High Ratio Deals ONLY
After the CMHC announcement hit headlines last week, a few lenders changed their guidelines for promotional rates offered. The lenders revealed that the promo rates are no longer offered for conventional mortgages anymore and they are only looking at high-ratio deals.
CMHC claimed that their cap wouldn’t affect qualified home buyers nor would it affect the cost of buying a house. Ahemm… the last time I checked, putting LESS money down on a home to qualify for a lower promotional rate, increases the interest payments made over the life of your mortgage, thereby directly affecting the cost of buying a house!
I don’t think that lenders are the only ones affected by this budget; CMHC claimed that their budget would only affect lenders as it inhibits how much bulk/portfolio insurance they can offer to them. Newsflash: things roll downhill and the consumers may start to feel the pinch too.
Another option if you are in a conventional position: a HELOC
Are you considering a purchase or maybe a refinance? Do you have a conventional deal (meaning you have a minimum of 20% for a down payment or 20% equity in your home)? Maybe you’re thinking of renovating? Would you like more flexibility with your financing solution? If you’ve answered ‘yes’ to any of the above questions, a good alternative for you may be a Home Equity Line of Credit (HELOC).
A HELOC is available to consumers who have a minimum of 20% equity in their home. The HELOC is secured by your home and therefore will require a lawyer to register a charge; this could set you back anywhere between $500-1200.
The Pros: Fully Open
The HELOC is the most flexible mortgage product out there as it’s fully open, meaning you can pay it off in full at anytime without penalty. Think of it as a credit card. This type of credit is known as revolving, meaning that you can use it, pay it off, and use it once again. It is not like a regular mortgage which is considered “termed” debt, once you pay it off – it’s gone, you can’t re-use what you’ve paid off.
A HELOC also has the most flexible payment schedule. The minimum monthly payment amount is interest only and anything extra that you pay goes straight to the principle. I’ve listed this as a “pro”, but if you aren’t financially responsible and just make the minimum interest only payment, you will actually never pay this off.
Option to Fix In
Although a HELOC is only offered as a variable rate product priced around Prime, some lenders will allow you to “fix in” a portion. The fixed in portion is just like a standard mortgage product, where you agree upon the term (1-10 years), the rate and you make regular principal and interest payments over the said period of time. As your payments are applied to the fixed portion, the paid off amount becomes available again at the revolving interest rate.
So for example, let’s say you have a HELOC with a credit limit of $100,000 at Prime + 1% (effectively 4%). You’ve done some renovations and now have a $50,000 balance so you decide to lock in your $50,000 balance @ 2.99% for 4 years in order to have a lower interest rate and pay it off faster. In doing this, you now have $50,000 fixed in @ 2.99% and the other $50,000 is still available to you at the 4% variable rate. After one year you have paid $5,000 off of the principal, which is now available to you on the floating portion. Therefore at the end of year one, you have $45,000 remaining @ 2.99%, and $55,000 available at Prime + 1% (or 4%).
The Cons: Higher Interest Rate
As a variable rate product, you essentially can opt for a VIRM (variable interest rate mortgage) which is currently priced between Prime and Prime – 0.25%, prime being at 3% (check out the current best mortgage rates); or you have a HELOC priced anywhere between Prime + 0.60% and Prime + 1.00%. The flexibility of the product does come with a price!
As mentioned above, there are two sides to this coin… yes; flexibility is great and a super small monthly payment is even better. But if you are only making the minimum, interest only payment you will literally NEVER pay off your debt.
RateSupermarket.ca Week in Review
There have been some small movements in the prices of fixed rates over the last week but still no movement on the variable front.
Although the 5 year terms are still leading the popularity contest among mortgages searched on RateSupermarket.ca (46.3% 5 year closed variable, 40.8% 5 year closed fixed), consumers are starting to consider the shorter termed mortgages (3.7% searching 1 year closed fixed and 3.6% searching for a 2 year closed fixed).