lower the bar, helping them qualify to buy their home.

5.    Housing prices will go up

With more borrowers passing the test and buyers qualifying for more expensive homes, there will be more demand. Due to the increased demand, housing prices will increase. Not to mention, the new rules will be implemented as we head into the busy spring season.

 

How can I prepare for the changes?

The best way to be ready for the new mortgage stress test rules is to look at your financial situation and work out your budget.

When searching for your home, use our mortgage calculators to calculate the budget for your top property choices to see how much you can afford.

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Everything you need to know about the First-Time Home Buyer Incentive

Everything you need to know about the First-Time Home Buyer Incentive 1000 667 Lenderoo

 

 

 

Back in March, the 2019 federal budget announced changes that will affect home buyers. These new measures aim to support buyers and improve affordability for Canadians who are ready to own a home. One of these new measures is the “First-Time Home Buyer Incentive”, which the federal government launched on September 2, 2019.

 

What is the First-Time Home Buyer Incentive?

 

This incentive helps Canadians obtain financial aid from the Canada Mortgage and Housing Corporation (CMHC). The CMHC will provide homebuyers with financing of 5% for resale homes and 5% or 10% for new constructions. This money is a loan that goes towards the down payment of a home, lowering the monthly mortgage payments.

 

While this all sounds great, we know that there’s no such thing as a free lunch.

 

So, here’s everything that you need to know about the incentive before you buy a new home.

 

Am I eligible?

 

All Canadian citizens, permanent residents and non-permanent residents who are legally authorized to work in Canada can apply for the program.

 

To be considered eligible, applicants must be a first-time homebuyer. This definition also includes individuals who have gone through a “breakdown of marriage or common-law partnership” or who didn’t live in a home that they owned in the past four years.

 

Other eligibility requirements include:

 

  • Your qualifying income is less than $120,000. This includes the annual salary as well as any investment or rental income. It is also the total income of the application, whether you’re applying by yourself or with a spouse, family member, or friend.
  • You have at least the minimum down payment. The minimum down payment is 5% for the first $500,000 and 10% for any amount over $500,000.
  • Your total borrowing amount is less than four times your qualifying income. Since the maximum qualifying income is $120,000, the maximum amount to anyone can borrow is $480,000.

 

It’s important to note that only CMHC insured mortgages are eligible. This means that buyers must have a down payment of less than 20%, including the First-Time Home Buyer Incentive amount.

 

Have more than 20% saved? Check out our mortgage tips for first-time homebuyers.

 

How does it work?

 

If you qualify for the incentive, the Government of Canada will provide you with a loan in the form of a shared equity mortgage. This means that the government will own a portion of your home and will share in the gains or losses of its value.

 

When do I have to pay back the loan?

 

The incentive is an interest-free loan to which the borrower does not need to make any ongoing payments. Instead, the loan must be repaid either when the home is sold or after 25 years, whichever happens sooner. You can also repay the incentive at any time without a penalty.

 

How much do I need to repay?

 

You need to repay the percentage you borrowed (5% or 10%) on the home’s fair market value at the time of repayment, rather than the amount borrowed. So, if your home goes up in value, you will need to pay back more than you borrowed. If your home goes down in value, then you will pay back less than you borrowed.

 

For example, you received an incentive of 5% for a $500,000 home ($25,000). If the value of the home increases to $600,000, then you repay 5% of the current value ($30,000). If the value decreases to $400,000, then you repay 5% of the current value ($20,000).

 

For this reason, it may be advisable to repay the incentive early if you are planning any renovations. While the government does not share in the cost of the renovation, it will benefit from any appreciation in the home’s value.

 

Will it really save me money?

 

With the incentive, you are able to increase the amount of your down payment, which lowers the amount of insured mortgage needed to buy the home. This means that you will pay a lower insurance premium and a lower monthly mortgage payment.

 

Using our mortgage calculator for the example above (assuming an interest rate of 5.19% and a 25-year amortization period), the monthly payment is $2,814.22 without the incentive and is $2,666.11 with the incentive. This means, that you will save $148.11 per month.

 

Is the First-Time Home Buyer Incentive right for me?

 

As with any decision, it’s important to consider the risks and rewards. Now that you have a better understanding of the program, you can make an informed decision about whether it’s right for you.

 

 

Yes, I’m interested. Start your search for a new home and contact a lender. Then, fill out the application forms and bring them to your lender. They will submit it on your behalf.

 

No, this isn’t for me. Continue saving for your down payment and get one step closer to becoming a homeowner.

 

Still have questions?

Contact us and one of our mortgage specialists will be more than happy to answer them!