Mortgage interest rates are rising. What should you do?
In light of increasing mortgage interest rates, there are strategies that prospective homebuyers or homebuilders should keep in mind. These also apply to current homeowners who are about to renew a mortgage.
Saskatoon-based Chantelle Stefaniuk is a Mobile Mortgage Specialist with Conexus Credit Union. She has worked in the financial services industry for 14 years, including three years in her current role. Conexus Credit Union is the largest credit union in Saskatchewan.
“The biggest impact we see with increasing interest rates is in the overall mortgage payment amount. In the grand scheme of things, interest rates are still relatively low. It’s worth remembering that in the early 1980s Canadian mortgage interest rates hit a high of 21 per cent,” says Stefaniuk.
Stefaniuk encourages her clients to spend time reviewing their household budget, making sure to have a financial cushion in place. With the use of debit and credit cards, it can be an eye-opener to see how much items (such as groceries or entertainment) cost each month. It is usually more than clients expect.
Then there is what Stefaniuk refers to as “the million-dollar question.” What advice does she have on the best mortgage option right now, in terms of the length of amortization and fixed versus variable options?
“While many of our clients go for a five-year fixed-rate mortgage, it really does depend on individual goals and what makes the most sense at that point in time. Are you potentially moving in a few years or is this your forever home? Are you newlyweds who are planning on growing your family soon? Does the company you work for have rumors of layoffs to come? A mortgage specialist can help walk you through these considerations.”
Because a variable-rate mortgage floats with the overall prime rate, it might be advantageous for making higher payments on the principal. On the other hand, a fixed-rate mortgage can provide a sense of stability when interest rates are rising. In Canada, mortgage default insurance lets qualified clients purchase a home with a down payment of as little as five per cent. The insurance provides a safety net for federally regulated banks and credit unions. When a client makes a down payment of 20 per cent (or more) on the home price, it is considered an uninsured mortgage.
As of January 2018, the Office of the Superintendent of Financial Institutions (OSFI) introduced new rules on mortgage lending by setting a ‘stress test’ for uninsured mortgages. The rules now require that the minimum qualifying rate for an uninsured mortgage is the Bank of Canada’s five-year benchmark rate or the client’s mortgage interest rate plus two per cent, whichever is the higher. The ‘stress test’ applies to new mortgage loan agreements and does not apply when a homeowner is renewing an existing mortgage.
Stefaniuk emphasizes that the most important thing a client can do before putting an offer on a home is to be pre-approved for a mortgage. There is no cost to be pre-approved.
As well as mortgage renewals, Stefaniuk’s clients include first-time homebuyers, clients building a new home or an infill, and clients upgrading to a larger home or downsizing to something smaller. In all these cases, she recommends the twin strategies of thoroughly reviewing your household budget and getting pre-approved for a mortgage.
On the issue of credit scores, Stefaniuk has thoughts on how it can impact the mortgage interest rate that financial institutions offer a client.
“It’s definitely important to maintain your credit score. Any missed payments can be an issue and that includes items like speeding tickets, parking tickets and cell phone bills. Always pay your minimum payment on time. Also, be wary of having too many credit checks in a year since that can count against your credit score. People don’t think of it, but something like car shopping with multiple dealerships doing multiple credit checks can have an impact.”
Finally, is it ever a good idea to switch lenders or to refinance an existing mortgage?
“If it’s a new home, a mortgage renewal or a new mortgage product, then yes, do your due diligence. For an existing mortgage, do your homework to ensure that the switch will be cost effective. This means that the administrative costs or penalties for switching lenders will be less than the money saved with the new mortgage terms.
“My best advice overall would be to trust your mortgage specialist and build a good, available team around you. After all, this is the largest financial commitment of your life.”
Find out more at www.conexus.ca/mobilemortgage.