Key Decisions for the Spring Market

Key Decisions for the Spring Market

It’s springtime and we’re anticipating a robust housing market. Deciding which mortgage is as complex as ever, especially since there is uncertainty regarding when we’ll see our highly anticipated rate cuts.

From fixed-rate mortgages offering stability to variable-rate options with potential savings to the availability of hybrid mortgages and cash-back incentives, choosing the right mortgage is not easy. Beyond these primary decisions lie many other factors like understanding pre-payment penalties and why mortgage features are so important, making it difficult to choose the right mortgage for long-term homeownership success. Let’s look at the key decisions that need to be made.

Fixed Rate Mortgage

Opting for a fixed-rate mortgage provides total stability for the mortgage term. With a fixed interest rate, borrowers benefit from consistent monthly mortgage payments, shielding them from potential market fluctuations. This type of mortgage is particularly well-suited to individuals who prioritize financial certainty and prefer to plan their long-term budget with confidence. First-time homebuyers often find comfort in the protection against rising rates and the steady nature of fixed-rate mortgages, making it easier to manage their finances over the life of the mortgage.

But what term should you take this spring? Before and during the COVID-19 pandemic, the 5-year fixed mortgage was the term of choice. After the pandemic, we dealt with record-high inflation, causing fixed rates to spike. We don’t know when, but we do know that rates will eventually trend lower, so for many, it doesn’t make sense to lock in for 5 years. Homebuyers and homeowners have shown a preference for the 3-year term so they can renew into a lower-rate fixed mortgage sooner. Certain homebuyers continue to take a 5-year term, but mostly because the rate is slightly lower than the 3-year so it’s easier to qualify under the stress test.

Variable or Adjustable-Rate Mortgage

With a variable rate or an adjustable-rate mortgage, the interest rates fluctuate alongside the prime lending rate, based on the Bank of Canada overnight rate. This stands in contrast to fixed-rate mortgages, where the interest rate remains constant throughout the mortgage term

Following the high-rate environment of 2023, homebuyers and homeowners are again considering this type of mortgage. Why? Economists no longer question whether the overnight rate will increase, but rather when the first cut will occur. With an adjustable-rate mortgage, when the overnight rate and prime rate decrease, mortgage payments follow suit, providing a favourable cash flow boost. For those with variable-rate mortgages, while payments do not decrease, the rate reduction means more money is allocated towards interest, accelerating your mortgage repayment. Anticipation of Bank of Canada rate cuts often leads borrowers to scrutinize adjustable-rate mortgages more closely.

Whether to take a variable or adjustable or not depends on when we can expect the Bank of Canada to start cutting the overnight rate. Before 2024, the major Banks projected up to 1.5% in rate cuts by the end of 2023. Now with macro data received since the beginning of the year, those projections have been tempered downward. It may be wise to wait until there is more surety as to when the Bank will start dropping rates before opting for an adjustable-rate mortgage and then ride the rate cuts down and enjoy your boosted cash flow.

Variable and adjustable mortgages do have a certain advantage over fixed-rate mortgages. If you anticipate needing to break your mortgage early for reasons such as separation, divorce, health issues, or job relocation, consider a variable mortgage for the lower fees. You’ll have more flexibility and lower costs if you need to exit your mortgage contract early.

Hybrid Mortgage

Considering the uncertainty surrounding future rate cuts, hybrid mortgages offer unique advantages. By combining features of both fixed-rate and adjustable-rate mortgages, borrowers can enjoy the benefits of each. With a hybrid mortgage, borrowers have the flexibility to choose what percentage of their mortgage remains fixed and what percentage becomes variable. This blending of characteristics aims to provide homeowners with a middle ground – the stability of fixed-rate payments and the potential cost savings associated with variable and adjustable mortgages.

Cash-Back Mortgage

A cash-back mortgage is where the lender provides you with a lump sum cash payment upon closing the mortgage. The cash payment can be used for various purposes, such as covering closing costs, helping with home purchases and improvements, or even paying off debt. However, it’s important to note that cash-back mortgages often come with higher interest rates and specific terms, so borrowers should understand the overall cost and implications before selecting this option.

Fixed vs Variable is Not Your Only Consideration
Other decisions that homebuyers need to consider when obtaining a mortgage this spring include:

  1. Insured vs Uninsured Mortgage: The terms “insured” and “uninsured” are used to differentiate between mortgages that require mortgage default insurance and those that do not. Insured mortgages are required when you have a down payment of less than 20% of the purchase price, and the government backs the mortgage through CMHC or private insurers such as Sagen and Canada Guaranty. The fee for this insurance is added to your mortgage, increasing the total amount and your mortgage payments.
    Uninsured mortgages, on the other hand, are those where the buyer has a downpayment of 20% or more, eliminating the need for mortgage default insurance. However, since the lender isn’t protected with mortgage default insurance, rates are higher than for insured mortgages.
    Insurable mortgages add another layer of complexity, qualifying for mortgage default insurance though not mandated by the government. Lenders pay for this insurance to mitigate risk or securitize mortgages, resulting in slightly higher rates than insured mortgages.
  2. Amortization Period: Insured or insurable mortgages have a maximum 25-year amortization, whereas uninsured mortgages may extend to 30 or 35 years with a rate premium. This option allows for lower monthly payments, freeing up funds for other uses.
  3. Mortgage Features: The saying “the devil is in the detail” certainly applies to mortgages. Features such as prepayment privileges for accelerated mortgage repayment, portability for potential moves, and any associated fees or restrictions warrant careful examination. Watch out for ultra-low-rate mortgages or “restrictive” mortgages. The rate alone may be great, but the restrictions and fees may cost you more in the long run, especially if you break your mortgage early.
  4. Mortgage Prepayment Penalties: One of the important yet often overlooked mortgage features is the implications of prepayment penalties, particularly for fixed-rate mortgages. Be sure to consider their impact on plans to refinance or if you need to get out of the mortgage early.

As you can see, choosing a mortgage involves more than just the interest rate—it’s about selecting the features that best suit your needs and financial circumstances now and in the future.

Top-Rated Mississauga Mortgage Broker Joe Purewal is Here to Help!

To navigate this complex landscape, seek expert guidance from the best Mississauga Mortgage Broker – Joe Purewal, and his team. They will make a recommendation as to the type of mortgage and the features you need based on a complete review of your situation. With their expertise, you can gain clarity and confidence in your mortgage decision, paving the way toward your ideal mortgage solution and homeownership goals.

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The-wrong-mortgage-rate guide by Joe Purewal

The wrong mortgage rate type can cost you a lot of money.

What is the difference between Fixed Rate, Variable Rate and Adjustable-Rate mortgages?

Buying a home will be one of the biggest purchases you will make in your lifetime and with it comes your quest to find the lowest interest rate you could get in terms of financing. I’ve seen clients from different walks of life ask me what’s the best rate I can offer and with that I usually respond with a question myself; “Well, what type of rate are you looking for?”.

Homebuyers often get caught up with the lowest rate they see without considering what type of rate best suit their needs. This way of decision-making end up costing them more money because clients later realize that the rate type they chose may not be the best option for their future plans.

I have outlined below the definition of each rate type as well as their advantages and disadvantages.

FIXED RATE

A fixed rate mortgage entails having the same interest rate throughout the course of the mortgage term. In effect, your mortgage payment stays the same over the entire term. I emphasize on the word term because all rates offered for mortgages in Canada change every term and thus, you cannot keep the same rate for the whole duration of the mortgage.

Advantage

A fixed rate mortgage provides clients with stability; knowing that your payments will not change, and you only need to set aside the same amount every time your mortgage payment is due to be debited. This in turn, gives you an opportunity to save more and pay down your mortgage at a uniform pace.

Disadvantage

The only time a fixed rate mortgage will work against you is if you decide to payout your mortgage prior to the term maturing. This is because the penalty to break a fixed rate mortgage is higher than the other two interest types. You also cannot switch from a fixed rate mortgage to a variable rate or adjustable-rate mortgage.

Ideal Use

Clients who plan on keeping their homes for a very long period or at least until the end of the term would benefit from a fixed rate mortgage since plans of breaking it early is almost non-existent.

VARIABLE RATE

A Variable rate mortgage roots from the word “vary” which is the very essence of the rate type. The payment going to interest and principal changes every time the prime rate changes; however, the total monthly payment remains the same. This means that your mortgage payments almost always stay the same until you reach the trigger point. A trigger point is determined by your lending institution and usually happens when the Prime Rate has grown so large that there is no more payment being remitted towards the principal balance of your mortgage. When this point is reached, your monthly payment will be adjusted.

Advantage

A variable rate mortgage may cost less to break compared to a fixed rate mortgage and still offers the same stability of a fixed rate mortgage.

Disadvantage

When the trigger point in this rate type is reached, it becomes very problematic and could cause borrowers to have to pay a lump sum to cover the unpaid principal or interest.  

Ideal Use

This rate type benefits clients who are looking for that stable monthly payment but have plans of breaking the mortgage early; thereby incurring less in penalties.

ADJUSTABLE RATE

An adjustable-rate mortgage operates on a lot of flexibility. The mortgage payment adjusts every time there is a change in the Prime Rate. This ensures that the same amount of payment is made towards the principal balance of the mortgage regardless of what interest rate is being charged. 

Advantage

Like a variable rate, the penalty to break an adjustable-rate mortgage is cheaper compared to a fixed rate mortgage. It also allows you to enjoy paying off your mortgage balance at a uniform pace regardless of prime rate fluctuation.

Disadvantage

Should the prime rate increase drastically, the mortgage payment for this rate type could become too expensive and unmanageable if the borrower does not monitor the prime rate fluctuation prudently.

Ideal Use

The ideal client for this rate type is typically one that is an experienced investor and have surplus cash flow that could support any fluctuation that could happen on the mortgage payment because of a change in the prime rate.

Contact us today for a free consultation. Leveraging over twenty years of industry experience, we can plan your way forward and achieve your goal of being a homeowner the smart way.

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New Tax Rules for Co-Signed Mortgages Joepurewal

Alert: New Tax Rules for Co-Signed Mortgages

If you or your spouse co-signed a mortgage with your child or grandchild to allow them to qualify for a home purchase and went on the title of the home, you likely have a “bare trust” arrangement. If so, you must file a bare trust tax return for the 2023 tax year and future years. It is being on the title with your child that creates the bare trust arrangement. 

A bare trust is not the type of trust where a lawyer is sought to create it. Often, it can happen accidentally, like co-signing a mortgage. It’s when someone legally owns an asset as is the case if you go on title with your child, but the home technically belongs to your child. You have legal ownership, but you aren’t the one entitled to that property or the income or gain. The only responsibility you have is to transfer the property when demanded.

The technical definition of a bare trust from the Canada Revenue Agency (CRA) is available here. Bare trusts occur when you legally own an asset because you have some percentage of legal title of the trust property, but your child enjoys the benefits of ownership. The arrangement is a separation of legal and beneficial ownership of a property.

Even though there is no tax on the trust’s value, if Canadians don’t file their bare trust returns by the April 2nd deadline (before the general April 30th tax deadline for individuals), they could face multiple fees or penalties. The fee is $25 per day for late filing, with a minimum penalty of $100 and a maximum of $2,500. If CRA suspects gross negligence in filing, they can assess the greater of $2500 or 5% of the trust’s property which can be significant.

NOTE: The CRA recently announced that given the unfamiliarity of this for most Canadians, they will offer relief from the penalty and only go after real blatant cases of gross negligence for 2023. Great news!

While that announcement was a sigh of relief, you still need to file the bare trust tax return. You may have to pay someone every year to file the T3 Trust Income Tax and Information Return and a Schedule 15 Beneficial Ownership Information of a Trust. The new reporting requirements can be found here.

Co-signing a mortgage for your child or grandchild remains an excellent way to help them get on the homeownership ladder. But this new consideration may give some pause. Keep in mind that there is no tax to be paid, just an annual filing requirement.  If you want to discuss the pros and cons of co-signing a mortgage, speak with Mississauga’s best Mortgage Broker, Joe Purewal. Joe will have a frank conversation about the benefits and drawbacks and discuss other available strategies to help your child or grandchild achieve their homeownership dreams.

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Rate Hold Continues, But Cuts Are Coming Soon!

Rate Hold Continues, But Cuts Are Coming Soon!

Rate Hold Continues, But Cuts Are Coming Soon! 

As expected, the Bank of Canada held the overnight rate steady. The Bank wants more confidence inflation is in check and no longer a risk before making any cuts. A relatively good start to 2024 for the jobs market gives the Bank some breathing room to wait and ensure inflation is getting back under control before pivoting downward.

According to Macklem, the Bank aims to balance the need to ease monetary policy without prolonging its restrictiveness, while also safeguarding the strides made in curbing inflation.

We are heading in the right direction. Headline inflation fell to 2.9% in January, much lower than expectations of 3.3% and down from December’s 3.4% pace. We did see a higher-than-expected GDP growth rate of 1% in Q4, against expectations that growth would be flat. While GDP data modestly exceeded the Central Bank’s projections, the details showed that the domestic economy is anything but healthy and struggling under the weight of high-interest rates.

Leading up to Wednesday’s decision, traders in overnight swaps were anticipating that the bank would initiate rate reductions by the July meeting. Economists, however, now view June as the more probable start for the easing cycle. The next Bank of Canada rate announcement is April 10th, 2024, where there is an outside chance of a cut or more likely a hint of what’s to come in June. 

Recent data has caused the major Banks to slightly revise the projections for interest rate cuts. Still very good news but slightly less aggressive.

Source: Canadian Mortgage Trends

If you require a mortgage or are renewing in the next nine months, get in touch for a thorough review of your situation and expert advice. Mortgage decisions are complicated, so make the most informed decision possible.

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low rate mortgage Joepurewal

Don’t let an ultra-low-rate mortgage lure you in and handcuff your future! Get the full picture.

It might not be a good idea to fall for the allure of ultra-low-rate mortgages that could jeopardize your financial future. It’s a misconception that the lowest rate is the only factor to consider when choosing a mortgage. Remember the saying – the cheapest isn’t always the best. Many Canadian homeowners would be surprised to learn that a low-rate mortgage could prove more costly over time. The right mortgage involves much more than just the rate.

Bargain-rate mortgages often come with additional fees, penalties, or constraints that may outweigh the benefits of a slightly higher-rate mortgage with more favourable terms over the long haul. That’s why it’s so important to thoroughly vet all the details before committing. Many people focus on the rate they are getting, not the product itself.

Ultra-low rates can be used as bait, but these mortgages sometimes have significant drawbacks. They may have restrictions such as –

  • The requirement that your mortgage is fully closed. Your mortgage must be completely paid off or settled in full unless you decide to sell. Your mortgage can’t then be ported to a new home.
  • The limitation of refinancing only with the same lender, unless you sell your home, restricts negotiation opportunities.
  • Excessive penalties for breaking the mortgage. 
  • Having a limited amount that you can prepay, for instance, only being able to prepay up to 10% and not the full 20%, hinders efforts to become mortgage-free faster.
  • Not being able to add a Home Equity Line of Credit so you can access your equity later.

Pre-payment options stand out as one of the most effective strategies for interest savings. Whether it’s a quarterly bonus, tax refund, or seasonal income boost, these occasions present prime opportunities to reduce mortgage interest costs. When allocating extra funds towards the mortgage principal, homeowners can save thousands in interest. Missing out on pre-payment privileges with a cut-rate mortgage means missing out on potential savings.

Also watch for low-rate “teasers”: cut-rate mortgages with a short timeline. Sometimes a lender will offer a rate that is good for just 30 days, after which the rate will jump. If closing takes a little longer, or there’s a glitch in documentation, then you need to be prepared with a backup plan. These teasers can be stressful – and not always the best deal anyway.

Be sure to look carefully and consider the potential pitfalls of signing one of these contracts. You may not want a mortgage with handcuffs, especially since 50-60% of homeowners break their mortgage before the end of the term!

Choosing the right mortgage may take more time than quickly accepting a low rate, but it’s essential to pay attention to the details. Most people spend more time selecting the right car than choosing the right mortgage, even though it’s likely the largest expense they’ll likely ever have. Remember – the devil is in the details – so carve out some time for those details and get a second opinion.

We know that even a slight decrease in interest rate can result in substantial savings throughout the term of your mortgage. While mortgage brokers excel at securing competitive rates from various lenders, their expertise extends beyond mere rate comparison. That’s why it’s best if you work with a Mortgage Broker who will spend the time to determine the features and privileges that best meet your situation, looking at:

  • Penalties to get out of your mortgage early.
  • What is best for you – fixed or variable rate?
  • The best mortgage term given your situation and the current economic environment.
  • Pre-payment options so you can pay your mortgage off early.
  • Payment flexibility that can adapt to changes in your circumstances.
  • Additional restrictions and fees.
  • Portability should you want to take your mortgage with you when you move.
  • The ability for someone else to assume your mortgage.

Ensure you have a mortgage tailored to your situation, as the cheapest isn’t always the best option. The right combination of rate and features, matched to your needs, is the fastest route to mortgage freedom.

Another important piece of advice is to read the reviews of the company offering that ultra-low-rate mortgage. Cut-rate mortgages typically pay less in commission, which means there may be a trade-off with the service you receive.

Get the Full Picture and Honest Advice with Joe Purewal

It’s wise to explore the mortgage marketplace thoroughly and conduct diligent research. If you’re tempted by an ultra-low-rate mortgage offer, don’t hesitate to request the contract, and bring it to Joe for a comprehensive review. Joe will carefully examine all the restrictions and implications with you, ensuring you have a full understanding, without any obligation. If you decide to go with that mortgage, you are then making the most informed decision possible. With Joe Purewal’s expertise and commitment to honesty and full disclosure, rest assured you’re in capable hands.

Whether you’re a first-time homebuyer, preparing for mortgage renewal, refinancing, consolidating debt, renovating, or investing, now is the perfect moment to seek timely, expert guidance from Joe Purewal. With Joe, you can expect straightforward and honest advice tailored to your unique situation. Choose expertise. Choose honesty. Choose full disclosure.

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How Alternative Lenders Unlock Homeownership

How Alternative Lenders Unlock Homeownership Opportunities

Once upon a time, those in Mississauga, Toronto, and the GTA dreamt of owning their own home. But increasingly, the path to homeownership became out of reach due to stringent lending criteria set by traditional banks. However, a new array of lenders emerged, offering alternative mortgage solutions that opened doors for aspiring homeowners. So, let’s get familiar with this very important lending niche!

What are Alternative Mortgage Lenders?

Unlike traditional banks, these lenders often operate with more flexibility, accommodating borrowers outside the conventional credit criteria. What sets alternative lenders apart? It’s the ability to pivot, adapt, and tailor financial solutions to meet the diverse needs of borrowers. These lenders, include credit unions, B lenders, Mortgage Investment Corps (MICs), and private lenders, Let’s take a closer look at each:

Credit Unions

Credit unions are member-owned and provide a wide array of financial services and products, including accepting deposits, making loans, and offering other banking services. Credit unions, often more lenient in their credit assessments, support borrowers with unique financial situations, offering an alternative path to mortgage approval.

B Lenders

B lenders, also known as non-conforming or alternative lenders, specialize in providing mortgage financing to borrowers who may not meet the stringent criteria set by banks. B lenders take a more flexible approach to underwriting, often assessing mortgage applications using a more holistic approach, considering factors beyond just credit scores. While interest rates may be higher compared to prime lenders and fees may be charged, their flexibility in underwriting allows borrowers with unique financial profiles to access mortgage opportunities that may be otherwise elusive.

Top B Lenders include –

  1. Home Trust: Home Trust is a leading alternative lender in Canada, specializing in providing mortgage solutions to self-employed individuals, newcomers to Canada, and individuals with credit challenges.
  2. Equitable Bank: Equitable Bank offers a range of alternative mortgage solutions, including home equity lines of credit (HELOCs) and reverse mortgages. They cater to borrowers who may not meet the strict traditional lending criteria and focus on finding tailored solutions to meet their clients’ needs.

Mortgage Investment Corps (MICs)

For a homebuyer who doesn’t qualify for a traditional mortgage, a Mortgage Investment Corporation (MIC) in Canada can be another solution. When traditional lenders have stringent criteria, MICs may offer more flexibility. These corporations pool funds from various investors and use them to provide mortgages. As a homebuyer, you might find an avenue through a MIC if your financial situation or credit history doesn’t meet the requirements of traditional lenders.

Private Lenders

Private lenders, as the name suggests, are individuals or organizations that lend their own money rather than funds deposited by customers. Operating outside the regulatory constraints of traditional banks, private lenders are often willing to take on higher levels of risk in exchange for potentially higher returns.

Private lenders focus less on credit scores and more on the value of the financed property. They often serve as a viable option for borrowers who may not meet the requirements of credit unions, B lenders, or MICs. Private lending comes with its own terms and conditions, including higher interest rates, fees, and shorter repayment periods.

Why do borrowers opt for the private mortgage route? For many, it’s the lifeline they need when traditional banks slam the door shut. Private lenders play a pivotal role in assisting borrowers with imperfect credit, non-traditional income sources, or those facing unique financial circumstances. Their focus on the property’s value rather than strict credit criteria positions them as a lifeline for individuals navigating challenging credit scenarios.

Private lenders are particularly valuable when it comes to second mortgages, which are used when homeowners don’t want to break their current mortgage or don’t qualify for a home equity line of credit to access their home’s value. There are many reasons for getting a second mortgage, including:

  • Debt consolidation – credit cards, tax arrears, unsecured loans – to reduce interest costs, boost cash flow, and improve your credit score.
  • Home renovations, including renewable energy retrofits
  • Large expenses – wedding, educational costs, medical bills, legal bills, divorce settlement, helping family, a big-ticket purchase, immigration costs
  • Investing in a rental or vacation property
  • Business needs

Expanding Housing Opportunities

The emergence of alternative mortgage lenders has expanded housing opportunities for Canadians. These lenders offer more flexible lending criteria, enabling borrowers with unique financial situations to access the funds needed to purchase their dream homes or access their equity for financial needs or opportunities. Whether it’s individuals with non-traditional income sources, self-employed individuals, or those with less-than-perfect credit scores, alternative lenders have become a lifeline for many prospective homeowners and existing homeowners.

Additionally, with higher rates, borrowers are finding it hard to qualify under the mortgage stress test where they must show they can afford their mortgage payments at a rate of two percentage points higher than the mortgage contract rate. With an alternative lender, you can have the option of getting a mortgage without the stress test requirement.

By offering options to individuals who may have previously been excluded from homeownership, these lenders contribute to increased housing affordability and accessibility. According to Stats Can, in the second quarter of 2023, outstanding loans from credit unions, private lenders, and mortgage investment corporations reached $388.6 billion.

Additionally, alternative lenders provide competition, which fosters innovation and drives the market to adapt to the changing needs of borrowers.

While alternative lenders provide access to financial opportunities, it’s important to keep in mind that rates are higher than with traditional mortgages and fees may apply. It’s essential to weigh the costs against the benefits while working with a trusted expert.

Joe Purewal, Mississauga Mortgage Broker – Alternative & Private Mortgage Specialist

Top-rated Mortgage Broker Joe Purewal is ready to review your situation to determine if an alternative lender is right for your situation. With a wealth of expertise, Joe can provide invaluable insights into credit unions, B lenders, MICs, and private lenders, helping individuals make informed decisions. If you are in Mississauga, Toronto, or the GTA and need to break free from traditional lending constraints, Joe Purewal is your trusted partner in exploring flexible and innovative financing solutions. Talk to Joe today!

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