Mortgage Rates, Benchmarks & Deferrals – What is Your Best Option
This morning, I had a great chat with Mortgage Professional and Broker, Ruth Akierman with Outline Financial to get a break down on what exactly is going on with respect to mortgages in this time of uncertainty. Ruth was able to provide a clearer picture as to how banks are handling the current situation while also providing some great tips. I have summed up her points below and thought I would share with all of you! Please keep in mind, all situations are on a case by case basis and you should contact your mortgage professional in order to determine what the best option is for you at this time.
Though the Federal Government and Bank of Canada have dropped rates momentarily, however other Financial institutions, such as TD and ScotiaBank have now taken a turn and have been raising their rates on a weekly or daily basis. They have done this to somewhat stabilize the market given the influx of pre-approvals they have received since protocols put in place admits COVID-19.
This is not to say that these rates are not still good, they have just come up from what they were. For perspective, just over a week ago, a Five Year Fixed, insured mortgage with less than 20% down payment with ScotiaBank was 2.39%, then rose to 2.59% and is now at 2.94%. For those with a Five Year Fixed, with a 20% downpayment or more, the rate is 3.24%.
To break it down simply, at the moment insured mortgages with less than 20% down are just under 3% and just above the 3% on conventional mortgages.
As you are likely aware the Prime Rate, which controls variable rate mortgages, has dropped from 3.95% to 2.95%. That 1% less is quite the drop and if you are currently in a variable rate mortgage and has provided quite the savings. After consulting with Ruth, she has advised to just sit tight as this is the best option for you right now!
Those of you who should be thinking about a change in your mortgage are those who have purchased properties between 2017-2018 and are likely sitting at a 3.6%-3.8% rate. A good thought would be to call your mortgage broker and see what you can do to re-configure to a variable mortgage at the current 2.95%. Yes, it may cost you a bit to break your current mortgage, however taking this approach has the potential for quite a large amount of savings over the next five years. I have provided an example below for your reference.
Though the Mortgage Stress Test changes were cancelled, the Qualifying Benchmark for what you are technically able to afford has changed. The original Bench Mark rate as set out by the Bank of Canada was 5.19% and has now been reduced to 5.04% – not as much of a reduction as originally planned, but still allows for greater affordability across the board. If you are still confused on Stress Tests and Benchmarks – basically the stress test will determine if you are still able to make your monthly mortgage payments in the case that interest rates rise. If you have an uninsured mortgage (less than 20% downpayment) you would have to qualify for the Bank of Canada’s [currently 5.04%] rate OR whatever the rate is that your lender has offered you plus 2% – which ever is the higher of the two.
The Government has now implemented the option to defer your mortgage. This is a great option if needed, however it is important you understand exactly what this means and if it is the right approach for you.
Let me break it down for you – let’s say your mortgage is $4,000.00/per month [$2,000.00 on the principal and $2,000.00 to interest]. Should you decide to defer, the $2,000.00 you would have been paying in interest will now be tacked on to your principal payment for the next month. You will then incur interest on the new principal amount. Once the deferral period of 6 months is over and you start your regular payments, your monthly mortgage payment may be higher than it was originally as you will now have a higher amount owing given that the principal . Be sure to contact your mortgage broker to determine your options and what works best for you.
Another option as opposed to deferral would be to extend your amortization period to reduce your monthly mortgage payment. If you are currently in a 20 year amortization, extend to 30 years and reap the benefits of the savings. Then when this is all over you have two options, bring your amortization period back down to the 20 years (or whatever your original amortization period was) OR use the money you have saved towards your mortgage which will then pull that amortization period in.
To see the deferral options by bank along with further info on mortgage payment options click here.
I hope that this information has been beneficial and has provided insight on some of the potential options out there. As mentioned, this is all on a case by case basis and I suggest contacting your mortgage professional to determine what your potential options are. If you would like to speak with Ruth Akierman, please reach out I will be happy to connect you!