If you’re keeping an eye on Canadian mortgage rates, you would be wise to keep your other eye focused on what is happening south of the border.
For better or worse, our economy is deeply linked with the U.S. economy, and while that means that strong U.S. economic growth is currently helping to fuel momentum here at home, it also means that rising U.S. inflationary pressures, if sustained, will work their way north of the border through our extensive trading relationship.
That will likely cause the Bank of Canada (BoC) to raise its policy rate, which our variable mortgage rates are priced on, more quickly than it would otherwise. At the same time, bond-market investors will bid up Government of Canada (GoC) bond yields, which our fixed mortgage rates are priced on, in anticipation of that outcome.
With that in mind, let’s look at the most recent U.S. and Canadian growth and inflation data.
U.S. GDP growth came in at 4.2% on an annualized basis in the second quarter of this year, marking the U.S. economy’s best quarterly growth rate in nearly four years. Over the same period, Canadian GDP grew by 2.9% on an annualized basis, and while that result wasn’t quite as impressive, it was more than double our 1.4% annualized rate in the first quarter.
U.S. inflation hit 2.9% on an annualized basis in the second quarter, which marked a six-year high after a steady march up from 2.1% at the start of this year. Over that same period, Canadian inflation hit 3.0% on an annualized basis, which was the highest it has been in nearly seven years and up significantly from 1.7% at the start of the year.
When improving economic growth coincides with steadily rising inflation, it’s a clear sign that an economy is operating at (or even above) its full capacity. And that’s why both the Fed and the BoC have been hiking their policy rates – to slow growth to a level that will bring overall inflation back down to about 2%.
Those efforts appear to be working. Last week we learned that U.S. inflation dropped to 2.3% in September, down from 2.7% in August. When you look at the chart below, it sure looks like U.S. inflation has been brought to heel. By comparison, Canadian inflation cooled from 3.0% in July to 2.8% in August. (Our September result will be released this Friday.)
But we shouldn’t be too hasty in drawing this conclusion. In fact, last month’s lull may prove to be the calm before a coming U.S. inflationary storm. Here are my reasons for writing that:
- U.S. President Donald Trump’s trade tariffs are inherently inflationary for U.S. consumers, but the full impact of those price increases has not yet been felt. A good part of the second-quarter bump in U.S. GDP growth was the result of companies (both domestic and foreign) accelerating purchases ahead of the soon-to-be-enacted tariffs. As those inventories are exhausted, the next round of purchases will include the added tariffs. Only then will their full inflationary impact be apparent.
- The U.S. unemployment rate dropped to 3.7% in September, marking its lowest level in forty-nine years. Not surprisingly when labour is increasingly scarce, average U.S. wage growth is finally starting to show some life. It hit 2.9% on an annualized basis in August, marking its fastest pace in the last ten years. Expect U.S. labour costs to continue to rise for at least as long as the demand for labour outstrips supply and especially now that U.S. immigration policy is reducing the inflow of new immigrant labour.
- The U.S. federal government’s recent tax cuts and aggressive stimulus spending pushed its annual budget deficit to $833 billion during its 2018 fiscal year, which ended on September 30. That deficit is projected to rise to approximately $1 trillion in 2019. The U.S. Treasury has to keep issuing new debt to cover this massive shortfall, but it’s a bad time to be doing that. The two largest foreign buyers of U.S. government debt are China and Japan, and both have cut back their U.S. treasury holdings this year. Reduced demand for treasuries is helping to push their yields, and, by association, the yields on (and cost of) most other fixed-rate U.S. debt higher.
- President Trump’s decision to restore Iranian oil sanctions in August has upset the global supply/demand balance for oil, and other producers have been either unwilling or unable to pick up the slack thus far. Not surprisingly, market watchers are raising their oil-price forecasts and many are now speculating that we may see a return to prices of $100+ per barrel. If that happens, higher energy prices will have a pervasive impact on overall inflation.
In summary, several factors have the potential to push U.S. inflation higher over the near term, despite the apparent lull in the U.S. inflation data for September. If that happens, the Fed will have to accelerate its rate-hike timetable beyond the four additional quarter-point hikes that its policy makers are already forecasting between now and the end of next year.
The full impact of the Fed’s myriad rate rises will take time to accrue, but their impact on U.S. economic growth will be significant and we have already seen some of these effects in North American stock-market prices. The Fed has embarked on thirteen rate hiking cycles since 1950 and ten of them ended with a recession. If and when we get to that point, rates should then turn back down.
So how does current and expected U.S. inflation impact a Canadian mortgage borrower’s assessment of the age-old fixed-rate versus variable-rate question? If you opt for a variable-rate mortgage, you should be prepared for more BoC rate rises over the short term, albeit at a slower pace than those of the Fed. Over the medium term, if the rate hikes on both sides of the border slow growth to a point where our economies tip into recession, rate cuts are then likely.
The Bottom Line: Predicting that rates will rise and then fall is not rocket science. After all, that’s why they call it the business cycle. The key variable is the timing of when all of this will occur, and the best way to make that determination in the current environment is to keep a close eye on how the key factors outlined above are impacting U.S. inflation. Everything else should follow from that.
0 Comments
Hi Dave,
That was a great article! Your insight into how to better decide between a variable and a fixed mortgage seems a good way to find the right solution. I am looking forward to your next post.
Paul
Really enjoyed this article! Not only did I learn some things, but also found the advice on weighing one’s own fear vs. greed when selecting a mortgage product to be very insighful. Wish I had read this before I bought my first home!
Great article and advice Dave. I appreciate the perspective.
Thanks for a very informative article. It certainly helps a consumer make an informed choice as opposed to fear-based or greed-based decision – which is imperative in these volatile times.
Dave,
Another problem today is cash flow. Paying off your mortgage ASAP maybe the worst thing you can do. If you want a different viewpoint on this drop me a line and I show why in many cases you can do better (without more risk).
Cheers,
Brian
Some good advice…I would also suggest the prospective purchaser to calculate their monthly expenses off of net income instead of gross. It always surprises people when they go through this exercise how little money they have left at the end of the month once they pay mortgage, taxes, hydro, gas, water, insurance,food, car loan, student loan….if at the end of this you are okay with what is “left”, then go ahead and take the plunge
I discovered your homepage by coincidence.
Very interesting posts and well written.
I will put your site on my blogroll.
🙂
Great comments David. As a Financial Planner I’ve been telling my clients this for years. We always implement life insurance completely independant from the clients lender.
Here’s another scenario to consider – along the same lines you’ve mentioned above.
Let’s say you qualify properly for the mortgage insurance through the lender – i.e. you were healthy at the time of application – but then your health changes!
You find out you have something as simple as high blood pressure – or worse? Now the ONLY life insurance you have is with that lender, and on that property. As soon as you want to move homes or possibly even refinance, you loose that life insurance. Your rates are re-evaluated based on current age and current health. Now your stuck! You can’t even shop around for the best mortgage rates available at other lenders because moving means you loose the only life insurance coverage you have, and may not be able to qualify for it again elsewhere.
Same goes for the coverage you have through work! Any change in health means your stuck with the benefits you’ve signed up for at that time. Change jobs and you loose that life insurance altogether. Serious consequences!
Having your OWN traditional life insurance policy – separate from your lender or group benefits plan – is the best way to go. The most flexability and the lowest premium paid over the entire time you’ll need the coverage.
Good tips!
Good work David!
On My website http://www.rightinsurance.ca there is a great video from CBC….
In a nutshell, the reporters talk to family memebers who find out too late the Big Banks are not paying the insurance claims!! Why because the insurance is reviewed after a claim…not before! I have a complete list of problems and short falls of personal insurance vs. bank bought insurance!
The stories you hear about in the press about insurance companies not paying almost always are sold by people who are not trained to sell insurance or have little experience. If you own this type of insurance replace it ASAP!!
………………………………………………………………………………………………………………………..
CBC Marketplace
“In Denial” – report on
Mortgage Insurance
Mortgage Insurance is meant to offer peace of mind and to reassure you that your family will be able to stay in your home if anything should happen to you. In this CBC Marketplace video, you’ll see that the reality falls a little short of that. Video produced by CBC.
Great comments. One other point to make, in the case of life insurance, your premium is based on the original mortgage amount and any claims are paid directly to your lender. As you pay down your mortgage, so does the amount the insurance co is required to pay out the mortgage. So when a claim is paid, yes your mortgage is paid out but you are paying premiums for a higher amount. For example a mortgage is taken out for $300,000 that is life insured. Premiums are paid based on a policy of that value. If at the time of a claim, the mortgage balance is $200,000 and this is the amount that the insurance will pay to your lender but what about the additional $100,000 that you have been premiums? Nothing…The better alternative is traditional life insurance for the value of the mortgage. At the time of claim, you receive the full policy value, payoff the mortgage and the balance is in your pocket.
Dave,
Here is another idea for your safe mortgage a large insurance company will pay interest, principle and taxes on your mortgage if you are disabled. In fact, this could be a short as 2 years or as long as 25 years. It has no effect on current benefits because payments are direct to the mortgage company and the city for property taxes.
Banks do not offer anything like this (2 year limit and and a low dollar limit). Also, the cost is more expensive. If you change banks, the benefits are gone.
This is portable to another mortgage.
Dave, great post for an under-utilized product. I think its a product that fits the bill for most people as most people have a mixed(greedy/fearful) profile. Hope things are going well…love all the posts!
Dave,
Here is a question for you. Why did they allow the 25% down to 20%?
Also having 40year mortgages? Do you think this might be a factor to why housing prices are so high?
Brian
Hi Brian,
The decision to increase the minimum loan-to-value required for a loan to qualify as a conventional deal (from 75% to 80%) was made after performing extensive stress-tests using historical data. The results showed that this subset of loans had been very low-risk in the event of a market downturn and based on those findings, the high-ratio bar was raised from 75% to 80%. I don’t think this change has materially contributed to higher prices because the mortgage loan insurance cost on a 75% loan was quite low and could be added to the mortgage balance.
Conversely, I think the decision to offer 40 yr. amortization periods on mortgages definitely led to higher houses prices because it increased affordability (and interest costs) for borrowers. Fortunately, this product was only around for a brief period before CMHC pulled it.
Hi David,
In the end this recovery is hooked on cheap rates. Tak that away and you have no recovery. I expect these rate increases to be the last for over a year.
Don’t forget low rates means seniors run out of money sooner (GICs).
After the Japanese real estate bubble burst in the early ’90s, the Bank of Japan resorted to using ultra low interest rate to try to stimulate the economy. Well it didn’t work. The Japanese economy has been in dire trouble since and Japan has the highest public sector debt among the G7 countries. So why are we following in their steps.
Liquidity trap is a fancy macro economic term and not too many people understand what it is unless one understands the AS/AS curve, But there is one more thing, IMO, that no one has talked about in the media and by other commentators is the fact that when interest rate is this low, the opportunity cost is also very low. Hence businesses are sitting on their cash and do nothing. Any mistake they make by doing nothing is very low indeed. That is exactly what is happening to this so-called recovery and that’s why not a lot of new jobs are being created. Some commentators, professional or otherwise, will point out that the reason employment is not being created is businesses have too much over-capacity. I would differ. I would suggest this over-capacity is a red herring. Most of the capacity in the hands of businesses are obsolete. They should be retooling now to meet the new economy we are heading into. Yet, they are not because interest rate and opportunity cost is too low. So the BoC must continue to raise interest rate to bring the economy back to normal and healthy in order to sustain the recover for the long haul. I would venture to suggest that to be healthy, real interest rate must be at lease 2% above inflation.
There is another point I want to make. In the real estate market in particular, interest rate does not make the market. It will influence pricing of the market and change the market behaviour. The size of the market is a function of other factors like savings (of course), available income, demographics and household formation. That is why the real estate market in Canada has cooled and will remain cool for the foreseeable future. It will not rebound until more jobs are created across the whole economy. That will not happen until interest rate rises back to a normal level.
Honestly, I really like your blog. I will come back often and hope to add useful comments.
Thanks Leo. I welcome your comments.
Dave,
Great blog. I will refer to in in my blog.
I agree 100% with you on variable rate mortgages. It is a great tool for those in the envious position of having ample equity and income to advantage of much lower VRM pricing, increase and hold their payments at a much higher than required level, so that they will enjoy their mortgage free day that much sooner. That is a more practical reason to choose VRMs over fixed rate mortgages.
IMO, the BoC will continue to increase rate back to the normal level, albeit at a much slower pace that would otherwise in light of the world economic situation.
The stock market is not doing well. Money is moving into bonds thus increasing bond prices and lowering yields. How long will this last? Who knows. It will continue to be volatile going into 2011.
For most first time home owners, they don’t have the luxury in choosing VRMs because they cannot qualify based on the BoC Benchmark rate. Most them will likely to have only 5 or 10% down and they must choose a 5-yr fixed, which is not bad right now. What will happen in 2015 when they have to renew.
Oh, to be or not to be!
I think you’re missing a couple of things in your description of the liquidity trap.
For one, you say that “Such an emergency measure is required when spending and business investment plummet because with less money circulating, the economy slows dramatically.” Why is there less money circulating? Well, for one, debt payments of Canadians have increased dramatically over the past 10 years. When money is going to pay off debt, it is not spent on goods and services in the economy, the money goes to the banks. Yup, our Canadian banks who are the toast of the world. The dramatic increase in the price of housing has a lot to do with incrased debt payments. Canadian household debt has gone from $602 Billion in 2000 to $1.3 Trillion in 2008, which is more than double in 8 years.
And the $25,000 bonus you mentioned, why would people not want to spend it on something frivolous in this climate? Unemployment is high, debt is high, confidence in the economy is low. If you have a lot of debt, and your job is not secure, would you blow the 25 G’s or would you pay down your debt, or save it in case you’re job gets shipped off to China or Bangladesh?
The Certified General Accountant Ass’n put out a report in March called “Where has the money gone?” Very informative, and gives you a pretty good idea of where our money goes, and why our debt level is increasing.
http://www.cga-canada.org/en-ca/ResearchReports/ca_rep_2009-05_debt-consumption.pdf
Hi Jean,
Thanks for your comments. To clarify, I do not think that Canada is currently experiencing a liquidity trap, so the examples I used were not based on current conditions. I agree that in today’s environment people might well want to spend their $25,00 bonus instead of save it or pay down debt, and our economy is better for it (even if the individual is not!) In a liquidity trap scenario though, most people in that situation choose to save their money or reduce debt and that is what causes less money to circulate in the economy, which slows growth etc etc.
Dave
Dave.. Well put. I can’t agree more. Technically, for a client to qualify for a VRM, he or she must qualify with the BoC Benchmark 5-yr fixed rate – currently at 5.49%. So if the borrower qualifies, he or she would have passed the Benchmark stress test. I’d emphasize the correct way to take advantage of the much lower VRM rate is to fixed the payments at a higher amount (shorter amortization) to pay of the mortgage that much sooner. And take advantage of the prepayment benefits as well.
Cheers.
Thanks for posting this Dave. Should help the confused.
Right on! Over time, the housing market is a function of household formation, which in turn is a function of overall economic wellbeing. With unemployment rate hovering around 8% or more in Canada, we won’t see the kind appreciation of housing prices the last few years again any time soon. Bubble? There may be bubbles in isolated local markets like Vancouver and Victoria, for different supply and demand reasons, but I don’t think there will be a housing bubble across Canada. In any case, real estate bubbles are short term phenomena.
House prices are inextricably linked to interest rates – a couple of points that I think are missing in your analysis:
1) House prices probably do rise when interest rates rise as increases in interest rates are generally telegraphed beforehand and people rush to close a purchase before the higher interest rates come into effect thus driving up prices – it has been argued by many that this helped drive prices up in Canada in the spring of 2010.
2) The period from 1980 to 2010 while seemingly a long one was also an unprecedented period of declining interest rates – any increase in interest rates over that period was on a macro level just a short-term blip.
3) Comparing the increase in house prices from 1980 to 2010 to the increase in incomes over the same period is a more interesting comparison. While house prices increased dramatically income levels did not. The increased house prices were manageable because continually reducing interest rates over that period kept affordability in line with incomes.
Interest rates are a key factor in what will happen next to house prices – if they increase meaningfully they will reduce affordability and thus house prices.
If interest rates stay flat and as they can’t really go any lower you would get a moderate decline in prices as the market works through the price increase from the rush to buy before the expectation of interest rates going up then slow growth thereafter as house prices grow in line with incomes.
If the economy declines &/or babyboomers have over-leveraged themselves in real estate expecting continuing price increases to finance their retirements then you will see house price declines as people are forced to sell.
It is interesting to note that in the US it was the volume of house sales that declined (as we are seeing now in Canada) before the prices declined as sellers held on with the expectation of getting their prices and eventually those who had to sell driving prices down.
Hi Leo and Mike,
Thanks for your comments. A couple of additional points:
Mike, I’m not sure people change their home purchase timing based on short-term interest rate fluctuations as per your point in #1.
While average 5 year mortgage rates did certainly decline overall from 1980 to 2010, they actually increased month-over-month almost half the time (in 169 of 365 months).
My overriding argument was that the data does not support the assertion that rate increases will automatically have an immediate and negative impact on house prices. I think if and when rates increase, it will be because the economy is strong and prospects are good, so I would respectfully disagree that if rates increase meaningfully that that will definitely hurt house prices. If incomes are higher and we have upward inflationary pressure combined with rising consumer confidence, these factors may well offset the negative impacts of increased borrowing costs (or at least mute them).
I agree with your point that today’s low rates have brought forward future demand. I just don’t think meaningfully higher rates are around the corner.
For the record, I think the this phenomenon can partly be explained by demographics. Boomers have bid up houses prices for decades so you could counter my theory by aruging that “a rising tide raises all boats”. But I still found it interesting that the data was so counter-intuitive to such a widely held belief.
Dave
Dave said, “Mike, I’m not sure people change their home purchase timing based on short-term interest rate fluctuations as per your point in #1. ”
What? Of course they change their timing, especially if first-time home buyers. I heard, “You’d better buy before the rates go up” over and over again. I think this is one of the biggest drivers (along with “they’re not making any more land” and “you’d better get in before you’re priced out of the market.”
If you want to move a herd, frighten them! Fear is a great motivator.
Factoring in inflation, wages did not increase. This was a problem for TPTB: how do we get these suckers buying homes when they can’t afford to? I know, we’ll keep interest rates artificially low for too long, enticing initially the speculators (the first ones to the Ponzi game), and then the herd will follow. We’ll give them a wage increase in the form of lower payments.
Not only did they pull forward future demand, but they pulled forward an artificial wage increase.
Psychologically speaking, when you take people who never dreamed they would get into the housing market (and should never have been there in the first place) and practically lay a house at their feet (with 0% down and over 40 years), they will jump at it.
I say the PRIMARY driver of the frenzy has been a fear of interest rates going up, driving people into the market, which then consequently drives the price up.
Add to the mix the ridiculous CMHC (which makes the Ponzi scheme a thing of beauty). The banks get to lend to people they shouldn’t be lending to and, if it all turns out badly and buyers declare bankruptcy, voila, the taxpayers who were prudent get to bail the banks out. Oh, the sweetness of it all. The bankers can’t lose.
Fear and greed – a dangerous mixture that brings down countries.
The FIRE industry produces nothing, absolutely nothing. It needs to be put out.
While I agree that the contribution to equity needs to be taken into account, in addition to free cash flow, there is a serious fallacy in this model. A property that cost $500K to generate $42K in rental revenue when the interest rates were 8.5% would cost a lot more in the present low-interest rate environment. Scenario 2 should consider mortgage payments based not on a $500K property value but a $900K or something similar. Then the difference in cumulative return on investments between scenarios 1 and 2 will not be as wide as this model portrays.
Hi Sashi,
The point of the post was to show that using Free Cash Flow to evaluate a rental property’s investment potential when rates are low does not give one a complete picture of its value. To illustrate, I showed that with rates at 8.5%, very little of each mortgage payment goes to principal, while at 3.7% the proportion more than doubles. While it’s reasonable to assume that when rates are higher a property will cost more, it doesn’t change the fundamental point (and keep in mind that rents would be higher as well).
Thanks for your email.
Dave
Great post David!
I’d like to add a few more pointers
Things you need first…
High tax bracket
Stable job
Disability coverage.. (coverage at work is too weak)
Life insurance…if you are going in debt…you need more
Able to max out on the TFSA every year!
What you want/should consider to buy…
Conservative investments… at least 30 to 40% in bonds!!
Taxes… pay little or no taxes untill you sell!
[…] (one-third of whom actually sign back the offer), or by pushing mortgage life insurance, which is the worst form of life insurance ever invented. I’m not surprised that TD is trying to maximize its profits, but I am surprised when customers […]
Hey David
I am glad that you picked up this and blogged about it. I noticed it in the paper last week. What a way to handcuff clients to the bank I hope other banks don’t follow suit.
Here’s the ultimate irony Chris. At the same time that TD is pushing borrowers to register 125% of their home’s current value in order to make future borrowing from TD cheaper and easier, they are quoted in today’s Globe & Mail expressing concern to the that Canadian personal debt levels are “excessive relative to what economic models would predict as appropriate”. Do they really think nobody notices the contradiction?
Here is the full article FYI: http://www.theglobeandmail.com/report-on-business/economy/excessive-personal-debt-a-concern/article1764981/
So true David… and yet despite this, Canadians love their banks and have blind trust in their bankers that they are serving their best interests. As a mortgage planner you understand the need to take a holistic view of mortgage financing to help your clients. Thanks for sharing the link…
Nothing new. Credit Unions in BC have been doing this for a long time. Don’t know about Ontario system, but collateral mortgages on real estate is a registrable charge at Land Title Office here in BC. It is not a chattel mortgage.
[…] While getting pre-approved may seem like a cursory exercise, if rates increase after the fact you may find yourself married to the lender who pre-approved you, regardless of its terms and conditions. What seems like a meaningless exercise, because it costs nothing and doesn’t involve a firm commitment on your part, can turn into a long-term financial relationship before you know it. As such, choosing where you apply for pre-approval is an important decision that should include a review of the lender’s contract terms and conditions, covering important details like conversion rates, prepayment privileges and penalties, registrations on title, etc. (For more information on this topic, see my post called “What’s In the Fine Print?”) […]
great post Dave…there should be transparency through the whole process.
This IRD is brutal! I went to my bank (TD)in September to get a quote for breaking my 5 year mortgage after a year and 1/2 and was quoted a penalty of $3300. Fair enough as I was fully aware of a penalty that was apparently supposed to be around 3 months interest. After putting my place on the market I double checked with the bank in November and the penalty was now $11,000!!!??? I was never told that the penalty could fluctuate (especially this much in les than 2 months)and I went to 2 different brokers at TD and neither of them could even explain how these numbers are justified or even work. I am just shocked and appalled at the lack of full exposure on behalf of TD and even their ignorance on their own policies. This type of penalty does need to be standardized because it makes it nearly impossible to set a selling price if the penalty can vary so much.
David,
Here is a story I got from the National Post:
http://opinion.financialpost.com/2010/11/24/three-in-ten-dont-have-life-insurance/
Jonathan Chevreau November 24, 2010 – 10:50 am
Read more: http://opinion.financialpost.com/2010/11/24/three-in-ten-dont-have-life-insurance/#ixzz16LtcM5N8
Three in ten Canadians lack life insurance, according to a TD Insurance poll released today. Not surprisingly, six in ten don’t have the more esoteric critical illness insurance.
Actually, it’s impressive that 70% DO have life insurance, considering there are so many single people who don’t really need it. Of the 31% who lack coverage, TD says 40% don’t think it’s necessary, 23% admit they “probably should” have it and 23% say they just can’t afford it. In addition, 33% worry they aren’t adequately protected by their insurance policies.
Brian
well written.
Great insight. A voice of calm and reason in a turbulent marketplace.
This is a tricky think for the government. Allow mortgages to be to risky and you risk a bubble that will one day crash. Tighten rules to much and you slow the economic growth to a crawl.
I hope they get this right.
Hi David,
Good post…but the government (PCs) got loose with credit (read 40 year am and low downpayment). Now that the debt is high, they have decided to take away the booze!
In the end, rather than going back to the old rules (sort of) why not stick to what works and have a better market for everyone? Now at some point (overdue) the market has to come down hard in the near future.
cheers.
Brian
ps. I can send the book out you in an pdf form some time next week. You will get some ideas on how to payoff mortgages etc. for those who want to be risk free and bypass the SM.
Nice post. It’s like getting a credit increase on your Visa. Some can manage it & well, some can’t. Unfortunately, most of these changes are geared towards the “One Bad Apple”. Cut to a 30 year amortization because some can’t handle credit. Forget the rest 🙁
http://www.notapennydown.com/blog
Hi Dave,
I”m an independent Mortgage Broker.
A client sent me the link to your blogs. You makes the “TD Collateral Mortgage” sound a very very bad thing.
To be fair, it benefits a lot of people from saving legal fees when refinancing with TD.
What incentive does TD have to give the best rates when you are renewing? Plenty! it cost them significantly more to get a new customer than retain one. they can offer better rates on retention.
the bottom line is: there are pros and cons about this. some will benefit from it, and some will be held back by it. People should really assess their own needs.
Liang
Can you offer some specific feedback please? It’s difficult for me to respond to your concerns when the comment is so general.
Dave
Great Blog. About time some one talk about terms longer than 5-years.
Hey Dave,
Hope things are good in your neck of the woods.
Thought I’d forward along this attachment:
http://www.canadianmortgagetrends.com/canadian_mortgage_trends/Article_Files/2011/5yr-vs-10yr.pdf
It compares a 4.79% 10yr fixed to a 3.79% 5yr fixed. (By the way, curious to know where you’re finding 4.79% on a 10-year fixed nowadays?)
The breakeven rate that I get is 6.37%. In other words, the 5yr rate would have to be higher than 6.37% in 60 months (i.e. over 2.58% higher than today) for a 10-year term to be cheaper than consecutive 5-year terms.
That said, this uses different assumptions than your calculations. Besides the slightly lower 5-year rate, it assumes clients will set their 5yr payments at the 10yr rate during their first term. That seems reasonable since the customer would pay a 10yr payment otherwise.
Long story short, a 6.37% 5yr rate implies a 2.58% jump in bond yields in 60 months (i.e. a 5.24% five-year gov’t yield). Anything’s possible but that’s a big move in a BoC-managed inflation environment with moderate-GDP growth. It’s also 16 bps above the 20-year average of the five-year yield (5.08%), which hasn’t been pierced in nine years.
That’s not to say it won’t happen. It’s just not a high probability in some folks’ opinions–prompting the argument that 1% is still a high premium to pay for 10yr rate insurance.
As a side note, in a 2009 study going back to 1967, 10-year terms have beat two consecutive 5-year terms only 9.6% of the time.
In any event, no one can foretell future rates so this just another perspective. I agree with you that there are cost-effective ways to both hedge a 10yr term and abort a 10yr term at month 61.
Cheers,
Rob
Hi Rob,
Thanks for your comment. I completely agree with your analysis.
While I think the ten year is a good fit for certain types of borrowers, I agree that it’s not the best option for borrowers who are planning to make significant prepayments on their mortgage.
After all, if you decide to pay a premium for the ten-year fixed rate, you’re buying rate insurance for the second five-year period of your term. Paying extra for that insurance and then immediately accelerating the reduction of your principal would lower the size the potential benefit you’d hope to receive five years hence. In effect, one strategy would be working against the other.
I think the ten year is a better fit for borrowers who want to pay at the scheduled rate and divert their excess cash to other investments. If they pay at the scheduled rate, they’ll break even at around a 2% increase in bond yields. For the camp who worries about all this money printing and thinks governments will try to inflate their way out of their debt crises, a 2% increase might not seem like such a reach.
I did simplify in my example though. If rates are 3.89% (5 yr.) vs. 4.79% (10 yr.), technically the breakeven wouldn’t be 5.69% because if you pay at the scheduled rate you would have a smaller balance at the start of the second five-year period, so the breakeven of 5.69% should actually be a little higher. (I figured a full explanation on this point would take me too far off topic so I decided to keep my numbers simple.)
Nice to have you on my blog. I certainly enjoy reading yours regularly.
Dave
Never mind today’s rates; what do you think rates will be when borrowers renew? Borrowers need to use a stress test to see how their monthly cash flow budgets will be affected when rates get back to normal when they renew. Yes, a stress test!
Hi Dave, I stumbled on this page while reading other articles on your blog. So did you finish this marathon? I am planning to run this fall, I’ve only done a couple of half marathons. 🙂
Hi Priyank,
I had a few setbacks (injuries) and have not yet run a full marathon. I ended up doing three half-marathons last year and I completed the Around the Bay Race in Hamilton (30k) a couple of weeks ago. I’ve signed up for the Mississauga full on May 15th, 2011. Injury allowing, I’ll be making my first attempt at the full very soon.
Good luck with your training. It sure is addictive once you catch the bug!
Dave
Hey Dave,
This is a great point you make: “…you could have avoided most of that (IRD) cost by simply choosing another lender offering the same interest rate.”
Had just a quick observation on this interest rate differential example from above: 6.4% – 1.6% = 4.8%
The Big 5 banks generally calculate the comparison rate based on the posted rate closest to the remaining term, minus the discount at origination.
Chartered bank 3-year posted rates have never been below 4% according to Bank of Canada data. Hence, that 1.6% figure may be low based on three years remaining.
As an example, 3-year posted is 4.55% today, which would make the comparison rate 4.55% – 1.42% = 3.13%. That changes the numbers a bit when compared to using a 1.6% comparison rate.
It’s also worth noting that banks generally use the contract rate for the current rate.
Regardless, your point stands that bank IRDs can be more brutal than many non-Big-5 lenders.
Cheers…
Rob
Hi Rob,
Thanks for your comment. I used a posted rate of 3.35% (which was the posted rate for one of the Big Five on April 4, 2011) for the mortgage with three years remaining in my chart and I have updated the example I made in the 5th paragraph to use that rate as well.
In my experience, the Big Five banks almost never use the contract rate when calculating mortgage penalties. In fact, in every case I can remember they used the posted rate (much to my clients chagrin). Maybe the Big Five bankers are a little more laid back on the west coast!
As you said, the bottom line is the Big Five charges exorbitant penalties on their fixed-rate mortgages and in my opinion, it’s outrageous that they don’t have to disclose this fact upfront. Changes to the disclosure rules are long overdue.
Dave
Dave
Hi Dave,
Now you’ve really tweaked my curious bone. 🙂
May I ask, which bank had 3.35% as their 3-year posted rate on April 4, 2011? With that info I can check into why the BoC 3-year posted rate data and our posted rate database doesn’t reflect that.
Regarding the “current rate,” I want to share this link in case it helps. TD has a useful page that outlines the IRD calculation used by them and some other big banks:
http://www.tdcanadatrust.com/mortgages/ird_calc.jsp
As for TD, they claim to use the current rate of the borrower’s actual mortgage (see “Step 1:” on that web page), instead of the posted rate. A few other big banks I called confirmed the same calculation.
If you know of specific Big 5 banks that use posted as their current rate, I’d love to know and learn something new…
Cheers,
Rob
Hi Rob,
As per your first question, I’d prefer to email you the name of the lender whose three-year posted rate I used for my analysis.
Thanks for sending me the TD penalty link – I applaud them for disclosing how their penalties are calculated. Do you know when they started providing this information and if it is retroactive for existing mortgage holders? (I ask because one of my clients has been trying for several months to get an explanation from TD of how his mortgage penalty was calculated and alas, try as he might, no one there will answer his very simple and pointed questions.)
One more comment on TD, since you brought them up. As luck would have it, I had a client in this morning who had a penalty quote from TD in hand. On a rate of 4.75% with a mortgage balance of $300,000 and 37 months remaining on his mortgage, the penalty quoted was a little under $17,000 (the quote was based on today’s rates). Using the standard non-bank lender penalty calculation, and using an average non-bank three-year rate of 3.85%, I get a penalty of $8,500. That means TD’s penalty is double what the non-bank lenders would likely charge, which is consistent with the overall premise in my post – namely that the Big Five’s fixed-rate mortgage penalties are substantially higher.
In answer to your question about which Big Five Banks use the posted rate, here is a quote from one of their Mortgage Disclosure Statements (which my client only received after her mortgage had funded, unfortunately):
The prepayment charge will be the higher of the following two amounts, each of which will be calculated by us using a method determined by us from time to time at our discretion:
• three months’ interest casts on the amount you are prepaying, calculated at your existing annual interest rate (plus any discount you received on your existing annual interest rate); or
• the interest rate differential amount
This lender then goes on to show an example that grosses up the client’s rate to the posted rate that was offered at the time of funding. (Notice also the “at our discretion” wording? Even when they are explaining how the penalty will be calculated, they are reserving their right to arbitrarily increase it if they wish.)
Rob, the bottom line is that it seems next to impossible to get a Big Five bank to show people the rates they used to calculate their penalty. To best estimate how they do this, I have taken the penalty quotes provided to my customers over a period of time and worked backwards to determine what rates were used. In my estimation, the Big Five are either using the posted rate, applying the posted rate discount to the contract rate, or both. For my money, if it looks like a posted rate and quacks like a posted rate, then I figure that one way or the other, they’re using a posted rate.
Best,
Dave
Isn’t this focus on IRD fighting the last war? Outrageous IRDs are an issue today because rates have dropped since today’s mortgage-breakers did their deals.
Deals being done today will likely not face IRD penalties when they’re broken 2-3 years from now, as interest rates won’t have fallen. Hopefully, they’ll have gone up, reflecting an economic turnaround. So today’s buyers should be looking for mortgages that are portable and assumable, no?
I can see where you’re coming from Ralph but actually, no. If a Big Five bank uses the borrower’s original discount to either articifically increase their original rate, or to artificially decrease their comparison rate (or both), it will mean that their penalties will still be based on IRD. In the meantime, non-Big Five lenders who don’t monkey with their rates will be using a penalty of three months’ interest, so the difference between the two penalty policies will never be more pronounced than in a slowly rising rate environment. See scenarios 3 and 4 in my charts for examples.
Thanks for your comment.
Dave
Many good points Dave. Variable rate mortgages are always a better choice from a long term interest cost point of view, especially when that cost is not tax deductible. However, most borrowers are more concerned wit their cash flow and their family budgets. My view is if the consumer has the risk tolerance, financial strength and income to weather increase in interest rates, he or she should take advantage of the low variable rates, but find a lender who will allow fixing payments. Fix the payments at a higher level than the minimum the lender allows. That creates predictable cash outlay and extra cushion in the event of rate increases. At the same time, that will help pay off the non-tax-deductible debt that much sooner.
Hi Dave,
Getting rid of debt is good, but is paying (extra) down the mortgage going to put one in a better place financially? If take that to the extreme you are better paying cash for the house and saving the interest cost! If real estate goes up that was a poor decision because you could have bought several houses and could have made more money. If real estate crashed (like the US) paying cash also hurt because that money is now worth less.
Should the money go somewhere else? Banks will tell you put the extra money in RRSPs and put the tax refund against the mortgage. Or pay extra on the mortgage depends on the day and the branch you talk to.
Both ideas are fine on paper and many years old. What it does not factor is inflation, taxes, risk management such as disability or premature death as well as lost opportunity costs.
Hi Dave,
I like the idea of setting up the payments at one’s MQR – sounds much wiser than the anniversary payment feature that I was planning for. RRSP/TFSA v/s additional mortgage payment is an age old question but so far I am leaning towards maximising the TFSA simply because the returns are higher (atleast for now).
thanks for the post!
Priyank
Hi Priyank,
That is an age old debate. On the one hand, paying off your mortgage gives you a guaranteed return on your money because you are saving interest cost, but investing can produce higher returns and help diversify your balance sheet.
As long as the extra money is saved/invested rather than spent, I think you’ll be in good shape.
Best,
Dave
Hi David,
Do you know how much the CMHC is holding in total mortgage insurance? As the CMHC is a Crown Corp, whatever the figure, it of course means that the Canadian taxpayer is on the hook for this upon default.
Thanks
Shawn
Hi Shawn,
In 2009, according to their annual report, CMHC had a total of $472.6 billion in insured mortgages outstanding. If you want more information, just Google “CHMC 2009 Annual Report” and go to page 93 (CMHC does not provide a link to the report).
Big numbers for sure.
Dave
Thanks Dave!
I love your articles as they are relevant and address people’s concerns. Keep up the great work!
Yvonne Brockman
Remax, Hallmark
The approach and analysis of fixed Vs variable rate were great!
Thanks
Prem
Thanks for the kind words Prem and Yvonne!
Dave
Dave. Great information regarding the CMB, benefits to consumers (liquidity and low rates) and interest (Demand) both domestically and from foreigners for our mortgage assets (with a government guarantee).
Thanks Mark.
Many high profile business leaders have signaled their support for clean energy including former Premiers Mike Harris and Erne Eves. (http://bit.ly/r0NUfZ)
And now, the Pembina Institute, an independent organization, has released a study which says the wind, solar and biogas power producers under Ontario’s feed-in tariff program are being blamed unfairly for rising power prices.
The alternatives are no cheaper. The FIT program would never add more than 1.5 per cent, or about $2 a month, to the typical consumer hydro bill, the study says.
Read it here: http://bit.ly/r0NUfZ
I have a mortgage insured with CMHC
Question If I sell and buy a different home and still require mortgage insurance is it transferable to the new home, and pay premiums on the difference, or is it strart from anew losing my premiums from my first home.
Hi Ben,
You can port your existing policy, but if you are increasing the loan-to-value on the new property, it cannot exceed 90%.
Also, if you are borrowing more money, CMHC will charge you a top-up premium on the additional amount.
Hope that helps.
Dave
Hey Dave…. i really like your website and your “borrower beware info”… very nice. The only comment that I’d make is that you are correct… many/most lenders DO add discounts back to a mortgage rate to calculate penalty — essentially charging the penalty based on the POSTED rate… but what they ALSO compare that to is the POSTED rate for todays remaining term. So they compare posted to posted. So if the bank was using the discounted rate and comparing it to todays discounted rate, wouldn’t that be the same difference. As long as they compare Posted to Posted, its fine..
Hi Corey,
Not quite. The gap between five year posted and discounted rates today is about 165 basis points and the gap between shorter-term fixed rates is much narrower. For example, two year posted rates are currently at 3.85% and discounted two year rates go for around 3.2 to 3.4%. So borrowers at the Big Five are getting 165 basis points added to their contract rate and as an offset, the banks are adding about 40 or 50 basis points to the comparison rate and calling it even because it’s “posted to posted”. I don’t know anyone who would call that a fair trade.
My main point in the post is that the Big Five Banks charge substantially higher penalties and that most customers aren’t aware of this when then sign their contract. I stand by that assertion.
Thanks for your email.
As always very informative;
Hey David,
I always enjoy my Monday read with you. Its a very unbiased approach and interesting as well.
I am constantly checking your site to determine how much a mortgage might cost a client, so its also kind of fun and a very useful tool.
In dealing with you, you bring trust and hardwork along with you. I very much appreciate that you are working hard on behalf of my clients and you even follow up with me too as well.
I can tell you like your job very much…
All the very best,
Jim
Thank you for your kinds words Jim.
It is a pleasure working with you as well!
Best,
Dave
Dave,
With the way the discounts on Variable’s have diminished and with the 4 year fixed rates near or below 3% could you do another fixed versus variable simulation?
With a 4 year fixed coming in around a quarter point less than the variable rates I’ve seen available, it seems to me that the 4 year fixed is definitely the way to go but I haven’t done or see the math to prove it
Hi Steve,
The gap between fixed and variable is definately shrinking, and while that makes a fixed-rate mortgage more compelling, we will only know in hindsight which was the better deal.
The benefits of going with a fixed rate are obvious but keep in mind that: a.) the reason fixed rates have dropped is that views on future inflation rates are being downgraded (which will also keep variable rates low) and b.) the variable rate can go down as well as up.
FYI – for comparison purposes, my best variable is at prime minus .50% (2.5%) vs. a four-year fixed rate of 2.99% and five-year fixed rate of 3.19%. As per the rate simulation, I am working on some different posts and won’t have time to run one for the next month or so, but if you want to call me I would be happy to talk numbers with you over the phone.
Best,
Dave
Hey Dave,
I tapped into some of the info on your site for new clients..thanks for the help!
Glad you found the info useful.
Come back any time!
🙂
I think that this article is a little biased considering it’s written by a mortgage planner who makes his living off of mortgages and that people should keep this in mind before taking anything it says too seriously.
Hi Amanda,
Can you be more specific? Where do you feel my comments were biased?
Dave
David:
Great post. One edit for you … you seem to have plugged the IRD formula in with the 3-month penalty info (as well as where it does belong). Regardless, thanks, I’m going to link to it from my pages.
Gord
Thanks for the catch Gord. I have made that change.
Dave
Great post. I was a little confused by the difference between the discounted and posted methods. I must have missed something becasue it seems like they should be the same. If the 2-year rate in the posted method is 3.29%, then wouldn’t the 2-year rate in the discounted method be 3.29%-1.95% = 1.34%? However, you used 1.60%. Are the 2-year rates used for these 2 methods different somehow?
Hi Michael,
Thanks for your email and happy to clarify.
In the discounted-rate example, the lender takes the borrower’s contract rate and substracts the difference between it and their current posted two-year rate (2.99%) minus the same discount that was given off of the original five-year rate (1.95%).
In the posted-rate example, the lender takes the difference between the original five-year posted rate and the current two-year posted rate.
These are subtle differences that depend on whether the lender’s calculate IRD using posted or discounted rates, but in both cases, the tweaks have the same overall effect, which is to aritifically inflate the size of the penalty charged.
Best,
Dave
Absoultely correct to be wary of the people who state that with rates so low, penalties aren’t a concern.
That’s what people heard whent hey were taking five-year fixeds at ~5% in 2007 or so, and what people heard when they were taking five-year fixeds at 3.8% in 2010 or so.
Anyone going for a 10-year mortgage should be very wary of IRD implications should they need to break their mortgage before t6he sixth year.
Great post!
Thank you for another well thought-out blog. “…..look back over twenty years, nominal GDP and house prices have both grown by an average of 4.7%.” I guess what you are saying is, possibly, the long term trend of housing prices in Canada closely mimics the growth in nominal GDP. I still think for the odd and peculiar local markets, a bubble is still not out of the question. For any statistical analysis, there are always events outside of the curve.
True, but if you enter a closed mortgage, sell your house and want to get a new mortgage, then you have to pay the ridiculous penalty.
It is not always the three months interest, sometimes it is some differential between the posted rate and what rate you have, that worked out to about 11,000$ for our mortgage!!! That would have eaten through all the privilege payments we made.
I’d rather get a variable rate, open mortgage and lock in when it’s clear that the rates are going to go up. I’m sure there’s a figure somewhere where if you plotted variable rate vs fixed rate over the past 25 years, the variable rate was always the best idea. However, the past 25 years were special years… probably unlikely to repeat as a mortgage rate trend.
Also, there’s no guarantee that the economy and the interest rates are going to go up. Europe is in shambles, China is a bubble, the US is a mess, Canada is dependent upon all three of these variables. When I get a new mortgage, it’s going to be OPEN and VARIABLE. Never again will I get a FIXED CLOSED… god how much money I’ve wasted.
Hi Eric,
Thanks for your comment. To clarify, a lender can only charge you a penalty of three-months’ interest after the fifth anniversary date of your mortgage (by law). Before that it’s IRD and you’re right, that penatly would be a killer (as I mentioned in the post).
I agree that rates may not go anywhere fast, but I think five years down the road is long time and it’s really that time frame that matters in comparing today’s 5 and 10 year rates.
Re: open vs. closed mortgages. Open variable-rate mortgages are almost never the way to go. Unless you pay out the mortgage very early in your term you’re better to go with a closed variable and eat the three month interest-rate pently when you eventually break it. Here is a post I wrote on the topic if you are interested: http://www.integratedmortgageplanners.com/blog/mortgage-product-commentary/open-vs-closed-mortgages-the-surprising-winner-is%e2%80%a6/
The rates a out of date but the basic principles are the same.
Best regards,
Dave
hi Dave
Thanks for doing this! I was going to craft a similar chart for my team but yours is superb and far more detailed in number of examples! Thanks for digging out the wording from the charge terms. The last example is nothing short of shocking that they would use the posted rate from 3 years ago. They would be putting that money back out there at then current rates, so that number is so irrelevant- no wonder clients are confused. Even those who deal with this daily have difficulty understanding some of this reasoning.
RBC did the same but offered a 1.78 discount at time of selling me the mortgage from an inflated 5 year posted rate on their website. I thought ‘okay’ since the rate matched competitors 5 years rates in the marketplace at that time. In the 2nd and 3rd year of my term I ask about penalty to break and move into a new mortgage. Penalty $18,000! Why. …………..They took this artificial discount they gave me and applied it to their IRD calculation!!!!!!. Bait and Switch….discount because we want your business in the beginning. Oh that discount sir…you need to give that back to us. Sales practices are borderline criminal. When I complained away up to their CEO my answer back from the legal representative did not address the question on ethics, disclosure at time of sale and shady sales practices their branch people are followling. Reminds me of the Ally Bank Commercial put instead they take take away your truck (discount) and punch you in the face financially when you want to move. 10% prepayment. Largest bank is the worst. Stay the hell away from the major banks I will never touch RBC or give them a dime of profit ever again
Having same issue with credit union – even though I’m offering to re-up for another 5 years. Very little being discounted.
Has this been tested in court (small claims perhaps)? I find it hard to believe that these practices are legal.
I’m no lawyer Mike but I think if it’s disclosed in the contract you originally signed then its enforceable. That’s why it’s so important to read the fine print!
I just found this article today (April 23/12) and the 10 yr rate is now as low as 3.79% IM REALLY considering this jump into the 10yr for security. Whats the thought on a 10 yr in todays market?
Hi Nigel,
I think the ten-year is a great option for a lot of borrowers. When the average five-year rate has been about 5% over the last decade and you can lock in for ten years at less than 4%, I think it’s a steal.
If you are interested, here is a more recent post I wrote that compares the five- and ten-year options.
Best regards,
Dave
An interesting thread…
Do people close houses faster based on speculation that an interest rate is going to go up? I don’t think so; would someone put off closing a house based on speculation that rates are going to go down? I think most would agree that this is unlikely, so why would the opposite be true. Short term Interest rate guessing is speculation at best and anyone that bought quickly in the past 10 years to avoid a micro rate hike that might happen next month is an idiot. Most home buyers are not idiots and would not rush into something as significant as a house purchase to avoid a micro interest rate hike that might or might not happen. Backwards evolution, you state that “I heard, “You’d better buy before the rates go up” over and over again. I think this is one of the biggest drivers (along with “they’re not making any more land” and “you’d better get in before you’re priced out of the market.”” What you are describing are sales tactics, not changing interest rates. Yes, sales tactics can drive sales and sometimes sales people use the threat of interest rate hikes as a tactic. What Dave’s post is about is wether or not house prices change in response to interest rate changes.
I agree that a huge rate hike would have a dramatic impact on affordability and if it happened in a short enough time period it might slightly deflate the housing market. What is more likely however is that the volume of sales will temporarily slow down as people ride out the bump. Most people would have no choice but to ride it out since many would be upside down in their mortgage and unable to sell. Interestingly, this highlights a key difference between US and Canadian mortgages that was at the heart of the US housing devaluation. In the US they have walk away mortgages, meaning that if you can’t make your payment you can drop your keys off at the bank and “walk away”. And thats what thousands of home owners did when they found that their houses were worth less than their mortgages. In Canada, if the bank can’t sell your house for enough to cover your mortgage you are responsible for the balance. It is interesting to note that US housing decline was completely independent of prime interest rates. In fact, american interest rates have only decreased since May of 2006.
Terrific article Dave! Thank you for the insightful comments on the broader markets.
Thanks Dave. Very informative.
Hi Dave,
Great read! Hard to find good info sometimes.
Hope you can help me with something:
My wife and I are planning to sell our apartment and our house and move closer to the city. Rather than purchase another home right away, we planned to sell both our properties now and rent for a little while and watch the market to see what it does.
Both of our currently owned properties are CMHC insured. My question is: will we have to pay a third CMHC premium on the next property we buy if both our current properties are sold first?
My understanding is that you can port CMHC insurance but can you hold on to it if for a time you own no property?
The next property we buy will be worth more than the 2 we own now. Can 2 premiums be ported into one mortgage? If not for the money we would potentially lose, it might be worth our while to hang on to one or both of them until we are ready to buy the next and transfer the insurance over.
Thanks in advance,
Mike.
Hi Mike,
Thanks for your email. CMHC will allow their insurance coverage to remain in force as long as one of your exisiting lenders lets you port their mortgage to the new property. In other words, your existing CMHC insurance policies must remain tied to the two mortgages you have now to remain valid.
I can’t envision any scenario where you would be able to port two separate mortgages to one new property (because one lender would have to agree to give up their first position and take a second position on title instead) so my advice is to try to port the larger of the two. Keep in mind that lenders will generally only allow a few months between your buy/sell dates so make sure you know how big your timing window really is.
Best regards,
Dave
Excellent summary and a very well written article. Thank you Dave
Thank you for your feedback Stephen.
Best regards,
Dave
Hi Dave,
Great article. I’m sure you’ve heard this before but I cant find an answer to this anywhere!! I purchased an investment condo in early 2010 for @ $400k (just put 5% down/30 yr) then sold it in late 2011…the bank seem to have deducted ALL the CMHC insurance amount out of the first years payments (ie all $10k or so)…so very little principal was paid down in yr 1/2. Any ideas why CMHC/the bank can do this? Given I repaid the full original principal shouldn’t one get a CMHC refund for the remaining 28 yrs of the policy? ie @$9k?
if not – why not and where does the money go?? 🙂
Cheers!
K.
Hi Kyle,
Happy to help.
CMHC charges a one-time upfront fee when you first get your mortgage so it doesn’t matter if you own the house for 2 years or 30 years, the fee is the same.
The longer you keep that insurance policy in place, the cheaper it gets – and doing that isn’t as hard as it might sound because you can port both your mortgage and your CMHC policy to a different property (subject to standard lender guidelines). You can also swtich lenders at renewal without voiding your coverage, so there are lots of times when you don’t have to just write-off the cost and start over.
As for where the moeny goes, it goes into a pool of capital that is used to reimburse lenders who experience losses on borrower defaults. Any excess profit (when times are good and defaults are low) is eventually remitted back into the public purse.
Best regards,
Dave
Hi Dave,
Doesn’t this mean that when you make the decision to borrow from your HELOC, you now have to make both mortgage payments and HELOC payments? Or does this depend on the institution?
Great post, by the way!
Thanks,
Kyle
HI Kyle,
As of November 1 (or sooner depending on each lender’s timetable for making this change), any combination mortgage + HELOC loan that is for more than 65% of a property’s value must be amortizing, and the HELOC portion of the loan can no longer be made automatically readvanceable. That said, existing loans that fall into this category will be grandfathered.
Best regards,
Dave
Dave,
I heard recently that if ou have a CMHC mortgage you can’t bridge-that they treat it as a new mortgage and charge fees? Is that correct?
Hi Anne,
That that is not the case.
In cases where you want to port your existing CMHC mortgage over to a new property, and where the new property must be purchased before the existing property is sold, CMHC will allow bridge financing as long as the gap is 90 days or less.
In such a case, no new insurance premium would be charged unless the mortgage amount was to increase as part of the port, and in that case, the additional premium would only be charged on the top-up amount.
Best regards,
Dave
Come one, it doesn’t take a rocket scientist to figure out that we are on a path of hurt. I believe disposable income to housing price ration is at 12 compared to when it was 9.7 during the 1980’s crash. It’s also supposedly reaching the level before the USA housing crash. How many times do you hear people say “how do they afford that house and the new car”? It’s cheap credit. We have a whole generation that do not realize that current interest rates are not sustainable and a fabrication of our governments to keep consumer spending up.
The reason short term rate increases have the opposite effect one would expect is that people get afraid and decide to go out a buy that new house to lock in on a rate before it goes too high. Sustained higher rates will cause mortgage payments to increase to the point where they are unaffordable and the bubble will burst.
Hi Dave,
I would like to know if one person can have their name on 2 cmhc insured mortgages, for instance, my wife and I are buying 2 separate houses and we both need a co-signer to qualify for the amounts. Her brother in law is co-signing for her and we were wondering if she can co-sign for me. Thanks.
Hi Matt,
CMHC will allow you to have more than one insured mortgage as long as you qualify.
Not sure how it will work in your case though because if your wife needs your brother-in-law as a co-signor on mortgage #1 then I don’t see how she could then add sufficent strength to mortgage #2.
Whoever is handling your files should be able to wade through the details with you though. Just be sure to ask lots of questions before you waive any financing conditions.
Dave
Hi Dave, I have currently had a home renovated and ready to sell, found a buyer for the home, but when the Mortgage Broker was trying to finalize things, she discovered that the property behind my house has not been disclosed as what they plan to use it for. Originally it was going to be an industrial area and a petition went around and this prevented anything further with the property behind. Now the buyer of my home is required to put 20% down. I have lost the sale of my home. Its because CHMC will not insure the home due to the property behind not being disclosed. I am very discouraged and confused. Now some how I need to re-mortgage the house and not sure I will even be able too. Any advice.
Hi Shaddes,
Are you remortgaging the house for yourself or trying to do so for the buyer?
Dave
Hi there,
Question is i am looking at selling my home and it will be early but i would like to pay the 3000 dollar penalty because it is worth it the way interest rates are, If i pay the one out and get a new one at a better rate for my new place am i going to be hit with cmhc charges on the new place again?
Hi Kris,
To be clear, it sounds like you want to break your existing mortgage, sell your existing property and then buy a new property?
If you sell your house and break your current mortgage then your mortgage insurance will be voided (they are tied together). The only way to avoid this would be to port your existing mortgage to the new property and then pay the penatly and switch to a new lender. That said, this would take some stick handling (I am assuming you may want change your mortgage balance when you buy the new property as well?) so you should seek out an experienced mortgage expert who can handle a deal with a lot of moving parts if you want to go that route.
Good luck!
Dave
Hi Dave great article my question if the CMHC pays the lender incase of a default then what does the lender to with the foreclosed property or with the money what lender takes over
Hi Joseph,
When a borrower defaults, in most provinces the lender sells the property under power of sale. If there is a shortfall, CMHC then remiburses the lender for the amount of lost mortgage principal (but the lender still bears legal and adminstrative costs).
Best regards,
Dave
good articule and view
My partner and I stumbled over here from a different web page and thought I might check
things out. I like what I see so i am just following you.
Look forward to looking into your web page again.
Thanks for your note Otilia.
Dave
Larock – you Rock!
I love reading these mortgage updates where you contextualize rates with present economic conditions.
Thanks!
Hi Dave – would it make sense at all to borrow money from say a loc and prepay your mortgage even though the interest rate on the loc is higher (3.5% loc vs. 2.1% mortgage).
Thanks,
Ron
Hi Ron,
Is this to convert your interest from non-deductible mortgage interest to deductible interest instead? If so, then the answe to your question depends in part on your marginal tax rate.
Can you give me more detail?
Best,
Dave
What happens when the US Government inflates its way out of debt? With high inflation can we expect to see rates reminiscent of the 80’s or something else?
I don’t see 80s style inflation in our future because the factors that will trigger higher inflation this time around are entirely different. That said, I remain convinced that the U.S. Federal Reserve will not stop QE until they have created significant inflation and when that time comes I think mortgage rates will be much higher than today. As to how much higher and when, that’s really anybody’s guess.
I actually have a tendency to go along with all the things
that has been put into writing inside “The Power of Prepayment | Dave The
Mortgage Planner” http://359igri.com . Thanks a lot for all the information.
Thanks,Edith
Good for you Edith. I’m sure your mortgage balance is better for it!
Dave
Hi Dave – thanks for all the info – you have touched on my questions, which I have been trying to get answered for quite a while, but not quite – its really very specific, let me use an example – I pay in full (say well over $10K) for 40 year amortized mortgage default insurance, presumably to cover default for that whole period – if I don’t sell the house or otherwise pay off the mortgage for 40 years I have paid in full in advance – I then sell the house in 2 years – to simplify this question I am not switching current mortgage to a mortgage with another lender, I am not porting the mortgage to another house with the same or different lender (at a higher value, which is required, and then there is a surcharge), and its also not portable if its not “owner-occupied”, I believe – I am selling a non-principal residence property – so to make the question obvious there may be 10 more mortgages (all default-insured with CMHC) in the next 20 years – each & everyone, including myself, pays for the full premium for the full amortization period and only is a risk for 2 years – I have paid for something for 40 years that was needed for 2 years – I’d like to get that premium back, in full, thanks – if and when I get another mortgage with 20% or less down, I’ll gladly pay a premium again
Hi Bryan,
Unless you port your existing mortgage over to a new property the high-ratio insurance policy you paid for will be cancelled. Those are simply the rules of the game.
Best,
Dave
Is the 20% on the purchase price only or the total amount of the mortgage taken out. For example, if I ask for more money than the purchase price to do renovations.
Hi Chris,
Your down payment is normally based on the purchase price, but if you are borrowing under a purchase + improvements program then the value of the renovations is added to the purchase price and your down payment is based on that combined amount.
Best regards,
Dave
Hi Dave,
We want to port our existing mortgage and purchase a new property (at a higher price). When we add to our existing mortgage, is it possible to borrow extra for renovations (i.e. can we apply for a purchase plus improvements loan when we are adding to an exisitng mortgage?) Thanks in advance.
Hi Tim,
Yes. If the lender approves your port (and your application for Purchase Plus Improvements), you can port your existing CMHC mortgage to a new property and add a CMHC Purchase Plus Improvements top-up to it. You would simply pay CMHC’s top-up premium on the additional amount you were borrowing.
Best regards,
Dave
Hi Dave, Question for you is if we Port our Mortgage and had CMHC No Down payment do we have to apply (Pay) another down payment when we Port our Mortgage to our new home? Also will we be able to Port our Mortgage if our credit history has changed?
Hi Maria,
The CMHC Down Payment program is no longer offered and as such, you will have to make a minimum down payment of 5% if you want to port this mortgage to a new property.
On a port you typically have to requalify (the same as you would if you were doing a new mortgage).
Best regards,
Dave
Hi there,
We bought are buying a house for the first time. It is in a rural setting on a pristine, spring fed lake that is crystal clear. We put down 20% to avoid the CMHC insurance, but found that we were asked to buy insurance anyway due to the fact that the house has no well. Where we live, it would be ridiculous to have a well when the lake has such pure water, and anyone would see that there is more value in having lake water rather than well water. What do you think?
~Bob
I just found out today that National Bank is also doing this, unbeknownst to us. Thankfully, we are saving enough by switching lenders to cover the fees but what an aggravation! and we were never told.
I agree with your assessment Dave. Long way to go before actual tightening by the fed.
Good article Dave.
I still can’t believe sometimes that our government continues to provide this kind of massive subsidy to mortgage lenders. Taxpayers should really be up in arms about it, but I guess we have such a high home ownership rate that people would probably be more upset with higher rates if this wasn’t going on.
It’s good to see them trying to ease it back, but I’d rather see the government out of it entirely. Too bad there will never be any accountability for letting these programs get so out of control in the first place.
Well, Dave Larock makes an important point in this article about that looming perception that an increase in interest rates is around the corner. Canada, due to its geographical and cultural affinity with the US, is one of those countries whose economies depend on a large extent on what is happening in US.
As Mr. Larock has pointed out in the article, the Fed has not been able to convince banks and other lending institutions to lend more to people. In such a scenario, there is a high likelihood that interest rates will remain at the current levels.
Hey Dave
Just lost my property in a POS proceeding due to mortgage default, however there was a $45k shortfall in the sale, in this case since originally the mortgage was insured by CMHC, is the short fall payable by CMHC?
Thanks
Shawn
Hi Shawn,
CMHC will reimburse the lender for the shortfall but they will still seek to recover that amount from you. In essense then, instead of owing the lender the extra $45k you will now owe that money to CMHC.
Best,
Dave
Hello Dave,
Thanks for your post! I have a rental property and was wondering if it is more financially beneficial to pay down my mortgage earlier by making one lump sum payment per year (up to 10% is not charged extra for my mortgage) or holding on to the mortgage longer and dong tax write-offs for the mortgage interest?
Thanks!
Alisa
Hi Alisa,
The answer to that question depends on a number of factors.
You need to compare the return you would otherwise earn on that lump-sum money if you didn’t pay down your mortgage plus the tax write-off you get by having a higher interest expense to the interest savings you would acheive by paying down your mortgage instead. My answer would also depend on how much equity you have already built up in your property as well.
Best regards,
Dave
Hi Dave, thanks very much, great article just the answers i was looking for in the comments regarding porting. keep up the good work!
Thanks for your note Scott. Much appreciated.
Dave
Hi Dave,
I own one property currently with high ratio insurance, I believe it is through Genworth. I would like to purchase a second property as an investment also with high ratio insurance. I was told I need 20% down for an investment property by the bank. However, I was also told if the second property is purchased for owner occupancy then I am allowed to purchase a second property with insurance provided that I move into it! Is this true? If so how many times can you do this.
I cannot find this info on the net anywhere,
Thanks,
Daniel
Hi Daniel,
You can buy a second property under the scenario you mention but it must be ownder-occupied can only be a single-unit property. Also, you can only do this once.
Best,
Dave
thanks for the commentary. for more info on the lack of traction coming out of QE, see Richard Koo’s work on balance sheet recessions. monetary policy has negligible impact in such deleveraging processes.
i agree that fixed rates will spike sharply (esp considering less liquidity now in funding markets given recent policy moves) and that variable rates are speculators, prone to any market catalyst.
in turn, makes me wonder why canadians are not more worried about housing affordability/debt overhang.
Hi Mick,
My guess is that many people think that higher mortgage rates are still a distant threat. Thanks for the Richard Koo recommendation. I will check him out.
Dave
Thank you… this reasonably-founded KISS advice helps makes sense of this challenge
I enjoyed reading your article and agree with it for the most part, with one exception. When you sign for a variable rate mortgage for a certain term, the payment is set at that time and it will not change over the length of the term. It is a common misconception to think that the payment will be changing as soon as the rate changes. If prime rate goes up or down, the amount that goes towards interest will go up or down, respectively. The required payment will then be re-evaluated at the time of renewal keeping the leftover amortization in mind. At that point, the payment may be increased (or decreased) in order for the client to be done paying their mortgage within the prescribed amortization.
So, according to your example, the mortgagee would have to increase their payment so that the principle part of the payment remained the same if prime went up.
I do wholeheartedly agree about choosing the variable rate mortgage and then increasing your payment to that of a fixed-rate term instead. That is a great way to go!
Hi Magda,
Are you by chance confusing US and Canadian policies? In Canada the vast majority of lenders increase variable-rate payments when the prime rate rises.
Best regards,
Dave
Dave, I’ve been reading your posts for several months now and have really enjoyed them. Your advice is both practical and easy to understand. The periodic comparisons between fixed and variable rate mortgages have been valuable, and supported me to stick with variable rate when I renewed several months ago. Keep up the great work!
Thanks for the feedback Jeremy!
Hi Dave,
No, I am not confusing US and Canadian policies and am well-versed in Canadian rules. Here is a quote straight from a Canadian bank’s website:
“With an RBC Royal Bank Variable Rate Mortgage, your payment amount stays fixed for the term; however, the interest rate will fluctuate with any changes in our prime interest rate.”
I did think your article is excellent though and it did convince me further to renew into a variable rate mortgage, even in our current low-interest environment. A well-written piece. Thanks for that!
Thanks for writing this article. I will be renewing my mortgage in January and I have received conflicting advice on whether to go with a fixed or variable rate mortgage. Have you considered writing an article on the pros/cons of going with a variable rate mortgage shorter than five years? There are some attractive rates in a three year variable right now. Would that not allow a home owner who is buying a new house or renewing right now to take advantage of the current low rates and then renew at a fixed rate before they start to climb exponentially?
@Magda, perhaps RBC does this but this is yet another reason not to go with them for variable-rate. Why would anyone want to get into the habit of one payment while rates go up? I dont know of any other lenders that change the interest/principal breakdown – and I’d bet that the content on the website is misunderstood. I’d ask an RBC rep before making such claims.
@Mike – You can fix a 3- or 5-year term anytime so I’m not sure why you’d consider a 3-year unless the 3-year rate was that much better. Yes a 3-year gives you a fully open option sooner so perhaps that’s another reason. I don’t see there to be a big difference between 3- and 5-year variable terms at this time.
If rates are going up, and with Fed tapering the QE, the long term mortgage rates rise, then the IRD penalty is negative, and the penalty reverts to the 3 months interest calculation even if you are in the first 5 years of a 10 year fixed mortgage.
Hi Colin,
When you break a ten-year mortgage, the IRD penalty is based on a comparison between the time remaining on your mortgage and the lender’s term that most closely matches that remaining time.
For example, if you have seven years left on your ten-year mortgage, then your ten-year contract rate will be compared to the lender’s current seven-year rate.
Since rates are typcially higher for longer terms, your ten-year rate would have to be lower than the lender’s current seven-year rate before a 3 months’ interest penalty would be greater than IRD, as you describe.
Also, since all of the major banks all use their posted rates to calculate their penalties, those lenders would use the ten-year posted rate that was offered when you got your original mortgage instead of the contract rate. This means that rates would have to be much, much higher still before a 3 months’ interest penatly would be greater than IRD.
Best,
Dave
Thank you for the thoughtful musings David. It added colour to a few of my own thoughts on the matter.
Dave,
So will it generally become harder to finance rental properties ( esp non- legal ones) as of May 1, 2014.
i.e should we be nudging potential investors to step up sooner?
Thanks..
anne
Hi Anne,
It will be harder in the sense that it will be more expensive (because the mortgage-default fees will be higher). If you have potential investors looking to buy, they should certainly be made aware of the May 1 deadline for new applications.
Best,
Dave
Thanks you for this information. I am about to buy my first home and your comments were invaluable!
Thanks for taking the time to provide feedback Sydney.
Best,
Dave
Dave, I was hoping you would respond to the BMO report, thanks for coming through with a quick response and even quicker swordwork.
Glad you enjoyed the post Jeremy. Thanks for taking the time to comment.
Best,
Dave
Good analysis. I own stock in BMO. That being said, I love it when the vested interests of the big 5 are challenged and refuted in a point by point rational manner. m
Hi Dave, great post. I would say though, that, arguing about the (in)ability to “make a compelling case” for going fixed is akin to saying I will not buy life insurance because I am a very careful driver, rarely drive at night, and I eat well and exercise. It is the “unknown unknowns” as well as the known factors that prompt people to hedge risks, not just those things that can be put forth as plausible,predictable future scenarios. The price to pay to insure one’s mortgage against the proverbial unseen bus that may be round the next bend is low right now, at under 75bps. For those who will not break their mortgage in the next 5 years a 3.09% fixed rate is as good a sleep aid as I can imagine. Cheers, David
Another great analysis. Week in and week out, you are providing a fine service to your fellow Canadians. Thank you Dave!
Thanks for your feedback James.
Best regards,
Dave
Just would like clarification on your response Dave if CMHC pays the lender the shortfall, but CMHS will come after your for the amount that they paid to the lender, what is the purpose of paying CMHS premium? Your no further a head gosh for bid if you land on hard times and you lose your home.
Hi Tanya,
CMHC covers a lender against loss in cases where they have to seize and sell a property for less than the mortgage amount they have registered against it. Thus, high-ratio insurance covers the lender, not the borrower (and CMHC regualrly pursues borrowers to recover any shortfall).
Borrowers can obtain mortgage insurance that covers them in cases of illness, accident or death, but this insurance is entirely seperate from the high-ratio default insurance that is provided by CMHC and its competitors.
In summary, borrowers pay the cost, but the insurance protects the lender.
Best,
Dave
Loved your weekly posts while shopping for a mortgage, loving them now to keep in touch with the way the winds are blowing. Keep them up!
Thanks for your note Graham.
Best,
Dave
It sounds like a scam. For most of the rest of us, when we require financial protection we are the ones that pay for the insurance ourselves. But for some reason, these institutions feel like they can pass the buck to the poor guy who is already trying to just make ends meet, and now they have to pay the insurance rates for the rich banks in order to get a loan from them. And as an ultimate kick in the groin…the insurance that your paying for only protects the banks and does nothing but allows the bank a collective sigh of relief when lending you the money. So as long as the rich stay rich…all is well!
Hi Tom,
I would respectfully disagree with your view. Without high-ratio mortgage insurance borrowers who are putting down less than 20% would have to pay rates that would be a multiple of those that are widely available today. High-ratio insurance is effectively a government-backed subsidy that gives mortgage borrowers with small down payments access to ultra-low mortgage rates. For my money, it is tax payers who don’t own homes who have the real beef because they are effectively backing these loans with their future tax payments and they get nothing in the bargain!
Best,
Dave
Dave, you ROCK! Thanks very much!
Dave,
We are purchasing a new home after selling our place that we’ve been in for just under 6 years. We needed to pay the CMHC fee the first time around and will be porting and increasing our mortgage to the new home. Our new purchase price and down payment will be in the 20% range and under the new rules it says we will need to pay the CMHC again. Can you clarify?
Hi Justin,
If you are putting down 20% or more on the purchase of your new home a high-ratio insurance fee should not be required.
If you want to contact me and provide more information I can help you evaluate your situation in detail.
Best,
Dave
After purchasing my first house, I started getting these mailers where they bragged about how one can reduce the total payment amount over the life of a mortgage. I knew it sounded fishy and now thanks to your crisp explanation I can laugh about it now. May be I should contact these phony companies and explain them this ans ask how is it helping. Thanks for the insight into this.
It’s funny how everyone thinks that just because the prices have gone through the roof they have more asset, I wouldn’t consider your primary residence an asset. only the government is making more money on your increased property tax. The only way you would make money is to sell your place let’s say in Toronto and you move far far away to a small village 🙂
Hi Dave,
Your blog is an absolute gold mine. I just became a first time home owner and have gleaned a ton of valuabel insight from your writings. Thank-you for sharing your thoughts and knowledge.
Brian
My pleasure Brian. Thanks for taking the time to provide feedback.
Best,
Dave
Just wondering, say house prices drop by 20%. If you have a CMHC insured mortgage with a company like Genworth, and your house goes “underwater”, what happens? Genworth does not suffer because CMHC pays the mortgage out, so they get their investment back and likely their business stays solvent but maybe not as profitable. So, who suffers other than the defaulted home owner once CMHC decides to try to get their money back?
Mike
Hi Mike,
If house prices drop it has no impact on the borrower’s existing mortgage as long as he/she continues to pay as agreed. If the borrower defaults and the house is sold for less then the mortgage amount, then the insurer (CMHC, Genworth or Canada Guaranty) writes a cheque to make the lender whole and then pursues the borrower for the amount of the loss.
In terms of who suffers, it is primarily the borrower, but to be fair, in this case they will have failed to meet their obligation and will have thus defaulted on the terms of their loan agreement.
FYI – CMHC and Genworth are both insurers and they compete against each other, so there is no scenario where Genworth would have a claim that would be paid out by CMHC.
Best,
Dave
This is a fantastic article. i have been looking for CRA ruling. I was never sure of the scope of investments such as bonds and stocks.
I was quoted a $12000 penalty from scotia bank… sold my house two months later and the rate ballooned to $16500. I was told that the policies had changed recently.
Shouldn’t the penalty go lower overtime?
Hi Manny,
A fixed-rate mortgage penalty is a function of both the time remaining on your mortgage and changes in interest rates. In your case, rates must have fallen between the time you were quoted the first penalty of $12,000 and the second penalty of $16,500.
In future, if you secure a mortgage through a non Big-Five lender your penalty will typically be much, much smaller (under almost any realistic scenario).
Best,
Dave
Some great points here Dave, very well written. I agree that the small premium for current fixed mortgage rates certainly make them very attractive vs the variable alternative. Great way to take the uncertainty of a mortgage rate increase over the term out of the equation for many clients.
The only thing I’d point out as a big disadvantage to the fixed rate, is the much higher penalties involved with breaking the mortgage, compared to the variable option (especially when clients are making changes to their mortgage on average every 3 yrs).
Great work!
Thanks for your comment Hugo.
I agree that the fixed-rate mortgage penatlies can come with much higher penalties, especially those offered by the Big Six banks, which I write about here. In this post, when I wrote “fixed rates are a better option than five-year variable rates for most borrowers” I used “most” instead of “all” in large part because there are times when avoiding an interest-rate differential penalty is high on a borrower’s priority list, and in those cases, I would still recommend variable-rate options.
Best regards,
Dave
Dave, I agree if you are wanting to lock in for 5 years, but given that trying to predict interest rates moves really is a mugs game (look at this year, for instance), and given that provided you have some buffer with cash flow, and historically it has been better to go with 6 month terms, wouldn’t you agree that 6 month terms are better than 5 years terms?
Hi Grant,
I don’t agree that 6 months terms are better than 5-year terms in the current environment for most borrowers, for the reasons outlined in this post. My view is not based on a prediction of where rates may be headed, but rather on the belief that the small premium you pay for the certainty of knowing what your rate will be for the next five years is worth paying at present.
My two cents.
Dave
I have been hearing that fixed is better than variable since 2010 when I renewed my mortgage, yet I took variable, and it has served me in good stead.
However since wolf has been cried enough times- perhaps this time the wolf will appear and rates will rise.
There is emphasis on creating inflation and the govts may do just that in USA and Canada. But there are many other factors to take into play.
Qui sait?
I have heard that CHMC is now only allowing insurance on one property. I have a client who has a non CHMC mortgage on one property but wants to purchase a second home. Would they be able to qualify for 5% down on the second property?
Thanks in advance for your help.
Hi Kent,
While it is true that borrowers can only have one CMHC-insured property at a time, Genworth will still allow borrowers to have more than one insured property, so there are options available to your client.
Best,
Dave
enjoy your articles. what do you think about a ten year fixed mortgage taken out in 2013 at 3.79 per cent? now that 5 year fixed can be had for 2.79. Do you think the ten year has a good chance of outperforming or breaking even with a 5-year or even a variable at the enf of 10 years?
Hi Jejdefreitas,
I think it’s too soon to tell but if your ten-year fixed rate is with a major bank then the penalty to break will be astronomical until the end of your fifth year. If that is the case, you should probably sit tight at least until then.
Best,
Dave
This is a common product among the big 5 banks. Any bank you go to either have the option of register the mortgage for a higher charge, or in some other cases, registering a mortgage/line of credit product together (for up to 100%) that is not transferrable either. I find it interesting that you target one bank instead of doing more research. The bottom line is, the customer has choices and they can discuss with their financial representative and their lawyer when choosing their lender for their mortgage.
Hi Jay,
There were several reasons why I singled out TD in this post:
1. While collateral charges are common among the Big Five Banks, they are typically used in cases where borrowers opt for a mortgage that includes a home-equity line-of-credit (HELOC). TD was the first lender in Canada to register all of its fixed-rate mortgages as collateral charges, even in cases where a HELOC was not included as part of their loan.
2. TD made no public announcement of any consequence to inform borrowers of this material change, and the Bank was deservedly criticized for not adequately educating its customers about the implications of this new policy (this post was part of that barrage). In spite of this, the Bank did not appear to make any real effort to improve its communication to customers at the ground level, to the point where the federal government is now introducing special legislation that is designed to force it to do so. In short, I felt compelled to fairly and properly explain the impact of collateral charges to Canadians when TD would not.
3. When TD promoted the option to register a mortgage charge for up to 125% of the value of a borrower’s property, the Bank pitched this feature as a way to make future borrowing easier and more flexible. Once again, TD made no meaningful effort to inform borrowers that engaging in this practice would effectively eliminate all other borrowing alternatives for them for the life of their mortgage contract (based on feedback from my clients and on TD’s own communications). I felt that this was a critical detail that was not being adequately disclosed to borrowers, and that’s why I wrote about it in this post. I would add that I have since encountered more than a few TD clients who were shocked and dismayed to find their hands completely tied when TD would not approve their request for additional mortgage financing.
You write that “the customer has choices and they can discuss with their financial representative and their lawyer when choosing their lender for their mortgage” and my post was written to inform that very discussion.
Lastly Jay, I note that you posted your comment from an IP address at TD bank. If you are an employee of the bank I would encourage you to raise these issues with senior management in an effort to better inform your customers.
Thanks for your comment.
Dave
Dave, can I have the cmhc insurance payment for the duration of the mortgage ex:30 yrs.
Thank you, AL
Hi Al,
Yes. You can roll the high-ratio insurance fee into the mortgage and pay it off over the life of your amortization period.
Best,
Dave
Hi David,
My name is Kieran Drea I am a British National living and working in Tokyo, Japan for the last 10 years.
I work for an Global Asset Management company that is relocating me to Philadelphia next year.
Do you know if the USA has such an excellent system for new immigrants to apply for mortgages? We have enough saved for a 40% deposit.
Kind regards,
Kieran
Hi Kieran,
I am not familiar with the US system for new immigrants. That said, with such a large down payment and an overseas job transfer I think you should have plenty of options available to you.
Sorry I can’t be of more help to you on that one.
Best,
Dave
Thanks for this info. I have a question. If I borrow money from my home equity line of credit (HELOC) and invest it in MUTUAL FUNDS (as opposed to cashflow-generating investments), would the HELOC interest payments be tax deductible?
Hi Moncia,
In theory mutual funds should be eligible but it comes down to their specific characteristics (for example, do they pay dividends or do they at least have the realistic prospect of paying dividends?)
The best way to be sure is to ask your financial advisor or your accountant.
Best,
Dave
Hi Dave ,I have a MTG. on one property without CMHC-INSURED but I’m in the process of getting a new MORTGAGE for a new property can I transfer the old MTG into the new one with CMHC-INSURED with adequate DP.
what would be the NO reason if any.
Thank you for your help.
Al
What is the smallest mortgage amount that can be insured. I’m thinking small home on small lot ….
This is a very important column for anyone considering a mortgage refinance especially cashout mortgage refinance.
Hi Dave.
My question is, I’m fed up with my bank, they arnt on my team, so I approached a different bank. I only have 120k remaining on my mortgage, and wanna consolidate my loans and line of creadits, jumping up to 185k roughly. I paid 175k for the property 10 years ago. So we ha the property re appraised lasts week, and it came in at 270k I’m taking the new loan out over 15 years and keeping my mortgage payment the same…. So I won’t have other loan payments and line of credit payments….. Cutting my monthly payments in half…. Just extending my mortgage by 5more years(15 years left)
My question is, the bank has me going through cmhc for this new loan…… Is this nessessary? When can cmhc be whipped off my mortgage?
Thanks for your time
Travis
Hi Travis,
As long as your loan-to-value on the new loan is less than 80%, which it has to be in order to refinance your mortgage, the new bank should not be requiring you to go through CMHC. They may prefer that you bear this additional cost (on the new money being advanced) because it lowers their potential risk, but to be clear, this is not a requirement.
If that is what you are being told then unfortunately you are being misled.
If you are prepared to switch to a different lender then feel free to contact me. I am confident that I can find one that would not include this “requirement”.
Best,
Dave
If the HELOC is used to invest in real estate in Toronto, more specifically condos, will this be applied to tax-deductible?
Thanks!
Hi Daniel,
If the HELOC funds are used to purchase an investment property then the interest cost would be deductible against the rental income you receive for that same property.
Dave
Hey great article.
question for you, a little off topic.
Back in January 2010 I went variable at 2.25 %.
Every two months I received a letter from the bank my rate will be increasing another .25%. till it hit 3% in 6 months time and sat 4.5 years at 3%.
I complained to the bank as the guy gave me the run around. A year ago, but recently now I questioned it again and this time I was told that’s not right. It should of stayed at 2.25 as it has not increased yet someone at the bank was increasing mine to 3% .
they are looking into it now…
Heard of anything like that or why a bank would do this?
Hi Steve,
I have never heard of this. How unfortunate for you! I have to ask … who was the lender?
Best,
Dave
Thanks. Enjoyed the article. Re: your last sentence: “It will be important to stay tuned, however, because a major cirisis of any kind could change that situation quickly.” What kind of crisis do you think would result in rates going up? Thanks.
Hi Alex,
That’s a tough question to answer because it comes down to a matter of degrees. If the euro-zone begins to dismantle (the dreaded ‘Grexit’) or Japan defaults on some of its debt, then we may well see a flight to safety which would drive up demand for safe-haven assets like Governement of Canada bond yields – and this would push mortgage rates lower.
Conversely, if either of those same events caused investors to reject bonds as an asset class altoghether, then bond yields everywhere would have to rise until sufficient demand was restored. In other words, its not the type to crisis that matters so much as the severity of it and the market’s reaction to it.
Thanks for your email,
Dave
Hi Dave,
In November 2012, I purchased my current house for 480K, and put down 15%. I paid a 5.6K CMHC premium (it was a port increase, so I payed 4.0% on the difference where my previous mortgage was about 265K). I am now in the process of porting my mortgage to a cheaper house at 292K, and only putting down 5%. My mortgage company has come back and said that CMHC is asking for the full 8.7K premium on the new house, giving me no credit for the 5.6K premium I’ve already paid on my current mortgage. I spoke to my mortgage company and I asked them what formula CMHC uses to determine whether or not a previously paid CMHC premium is portable to a new house and they really couldn’t give me an answer. I found this CMHC web page but it is rather cryptic to me.
Hi Grant,
For a specific case such as yours I suggest that you contact CMHC and put the question to them directly.
Best,
Dave
Hi,
Do you need to still come up with money to cover the closing costs namely the lawyer fee and land transfer tax on your purchase or, can the bridge loan cover this as well?
Thanks.
Hi Jessica,
Many lenders will allow you to add the closing costs to the bridge loan as long as you can confirm that you have enough equity in your existing property to repay the additional amount once that sale is completed.
Best,
Dave
Hi Dave,
Really enjoyed your article. I’m trying to decide whether to claim the interest on a rental property I own and had a question about tax implications when selling and investment property:
If I was using one of the tax-deductible mortgage interest strategies that you mentioned, on a property that I purchased for 100K, and if I assume that the property value does not increase over time for this example, what capital gains tax might I have to pay when I sold the property for 100K? Would I be taxed on 100K or $0, or some other amount related to how much tax-deductible interest I claimed over the years?
Thanks,
Joe
Hi Joe,
My read of the situation you outline is that you would pay capital gains on any amount over and above the original purchase price minus any depreciation that you claimed on your taxes in the interim. Thus, the base number would be much closer to $100k than $0.
Best,
Dave
Hi Dave.
Thanks for peaking my interest in this subject, pun unintended.
How about this situation. I have a home that I own with no mortgage. I purchased the house next door with a mortgage and will be renting out my mortgage free home while living in the new mortgaged home. Am I able to deduct the interest cost against the rental income?
Hi Dan,
If you used the mortgage proceeds to purchase the home you will be using as your principal residence then the mortgage interest would not be tax deductible.
It is the use of the funds that matters, not the specific asset that is used as collateral to secure those funds.
Best,
Dave
I have mortage on 2 properties. One Principal house and another rental/investment property.
If I take equity loan from my investment property to pay off my principal house mortage. Would I get tax benefit on the interest I pay for equity loan?
Hi Nidhi,
I do not believe that CRA would allow you to deduct the mortgage-interest uexpense nder the scenario you outline because these funds would be put toward your principal residence, thus making them ineligible.
Best,
Dave
I have a mortgage renewal approaching and was happy to come across your article. It gave me something to think about, and will probably help me to save some money.
Thanks for your note Jim. Glad you found value in this post.
Best,
Dave
Dave,
Thanks for the insight. I am looking to keep my existing condo and rent it out. However, when I run the numbers I will be in a negative monthly cash flow of give or take $100. What is appealing to me is the building of the equity as interest rates are low right now at 2.15%. Do you think this is still a worthy investment? I have 30% equity in the condo based on current market value. And would refinance at 80% of current market value taking leaving 20% equity.
Thanks
Hi Jason,
If you are currently in a slightly negative cash flow position and you refinance from 30% equity down to 20% equity then how much will you need to contribute every month? Taking on a small amount of negative cash flow can be justified in some circumstances but if I am reading your question right, once you refinance your current mortgage you would be in a significant cash-flow deficit each month. If that is the case then I would advise against the approach you are contemplating.
Best,
Dave
Hi Dave,
Great article! I have a large line of credit available on my principal residence. If I use this LOC to buy a rental condo, would the LOC interest be tax deductible? I will be able to produce proof of rental income.
I believe that you covered this under scenario #1 but just wanted to be sure.
Best regards,
Luke
Hi Luke,
According to my understanding of how the rules work, if you use the LOC on your principal residense to purchase a rental property, then then the interest cost on those funds should be deductibile against the rental income you receive.
Best,
Dave
Thank you for taking the time to inform folks. As we are needing to renew, however are wanting to sell soon, our bank suggested the variable closed. Skeptical until I read this article with the excellent examples. Cheers!
Hi Dave – We are about to refinance one of our rental properties. Is it advisable to put the term back to 30 years, since we will not be selling it any time soon? It’s renewing at a 25 year term. If we do this it would obviously lower the monthly payment a bit.
Also, we are thinking we should take a 5 year fixed even though the rate is about 0.5% more than for a 5 year variable – we never know how much we should gamble on interest rates. Do you have any thoughts on this?
Hi Valerie,
I like the idea of going with the longest amortization period that the lender will give you because that lowers your minimum contractual payment, and you can always use your prepayment allowance to pay off your mortgage more quickly.
The catch in your case is whether you are switching lenders, because you can move your mortgage at basically no cost if you don’t change your amortization period, whereas if you do, you would normally incur legal costs of about $1000. If that is the case then I would think long and hard before spending that extra money to be sure that you really value that extra five years of amortization.
In terms of the fixed/variable question, investors often like to have cost certainty when matching rental income with expenses, so there is a case to be made for going fixed, but without knowing more about your specific circumstances I can’t definitively say which option I would recommend.
Best,
Dave
Hi Dave,
Thanks for your article. I have a mortgage on my principal home. I am planning to rent my principal home and rent another house. So I will be receiving monthly income from my principal home but also paying for my rental place. Is the principal home interest tax deductible even thought I pay rent?
Hi Diana,
Once you turn your principal residence into a rental property, my read of rules would say that you can then deduct the interest cost on the mortgage you have on that property against the rental income you receive thereafter.
Best,
Dave
Thanks for your prospective, Dave.
It does makes sense to pay down a mortgage faster if the property is your primary residence. But what’s if it’s a rental condo unit?
Thanks,
Alexander
P.S. I noticed you’re a board member of the Moore Park Residents Association.
I used to play tennis at Moore Park tennis club 🙂
Hi Alexander,
Paying down your mortgage on a rental unit is a more subjective call than paying down the mortgage on your principal residence because the interest cost on the rental-property mortgage can be deducted against your rental income.
While paying off debt is never a bad thing, deciding whether to pay extra on a rental property mortgage is a function of the rent you receive, the property costs (taxes, mortgage etc.), your personal marginal tax rate and the after-tax return you could earn on that money if you didn’t use it to pay down the mortgage.
I suggest that you compare those numbers as away to help inform your decision.
Best regards,
Dave
Does CMHC apply on renewing a mortgage? I took it when purchased my first home and wondering if I will continue to have to pay CMHC once it is renewed. Thank you for your guidance.
Hi Ro,
The CMHC fee is a one-shot deal as long as you aren’t adding to your mortgage at renewal, even if you decide to switch lenders.
Best,
Dave
Where is the government on this, we were told 22,000. How is this allowed, it’s like forcing someone to do business with criminals. Have the banks not taken enough….the government needs to step in. We should be complaining to our mlas and they should be checking into how something like this is allowed.
I agree Cindy. The Big Five make about one third of their total mortgage profits from these outrageous penalties so this is big business for them. The government has talked about forcing more fair disclosure but most of that push came from Jim Flaherty and since he died it seems that all of that momentum has been lost.
Dave
Thanks for the cash flow models showing the impact of a lower interest rate and its impact on your initial investments roi. In both cases, however, the rental income does not cover the costs of the mortgage, maintenance etc. Are these cases really economically interesting when the owner will need to inject between 5 and 25k per year to cover the shortfall in rental revenue? How should this be taken into consideration when evaluating the real roi of your overall initial investment plus annual costs? Is there a better metric that should be used?
Hi Colin,
To clarify, in the examples given the borrower would have to inject about $23k/yr if rates were 8.5%, as compared to about $6k/yr if rates were 3.7%.
That’s quite a difference, and in my opinion, while having to kick in about $23k would normally not make sense from an investment standpoint, kicking in $6k, especially if you adjust the ROI to include the paid in equity, would appear to me to be more “economically interesting”.
Best,
Dave
Thanks a lot ..now with my renewal close at hand I can rest easy with the decision making process in which direction to go for the next 5years
Thanks Dave. What if I get a mortgage on the mortgage free house and use that to pay off the new principle residence?
Hi Dan,
The test is what you use the funds for. If you use them to purchase a principal residence then the mortgage interest would not be tax deductible.
Best,
Dave
TD penalized 1600.00 for breaking 2 and half months breaking the contract,
and no way ready to negotiable or absorb
have too many Policies in place !!!
not going back to TD !
Thanks Dave. Once the funds are used to pay for the principle residence the mortgage is now on the rental property. So for the first year the interest won’t be deductible but after that it would be since it would be used to keep the rental only. Right?
Hi Dan,
That is my understanding.
Best,
Dave
Thanks Dave.
I am having the same issue with Scotiabank. I am selling my house but will stay as a tenant. This is to allow me to retire in 2016. The buyer is willing to continue with Scotiabank and they would not be loosing any money. They refused my request and the buyer’s request because they know all my debt with them will be paid off with the sale of my house. I am a single parent and will loose $10K of profit because of this IRD. This is so unfair.
I am very sorry to hear that Godard.
Dave
Hi Dave,
I had my principle residences free and clear of all mortgages for a number of years. I then set up a Home Ready Line Account against this property. I took out a mortgage against this account to fund the purchase of a USA rental property for the purpose of generating income. Can I deduct the interest paid? Is there a difference between an investment loan and my Home Ready Line Account? I’m not sure if I used the right method.
Best,
Mario
Full Marathon! Wow, that’s awesome Dave…good for you!
Thanks Manny.
Dave
Hope that we can have more dashes of hopes in the future. Thanks for posting, Dave.
Dave
What a great explaination! I have passed this information on to persons I know currently working on mortgage deals.
I can not believe this type of contract is legal, it is blowing my mind.
I am currently dealing with an issue with a bank that has the discount rate IDR penalty worked into my mortgage. They are making us jump through hoops to try and port the mortgage and then have this crazy huge penalty for breaking the mortgage. Last year we were told the penalty would be 16, 000 and most recently over 20, 000 (it looks like it could be up to 25, 000 I have their worksheet). Ouch, right!! Three months interest equals under $3000.00.
They say my original dicount was 2.3% I am not sure how they got this discount number. We are closest to a 3yr term right now, and we originally signed a 5yr so we wouldn’t have received a discounted rate for a 3yr from a 5yr to begin with. If you would be able to explain how this works it would be super! I plan to ask the bank directly after they reply to my recent inquiry- they really do not like explaining how the calculation is done and I don’t wonder why.
My mortgage specialist that set up the mortgage in the first place has left the bank because of all the “unethical underwriting” and is now working as a mortgage broker.
Thank you so much
Respectfully,
T
Hi Tera,
I think that the 2.3% discount the lender is referring to was the difference between their five-year rate posted rate and your five-year contract rate at the time of funding.
Your lender is now applying that same discount to their three-year posted rate, even though the gap between three posted and contract rates is much, much smaller.
FYI – penalties are a big source of profit for the Big Six banks. It’s just too bad that they don’t do a fairer job of informing their clients about the terms and conditions in the mortgage contracts they are signing. Realistically though, our regulators need to step in to protect consumers because this practice will continue for as long as the Banks are allowed to get away with it.
Best,
Dave
Hi Dave, thank you so much for your time and this article to begin with.
I think I understand what is happening now but I understand HOW it is allowed to happen even less!!
Technically speaking they aren’t even adding (or rather multiplying) apples to apples.
Current buy out is almost $24, 000.00
We are not asking out of our mortgage for a lesser interest rate, which is what the IRD was supposed to protect the banks from. We are trying to move to our dream property and port our mortgage.
The trouble we are running into is that, although we can more than quailify for it, even just on half of our income, and we have about 33% down, its an issue with them not mortgaging any of the land. So they really have us in a trap if they won’t do a port AND they have this penalty that is pretty much impossible to overcome if they don’t port it.
There is an appraisal getting done to determine a maxium lending amount on the property but they are even dragging their feet on that and costing us all our financing condition time. I am just sick about it, I have wanted a property like this my whole life and I feel it slipping through my hands.
I hope more people get informed so they know what they are dealing with, I really believe they would not choose these mortgages, that have IMO unethical underwriting, if they truely understood what they were getting into. I personally will boycott the Big Six Banks (as soon as I can) and will encourage others to do the same. If the “regulators” will not regulate maybe a lack of business will encourage these banks to changes their ways.
My current penalty is 750% more than 3 months interest
Thank you again for your response
T
Hi Dave
A very interesting article. can you tell me what implication occurs if some one purchages a home with a mortgage for principal residence condition and later decide to convert the same one to rental property? Can he or she claim the same mortgage for tax return with CRA
Hi Krishna,
In the scenario you describe, you would be able to deduct the mortgage interest cost during any year that you rented out the property.
Also, my understanding is the when you sell the property, CRA will pro-rate the capital gain payable based on the number of years you used the property as a rental. So, for example, if you owned the house for ten years and rented it out for five, if you made a profit of $100,000 on the sale, then you would owe capital gains tax on half of that amount since you used the property as a rental for half of that time period.
Best,
Dave
We have no mortgage on our home are thinking of buying a condo to rent out. Can we claim the interest if we use a line of credit instead of a mortgage for the purchase
Hi Bill,
If you borrow money to purchase a rental property, the interest cost for that loan can be deducted against the rental income. It doesn’t matter what property you borrow that money against and its doesn’t matter whether that loan is a mortgage or a line-of-credit. The key is that the funds were used to purchase the rental property.
Best,
Dave
Hi Dave
Thank you for your answer.
Hi Dave
My mortgage lender has financed my home as a principal residence and made me to sign with notary that I would use this home as a principal residence during loan maturity period. Now my situation is changed and I need to rent out this home. Can I rent out this home for income generation?What steps I should take with lender to change the status of my property from principal residence to rental. Should I inform the lender about the changes of status of property?
regards
krishna
Hi Krishna,
In my experience, lenders are generally understanding if you have live in the property for a length of time after purchasing. After all, no one can predict their future, especially several years down the line. I think your lender would be okay with your renting out the property as long as you disclosed that you were using it as such at renewal, but if you’re not sure, I would just call them and ask.
Best,
Dave
Thanks Dave for your suggestion
Your blog is excellent, Dave. I’ve read several of your candid analyses of (among other things) financial products (such as collateral charge mortgages) and appreciate the clear way that you educate your readers (as consumers). Thank you!
Thank you for the feedback Dr. Watson. Much appreciated.
Best regards,
Dave
What is the way to handle financing/mortgage if I want to buy, move and renovate before selling my existing home? I’d like close on a new property first, then take 6 months to renovate before moving, and once I’ve moved into the new home then put my existing home on the market. It means carrying two houses for about 6 months. Do I need to commit to a mortgage? Bank says my HELOC can only be for 65% of the value of my home so there’s not enough there for me to use to close on the new home. The rates for short term mortgages (as in 1 yr) are quite high. Are there alternate options?
Hi Mindy,
You need to have an unconditional offer to purchase your current home in order to secure bridge financing, so that option would not apply in the scenario you describe.
That said, if you can qualify to carry both properties (and their associated mortgages), then it would be possible to execute your desired plan. While it’s true that lines of credit only go to a maximum of 65%, there are other solutions available that allow you to borrow up to 80%.
If you have additional questions, please contact me directly at dave@morplan.ca.
Best regards,
Dave
Three contestants are slashed to just two.It Dannii Minogue birthday tonight, but something tells me her celebrations are about to be cut short right now.She looking pretty coy, grinning from ear to ear with the knowledge Brothers Three have never been in the bottom two before.The first contestant safe is 15 year old Marlisa, so her and Ronan jump off the stage.The next safe is.
Toms Skor norge http://ibdp.org.br/images/upload/tomsskoronline/
Hi Dave,
Thanks for your blog, I enjoy reading them and learning about mortgages, etc.
I decided to go variable for the first time ever and so far quite happy I did. I’m curious about how the Banks Prime rates work though. Since most banks recently only lowered Prime rate by a portion of what the Bank of Canada lowered their lending rate (.15% instead of .25% in January and again this month), what will happen when the Bank of Canada decides to raise their rates by lets say .25%? Can Banks increase their Prime rate by the full .25%? or would they increase them by the amount they previously lowered their Prime (.15%)?
I’m worried in the future that when the Bank of Canada finally increases their lending rate, the Banks will take advantage and use this as an opportunity to quickly increase their Prime rate quicker then they lowered it?
Also, do you think the chances are high that the overnight lending rate stays at .50% for the next two years?
Thanks!
Hi Mike,
Thanks for your email and glad you have been enjoying my blog.
In answer to your question, I would bet my bottom dollar that lenders will match future BoC rate rises to the penny.
As for the chances that the BOC keeps its overnight rate at 0.50% for the next two years, that’s very hard to say with any confidence. For my two cents, based on current circumstances, I think it is likely that the overnight rate will be at or very near current levels in two year’s time, but my opinion is certainly subject to change!
Best regards,
Dave
Hi Dave.
Where all things are almost equal, is the cash flow advantage with a longer amortization term better than going with a shorter amortization over the entire term?
Longer term = higher cash flow but greater interest that has to be paid
Shorter term = lower cash flow but less interest and quicker ownership.
Does this become a question of who pays the interest on the principal?
Thanks.
Hi Ray,
I would always recommend taking the longest amortization a lender will give you because you can use your discretionary prepayment allowance to achieve a significantly shorter amortization once your deal closes.
Also, if you want to buy additional rental properties in future, you must use your contractual payment for existing mortgages when applying for that next loan, so keeping your contractual payments as low as possible will preserve maximum flexibility in that scenario as well.
Best regards,
Dave
Hi Dave, further to Nidhi’s comment above, if you have a HELOC on the rental property, and choose to take equity out of that and put it against your primary (say 50K a year for 4 years (no tax deductions)), when and if you choose to convert the HELOC back to a conventional mortgage (after applying the equity to your primary residence mortgage), does the interest on that “new” conventional mortgage on the rental property become tax deductible? It is by default in regular circumstances, but I’m curious about the scenario outlined above, where the value of the mortgage accrued by taking equity out and applying it to the primary residence. Thanks.
Hi Kevin,
It is the use of the funds, not the product type (HELOC/mortgage) that determines whether the interest is tax deductible.
As such, if you refinance a rental property and use those funds to pay down the mortgage on your principal residence, the mortgage interest is not tax deductible, regardless of the loan product you use to borrow those funds.
Best,
Dave
Thanks Dave. I love this.
Hi Dave, I paid off the mortgages on two rental properties and now need to raise cash. If I get a mortgage on one of the rental properties will the interest be tax deductible?
Hi Keith,
That depends. The key test is what you are using the funds for, not where you are sourcing them from.
Best,
Dave
Hi Dave,
Thanks for this post. It describes, almost to a tee, the situation I have with one of my rental properties. I have been in a slight negative cash flow position and have been relying on the build up of equity through the payment of principal to justify it. I am now using the chart you’ve shown above to analyze my situation more clearly.
I have a question about the ROI numbers you’ve shown. I guess the ROI numbers are based on the down payment of $169,000. So for Year 1, the “net” equity build up is $5,305 ($12,442-$7,137) which is a 3.1% “equity” return on the $169,000 down payment. So I guess rather than a traditional “cash-on-cash” ROI, you’re looking at an “equity-on-cash” ROI.
As for the following years, I believe the ROI’s may not be fully accurate. Should the ROI for years 2 through 5 be based on the cumulative “net” equity build-up, i.e. year 2 “net” equity build up is $11,610 ($25,349 – $6,602 – $7,137) and so a 6.9% ROI?
Thanks.
Always a good read, thanks for sharing those statistics. It’s good to see the comparison of Canada and the US. Thanks for sharing your post!
Very good read. This is the message we put out there when we do our speaking seminars at the banks.
Great post and discussion Dave! I’ve been doing extensive research on all the HELOC products out there so I can make an informed decision. They all seem to be collateral charges which if I understand things correctly, present these downsides:
A. Removes secondary financing ability if the charge % is too high.
B. Gives bank too much power by allowing them to secure all other current and future credit products the customer has with them under the one collateral charge. So customer has to pay out all the products (credit card, auto loan, LOC, mortgage) in order to switch lenders. Also if they miss a payment on a credit product the bank can foreclose on house or apply your mortgage payment to cover it.
C. More costly to switch lenders – approx $1000 in fees as you stated.
Here are my questions:
1. Are my understanding of the downsides correct? Did I miss any?
2. What % of collateral charge is ok to still keep the door open for secondary financing? 80% LTV?
3. About problem “B”, BC lawyer Kenneth Pazder wrote on another blog that he instructs his clients to get a letter from the bank saying “notwithstanding the terms of the mortgage, unless otherwise agreed by the borrower and the bank, no other indebtedness (save the mortgage loan and/or line of credit component as the case may be) shall be secured by the mortgage charge.” Will banks agree to sign this and would this solve problem B?
4. Another suggested option to solve problem B is to not have any other credit products with the bank holding the collateral charge mortgage. Do you agree?
5. Which of the banks/lenders (if any) are the better option(s) for reducing the downsides of a collateral charge?
Thanks!
Robert
(Ontario)
Hi Robert,
Thanks for your note. In answer to your questions:
1. I think you have captured the key points.
2. I think that in most cases, the collateral charge should only be registered for the amount of the funds advanced when the deal closes.
3. In my experience, not a snowball’s chance in Hades!
4. Yes.
5. If you want a fixed-rate mortgage only, any non-bank lender will still register your loan as a mortgage charge.
Best regards,
Dave
I really enjoyed reading the article and comments. I have wondering myself about this issue and have not really found a clear conclusion. Also data seems to differ across countries.
This makes good points, especially on income. Here is what I would add as food for thought not claiming to know the real answer:
I am not convinced a month 2 month analysis in this case is the best way. Maybe a moving average would be useful to use. Small up/downs are probably worth ignoring altogether and just focus on situations where rates increase by more than 1%.
Theoretically speaking a property value is given by the value of the rental perpetuity you can earn from it. This is roughly calculated: CurrentValue=(Expected Annual Net Rental Income)/Discount Rate.
The lower the Discount Rate the higher the value and vice versa implying rates matter a lot.
The only way to offset this is higher Net Rental Income which occurs when Income is rising or there is a shortage of housing.
The whole analysis is a bit blurred by the fact that it is easy to find out how interest rates have changed but on EXPECTED Rental Income we don’t really no. The only proxy is current rental income which is not the same.
My gut feeling is there is more to the property price than just rent and interest rates but I am not sure how and where to figure this in.
Does the gov’t really think these changes are going to effect the market in Vancouver and to a lesser extent Toronto,ie the foreign buyer.
I don’t think so. Time will tell but maybe when more changes are required they will look at countries like New Zealand and take a page from there book as to how to slow the market down.
That means higher taxes for their purchase.
Hi Ralph,
That is certainly their hope.
For my part, I think their gradual approach thus far has been appropriate.
Best,
Dave
It’s kind of a Catch 22 If you find a new house and buy it. You are paying for two moegtagrs if you sell your first one then dont have a place to go you could be stuck w/ your things in a storage place, and living in a motel. Best Wishes though.
Dave
My wife and I purchased a home from our in law due to some financial issues. He resides in it now. We used our HELOC to put 10% down on the purchase of the home. We were able to put 10% only down on a second property because it is for an inlaw. In reading your responses to similar inquiries, is the interest on the 10% tax deductible? IE: $30,000 used from the HELOC to buy the home.
How do I separate the 10% interest we used to buy the house from the the entire interest payments owing on our current property? No mortgage here.
Would starting a company be beneficial for me and putting this new found residence under a company?
Thanks
Bill
Hi Bill,
Rental properties require a minimum down payment of 20% so if you were allowed to put down only 10%, I think that is because the property is being treated as a second home and not as a rental property (because your renter is a family member and not an arms-length person). If that is the case, then the mortgage interest would not be tax deductible.
You should check with your accountant by that is my understanding.
Best regards,
Dave
Great article Dave I enjoyed that read. You have a very clear idea on what is going to happen in 2016 and thanks for sharing.
Ash
Thanks Ash. Much appreciated.
Dave
Wonderfully explained. Thanks for such a helpful article.
I am a millennial, having graduated in the middle of the last recession. The lower rates go, the more I save. As rates drop, I see this as an indication that the economy is worsening, hence the need to save more. Low rates don’t make buying a house more affordable. They only trap you into the purchase of a more inflated product – hence making us more dependant on the drug.
Thanks! Realy helped me understand the risk of waiving the finance condition.
Can we use our equity as deposit on NEW home before our house is sold?
We have 25% equity. The New property is $399,000 incl. GST.
Our current property is 425,000 less mortgage , approx. 25% equity.
Use bridge finance for 60 days…
Is this viable?
Hi Dan,
You have to have a firm sale on your existing home before you can secure bridge financing with the mortgage lender you will be working with on your purchase.
Best,
Dave
During the course of the mortgage can you pay off the CMHC fee in a lump some instead of on your mortgage each month.
Hi Chris,
The high-ratio insurance fee is rolled in to your mortgage unless you pay the balance upfront (which almost no one does).
While you can’t specifically pay off the fee, any good mortgage allows lump-sum payments and this will enable you to make a prepayment that is equivalent to the fee charged, which achieves the same end.
Best,
Dave
Hi Dave,
An interesting take, but something I hope the Govt does not do as it will not solve this particular issue! I think there are a number of things at play that need to be studied before attempting to put forward a solution. My relatively limited exposure to the Toronto market has yielded some interesting trends. Lately, I have been doing a lot of luxury high end condos. Most people who require mortgages on these properties that are priced close to, or over $1M have smaller mtgs and all are 25yr amort or shorter. Besides the escalating prices that are no doubt creating havoc for appraisers, there is another issue. Many high rise condo units in a number of buildings that have been purchased outright are theoretically listed as being owner occupied… but sitting vacant with no mortgages on them (Hidden under the radar). Identifying the extent of this phenomenon is problematic as there is no reporting. As a Lender or an appraiser, how do you wrap your head around the extent of this and the implications of what could happen if the market for Foreign investors tanked (if you could even identify them)?
Hi Bob,
I think we will have to agree to disagree on this one. For my part, I haven’t encountered any of the buyers that your refer to and I help finance lots of Toronto condos. I have heard of absentee ownership being a problem in Vancouver but haven’t come across it here at all (although, in fairness, my experience may not been representative of the broader market).
Our industry always seems reluctant to support lending-rule changes but without the four rounds we have seen thus far, I think a lot of us would already be out of a job. Given the statistical increase in the number of borrowers who are stretching themselves to the upper limits of their affordability in the Toronto and Vancouver markets, I think additional action by our regulators is now appropriate. For my part, qualifying high-value purchases using a maximum amortization of 25-years seems like the best way to address this specific concern.
Thanks for your comment.
Dave
My wife and I do well and are contemplating upgrading to a family home from a condo in the years ahead. We operate CPCCs and have flexibility over the salary we pay ourselves each year with a substantial amount left over. Recently we’ve gone through the exercise of figuring out how much money we need available for a downpayment and how much income we’ll need to demonstrate for the same when we proceed to a move-up purchase in 2-5 years.
The message we’re hearing about downpayments is that we’ll need 20% of the first $1.4M mortgage and 50% thereafter plus standard TDS and GDS ratios used to qualify for other mortgages. For a $3.5M purchase this is $1.3M down as a minimum (nearly 40%). From an debt service perspective – there are a number of fixed costs (groceries, car insurance, and etc) that don’t fluctuate with income leaving more funds remaining than a standard purchaser to devote to a mortgage, if so desired – so I would believe the same debt services ratios need not be so strict.
It is this buyer you’re worried about crashing the Canadian housing market? It would take a pretty substantial drop in the market to put someone starting with 38% equity underwater – compared to say the guy down the hall in the flashy new condo that mustered up 5% and qualified on a 5 year fixed at 2.49%. Either an increase in rates to anything but a historical low or a drop in the market of 6% puts this person underwater and fast.
Hi Oslercodes,
Your email focuses on down payment but my post proposes a change to the maximum amortization period that lenders use when evaluating whether borrowers have enough income to afford their mortgage payment. Specifically, the BoC is worried about the increasing number of borrowers who are stretching to the upper limits of what they can afford to take on large mortgages on high-value properties. In my opinion, reducing the maximum amortization period that is used to qualify these types of loans is a good way to address this specific concern.
To put the income qualifying test I propose in the context of your question above, our policy makers are less worried about a borrower who is putting down 5% of the purchase price and borrowing an amount that is well within their affordable range, than they are about a borrower who is making a larger down payment but whose income leaves them stretched to make their monthly payments. That’s because history has shown that income ratios are the best predictors of whether a borrower is likely to default on their loan.
Thanks for your email.
Dave
Hi Dave. Thx for your blog. I haven’t found any online calculators to estimate the effect of a pre-payment so this has been helpful. So question for you… I have a mortgage and am allowed to make a once a year prepayment, which I was going to do this year. But I only have 1 more year to go on my term. According to you, it’s not going to make a big difference being in my last year… so perhaps my cash is better invested or saved until I go to renew and can borrow less? Details are mortgage balance today $163k, prepayment allowed $25k at 3.42% fixed for one more year. What would you do?
Hi Susan,
Thanks for your email.
In answer to your question, prepayments can make a big difference to the amount of interest that you pay over time and to be clear, this is true even if you are in the last year of your mortgage term (in the graph provided, the final year is the final year of the amortization period, not the final year of the mortgage term).
Best regards,
Dave
Excellent article Dave. I was just on the RBC website before reading your article and was very surprised to see that they calculate the IRD using the “Discounted Rate IRD Penalty” method you describe. Before reading your article, I thought it might be an error because there is simply no logic to it. The “Standard IR Penalty” is certainly reasonable since, as you point out, it essentially recovers a bank’s interest loss in re-lending the money but I’m amazed that the banks have been allowed to re-define the IRD in these arbitrary ways! This may be a case of not enough people being aware of how unreasonable these bank procedures are so the banks have been able to get away with it. I’m so outraged here that I’m planning on approaching the media about this. I’d like to hear an official from a bank try to explain the logic behind their IRD definitions. I remember a while back there was a lot of attention on unreasonable bank transaction charges and I think the banks relented to some degree.
Thanks for your comment Dan. I agree that not enough people are aware of the way that bank’s calculate their IRD penalties – and nothing disinfects better than a little sunlight!
Hi dave,I was wondering if I took my rrsp,s and my tfsa , purchased a rental property, which would be mortgage free, then take rental income and put all of it into investments ,would it be tax wise or to complicated. Thanks have a great day
Hi Dale,
In the scenario you describe there would be no mortgage interest to make tax deductible (because the house would be free and clear).
Best,
Dave
Hi Dave,
Great post for a great many ‘math challenged’ folks; and a great way to sell mortgages (lol).
Building equity in real estate is excellent advice and the difference between a 25 mortgage and a 15 year mortgage, is the necessary starting point ….
TD put a collateral charge of almost 200% of the borrowed funds against our home, totally locking up the equity. We agreed to this for the sole purpose of getting a large credit line.
Now TD is telling me they can’t put a credit line on the same collateral charge as our mortgage! WHAT THE HECK!?!?! This is precisely why we agreed to the collateral charge in the first place!
Why on earth would they register that charge and not be willing to lend more funds on it? I’m bloody fuming mad at them.
Hello,
How do you come about doing this? We want to put in an offer on a new home but haven’t sold ours. Do you have to waive the financing clause? Or do we still need to get a letter from our broker? My broker said they don’t se letters anymore because it’s so rare and don’t need them. I’m really confused and we want to submit the offer this week.
Hi Chantel,
You will need an unconditional offer to purchase your existing property in order to secure bridge financing as part of your buy/sell transaction.
Best regards,
Dave
Great analysis. I can see that the discussions are still about rates rising in the next year or so.. Which makes me want to break and lock into a longer than 5 year fixed rate.
Great article but what kind of loss do you think there would be on the house over 10 years if in the first 5 years interest rates return the the normal average? And if the value of the house drops and your payment increases, how good of an investment is this really? Is that sustainable?
Hi Andrew,
No way to know at this point. For one thing, it depends on the which market you are referring to. The mortgage rule changes may slow demand to the point where prices stop rising as quickly in hot markets but that doesn’t necessary mean that they will fall.
Time will tell!
Dave
If a lump sum of 10%is made in year 2 and year 3, making the mortgage low-risk ratio, will cmhc premium be reimbursed
Hi Yann,
The premium is charged as a one-time upfront fee and is not reimbursed based on future prepayments.
Best,
Dave
Thank you! Your detailed information was extremely educational
Is there any practical way to know if my low-ratio mortgage (actually a HELOC from one of the big six banks) was insured?
Hi Chad,
I don’t believe that HELOCs can be insured so in that case, the answer would be no.
Best,
Dave
So if in a market like Toronto, where someone sold their home for $1.75 million (mortgage paid off, no other debt) and wanted to purchase a home for 2.25 million, under the new rules would they be able to buy the home if the mortgage is $500,000 and they had the income to support that mortgage under the New October 17th rules or would they be subject to higher mortgage rates because the home is valued at more than $1 million, based on the November 30th rules?
Hi Lisa,
Happy to answer your question. If the person in your example is buying for $2.25 million and needs to borrow $500,000, then they would be classified as “low-ratio” (because they are putting down more than 20% of the purchase price).
As such, this borrower would be subject to the insured mortgage-rule changes taking place on November 30, 2016.
Best regards,
Dave
Love your blog
Thanks Janice!
Dave
Dave. I really enjoy reading your articles. Thanks for taking the time to do this.
Thanks for your note Derek – and glad you are enjoying my posts!
Best,
Dave
If I don’t use the LOC from my principle residence to buy a rental property but rather refinance my principle residence to do equity take out to purchase the rental property and incur transaction cost to do that such as legal etc. my question is as follows:
1) After refinancing my principle mortgage payment increases. Would the incremental Interest cost (Post refinance minus pre refinance) be tax deductible during the period I earn rental Income?
2) Would I also be able to write off my transaction cost (Legal + Interest penalty) that I paid to refinance my principle residence as the intent was to use the funds to buy rental property?
Thanks
Hi Shahid,
If you pull equity out of your principal residence and use those funds to buy a rental property, then the interest expense on those additional funds is tax deductible against rental income you receive for the property. In addition I believe that any costs associated with the transaction can also be deducted (but you should double check with your accountant just to be sure).
Best,
Dave
Thanks for sharing such an informative post. I like your idea of explaining free cash with the help of examples. Keep up the good work Dave.
Thanks Cédric.
Best,
Dave
Hi I am selling my house and buying a new one, I payed CMHC on 234.000 put down 5%. I am buying a new one for 400,000 And have Equity of around 40,000 owing around 210,000. Do I have to but down 80,000 on my new house to not pay CmHc or do I only have to put down 20% of the top up money on am boring
Thanks josh
Hi Josh,
If you want to avoid paying any higher-ratio insurance premium you will have to put down 20% of the full purchase price of the new property. That said, if you are putting down less than 20% you should be able to port your existing insurance policy over to your new property, and if you do this, you would only have to pay a “top-up” insurance premium on the additional amount you need to borrow.
Best regards,
Dave
Thank you very much David! It’s very helpful.
Nice and pretty revealing article. I have a Heloc account but it unfortunately does not have a sub-account. I am however curious to know if I can still use funds from this acct for investment if my bank says its not possible to create a sub-acct (strictly for investment) from my current Heloc. I currently enjoy a highly discounted rate of 2.2% (will increase to 2.7% after April 2017) on my Heloc and am looking at investing in mortgage investments offering average 10% interest. Does borrowing money from my Heloc low interest of 2.2% make sense when its obvious that interest from my investment will impact the income I report in my taxes rather significantly. I currently make about $100,000 a year.
Mide
Hi Olumide,
You don’t need to have a sub-account for your HELOC in order to be able to deduct the interest expense. As long as you can clearly show that the funds were used for eligible investments you will be fine (the sub-account just makes the flow of funds easier to track and report).
As to whether borrowing money on your HELOC makes sense, I don’t have enough information on your specific investments and on your personal circumstances to offer an opinion on that question.
Best regards,
Dave
Hi David,
I just bought a house in Nov/16 and had to get CMHC Loan Insurance. Will I have to pay for this insurance until my mortgage is paid in full? If so does the premium that I pay decease as my mortgage is paid off?
Right now I pay about $2288.00 a year, so in 5 years when I go to renew my mortgage will this decease?
Thank you Dave
Hi Morgan,
The high-ratio insurance fee is a one-time fee that typically gets rolled in to your mortgage balance at the time of funding (unless you choose to pay it with cash upfront).
When you renew your mortgage in five years, if rates are the same as they are today your payment will go down because you will be starting a new term with a lower mortgage balance.
Best regards,
Dave
Can anyone get a 10 year closed variable or are they always in 5 year increments to get the best deal?
Hi Murray,
I am not aware of any ten-year variable-rate mortgages. Typically you would be choosing between three-year and five-year variable-rate options.
Best,
Dave
Thank you so much for the article, this helps me decided on closed term for my rental property. Muchly appreciated
Renewal coming up and was surprised concerning true cost of an “open” versus “closed” mortgage. Thank you!
Thanks for the informative site. I am currently looking for a mortgage for our second home. In BC. This will be very helpful when I go to the banks
Hi Dave,
I have a relatively large investment portfolio. I am a few years to retirement and plan on buying a cottage. My house is paid off with no mortgage. What I plan to do is sell enough dividend paying investments in my margin account to buy the cottage, then set up a Heloc to repurchase my dividend stocks. I plan on using the cash flow from my investments to cover the interest payments. Would I have any issues deducting the interest payments on my Heloc?
Thanks for your help.
TJ
Hi TJ,
As long as you use the borrowed funds to purchase eligible investments (see my post for details on that) then you should be fine. That said, if you want to be 100% certain, I advise that you speak with your accountant or call CRA.
Best regards,
Dave
Hi Dave, what I believe is not taken into account is if rates do rise then property values will decrease! So in essence your equity position can be compromised if you over pay for a property in this low rate environment. Thoughts?
Hi John,
There is always that risk when you buy a property, but it is beyond the scope of this topic.
Best,
Dave
Good Summary of situation Dave…..
Thanks Chris.
Best,
Dave
What a truly fantastic race re-cap Dave. Some of those details brought happy tears to my eyes because I know those feelings past 30K of a marathon and you describe them perfectly. You powered through and completed an amazing and extremely difficult marathon course! CONGRATULATIONS Dave!!!! It was a true pleasure chasing you around the track this winter so I hope I get to again this summer season because I’m now training for Chicago, my destination race! You are an incredible runner and I feel very lucky to train with you!
Thanks Tiffany – glad you enjoyed my post. As for chasing me at the track – pretty sure it’s the other way around most days! Looking forward to another season of pushing each other to keep getting faster – I know I’m better for it!
Thank you so much for the information. It seems like we Canadians can’t do much if we decide to go for the Big Five. In your comment section, we already see people complaining TD, Scotiabank and RBC. I don’t have much faith for my current mortgage with BMO.
However, is there any update on this issue? I am not not sure when your wrote this since there is date indicated that on this page.
Hi Brandon,
Since I wrote this post in 2010 there has been some improvement in the way the Big Five discloses their penalties, but no change in the penalties themselves.
Best regards,
Dave
Is CMHC required for mortgages with the seller of the house?
Hi John,
Are you are referring to a vendor take-back mortgage? If so, then this loan would be considered a private mortgage and as such, would not require high-ratio mortgage insurance.
Best,
Dave
We have sold our house and will be putting forth an offer on a new one. I understand the fee part but are we also paying the new mortgage along with the payment for the current home unitl we closed on ours? So 750 + 350 + fees for bridging?
Hi Ann,
That is correct. You need to make your mortgage payments on each loan for as long as it is outstanding.
Best,
Dave
I wonder if I use a LOC secured by my current home(which also has a rental suite) to purchase a second home THEN move into that second home and rent my previous home and suite can I deduct the interest payable on the LOC. I would of course declare the rental income earned on my former principal residence.
Hi Jake,
It is the use of the funds that determines whether they are eligible for the tax deductibility.
In the example you cite, you would be using the funds to purchase a property that you would then live in as your pricipal residence, and as such, your interest paid on that money would not be eligible for a tax deduction.
Best,
Dave
I had forgotten all about Stan!! He’s a such staple of the ATB. It is always such a boost to hear that song and give him a high five, especially after making it through the worst of the hills. Thanks for this lovely reminder of the everyday people that really make races special.
You gotta love Stan right? 🙂
Hi Dave,
Great article and clarifications. You have emphasized that to be tax deductible the use of the money must be for an investment not your principal mortgage. What if you borrowed money and used it to pay the expenses on your investment property (condo fees, mortgage interest, property taxes, etc.). Then your own money that you would have otherwise used to pay those expenses is used to pay down your principal residence mortgage. Would that qualify as a tax deductible loan use?
Mike
Hi Mike,
Based on my understanding, if the borrowed money to cover expenses on your rental property then the interest expense for those funds should be tax deductible.
Best,
Dave
From one of the “old guys” in the industry, my compliments on one of the best written blogs I have seen.Well researched and I believe, right on.I have done a bi-monthly newsletter out to my clients for 20 + years and was in the process of researching for my next issue when I came across your blog
I couldn’t have said it any better so I used it in my FB post.
regards
Brian
Thanks for your note Brian and glad you found the post useful (I’m almost 20 years in the business so that probably makes me an “old guy” too!) 🙂
Good analysis. However, not being vested (personally) in the industry at all, Im good with the rules. The formula will knock down prices. I have no problem once again with this policy objective and my income wont influenced by this. Keep up the good work. Blog is great!
Thanks for your comment PT. For my part, I’m good with the changes in principle but think that the policies need tweaking (as per the post above).
Best,
Dave
Hi Dave,
Thanks for the great article. So I’ve had a rental property for 8 months now. All this time, I’ve been using the rental cheques to cover the expenses such as mortgage payment, condominium fees, property tax, rental insurance, water heater rental. Since all these expenses have already been paid, can I go back now and withdraw all those expense amounts from my HELOC? My reason for this is to free up thousands of dollars to transfer into my principle mortgage. Since it’s November 2017, I figure I can since I’m still in the current tax year.
Colin
Hi Colin,
If you borrow against the HELOC on your rental in order to pay down the mortgage on your principal residence then the interest charged on those funds would not be tax deductible.
As a reminder, it is the use of the borrowed funds that determines whether they are tax deductible, not which asset they are borrowed against.
Best,
Dave
Hi David,
After reading the comments I have a situation that maybe you can shed some light on.
So I have a home that is mortgage free. I want a new house but I want to keep my current home and use it as a rental property. Even if I mortgage my current home to buy the new house that I want to live in, the interest won’t be tax deductible.
What about if I were to sell the current house to my parents for FMV and they pay for it by issuing a promissory note payable to me. The next day I go to the bank and secure a mortgage and use the funds to purchase back the home from my parents. My parents then use the funds they received to repay the promissory note that was issued to me. I then take that money and purchase my new principal residence.
What are your thoughts on that?
Thanks,
John
Hi John,
Interesting thought but this approach would cost the earth in land-transfer taxes (which your parents would have to pay if they bought the property from you, and you would pay again if you bought it back from them).
In the end, the land transfer taxes would be many, many times more than any saving you would realize by making your mortgage interest tax deductible (and that assumes that you this would pass a CRA smell test as well!)
Best regards,
Dave
Dave,
Wanting to buy a second home and turn my current home into a rental property, the house is 7 years from being paid off and the rental will cover this mortgage and taxes.
Debating if I draw equity to put 20% on the new home or as little as possible and have a cmhc backed loan in case things go south will this protect my rental property assuming the default covers all costs associated with the default?
Thanks! Grant
Hi Grant,
To clarify, default insurance covers the lender against loss, not the borrower. If you were to default on a mortgage the insurer would come after you for all related costs, and if you owned an additional property I imagine that they would try include your equity in that as part of any settlement.
Best,
Dave
Hi Dave,
This situation is happening in Alberta, and it is my understanding that there are no significant land transfer taxes here. We have a land transfer fee with 2 portions, one on the property value and the other on the mortgage value, both with a base of $50 plus $1 for every $5,000 portion of the value of each. For example on a $500,000 home the fees would be less than $300. Would this make this option more viable?
Thanks,
John
Hi John,
Thanks for clarifying. If the land transfer taxes are not significant that would certainly lower the transaction costs but I’m still not sure if this would pass the smell test with CRA because it can always invoke the “general tax avoidance” clause even if your approach technically conforms with the tax rules as written.
That said, I recommend that you run your idea by an accountant. If you can circle back after I would love to close the loop on what he/she said!
Best,
Dave
My fear is that B of C will follow irrational decisions of US Fed and slowly increase rates over next 2 years. If 5 year fixed mortgages hit 5% rate then Canada’s economy will be crippled. So many in Vancouver & Toronto have massive mortgages … rate increases will cripple disposable income as wages are not climbing. If wise, B of C should chart own independent path for rates.
Hi Peter,
Thanks for your comment. While anything is possible, I don’t think the BoC will follow the Fed in the near future. For one thing, letting the Fed go first weakens the Loonie and in so doing, stimulates our exports. Also, the BoC seems more data dependent than the Fed and with inflation still under control in the current “sweet spot”, and overall GDP now decelerating, they have time to wait.
Time will tell!
Dave
David. Where do you see 5 year discounted fixed rates 3 years from now? How can the economy tolerate rate increases? So many people are barely making minimum payments. Is this just hot air or are central bankers actually serious about raising rates? Wages seem stagnant and the economy seems still sluggish… I just don’t understand rationale of why US Fed wants such aggressive rate increases. Do you?
Hi Peter,
Hard to project that far out. Based on what I see today, I don’t think rates will being materially higher three years hence but there are so many variables that can change between now and then that I’d call that a more of a guess than a prediction.
FYI – the mortgage stats I am reading show Canadians making prepayments at a record rate so while there are certainly more stretched borrowers these days, on an overall basis, a lot of Canadian borrowers are actually doing a pretty good job of making hay while the sun shines.
I agree that policy makers are unlikely to raise rates aggressively with so much debt outstanding, and BoC Governor Poloz has said as much. I think the U.S. Fed is more married to their models and such, I think there is much more risk that the Fed makes a policy misstep by over-tightening.
Thanks for your comment.
Dave
I really appreciate your efforts and sharing your valuable experience.
Thanks
Hi David!
Amazing information. Like nothing I’ve heard before.
Mortgage renewal is May of 2020. Currently on a 5-year fixed @ 2.69 with Firstline. Mortgage: 216,000. 106,000 fixed 5-year, and the remaining readvancable HELOC @ 3.70.
Wondering will a stress test be applied on renewals. My understanding is it won’t if I remain with current bank.
Anyway, will seek your advice as renewal inches closer!
Hi Mike,
Thanks for your note and glad that you enjoyed the post. In answer to your question, if you renew with your existing lender you do not have to qualify under the new rules.
Happy to get in touch when your renewal date approaches.
Best,
Dave
Thank you for this advice David
Most welcome Johnny!
Hi Dave,
I am just about to buy our first house and was confused by TD’s collateral charge options on the mortgage documentation -your blog gave me exactly the information I needed (sigh).
Well written and incredibly informative – will advise my fiancee not to opt for the 125% :D.
Cheers,
Dan
Thanks for your note Dan. Glad you found the post useful.
Best,
Dave
Hi Dave liked your “a devil in the detail” article.. Was easy to understand the semi and annual difference thanks.
Look forward to your Monday updates. Wondering if the boc will continue to raise rates next year on top of this years next quarter hike. Best of luck out there.
Paul
Thanks for your note Paul. Glad you enjoyed the post.
Best,
Dave
Hi Dave,
Can you follow the same strategy without a HELOC? For example, refinance home to increase mortgage from $50k to $100k, and immediately contribute the extra $50k into an RRSP?
Thanks!
Hi InvestGuy,
It doesn’t matter if you borrow the money using a HELOC or a mortgage. It is what you do with that money that determines whether or not the interest is tax deductible.
On a related note, you can’t tax deduct interest on money invested in an RRSP (because you already get a tax break on money contributed to an RRSP). Basically you can’t double dip!
Best,
Dave
Hi Dave,
Would a HELOC from private lender qualify for tax deductible.
Hi Kola,
It shouldn’t matter what the product is or who you borrow from, it is the use of the funds that determines whether they are tax deductible.
Best,
Dave
Hi Dave,
Great article, this helped me see that in my situation, it possibly makes more sense to consider variable rates as I will eventually be able to bare risk. Your article help us get unbiased knowledge and help us study all angles.
Thank you,
Chantal
Love it :))
The author fails to mention that Canada is already engaging in mercantilism (trade wars) when it purposefully rigged interest rates lower which devalues the Canadian currency (now at 77US cents or $1.29cad) and gives exporters of goods to the US a 29% subsidy to export their goods. That is dumping my friend.
Currency Wars = Trade Wars.
Canada is engaging in stealth wars.
Rigging interest rates lower creates monetary and price inflation and a devaluation of the Canadian dollar. Today we have seen real estate and stock inflation for the most part so far courtesy of the high priests at the temple of the Bank of Canada who try and tell us core inflation is the only real barometer of inflation. They even go so far as to tell us they want 2% inflation contrary to the Bank of Canada Act. These clowns need to resign and leave free markets alone. They only protect their rich buddies and make things worse for the rest.
An even playing field would not warrant trade wars.
Cheers!
Hi Dave,
I used the HLOC of my house A as the part of the down payment to buy a new house B. Then I moved from A to B and rent A house out. Is the interest of HLOC on house A tax deductible?
Thanks,
Hanson
Hi Hanson,
It is the use of the funds that determines whether or not the interest is tax deductible.
As such, if you are using the funds from house A to buy house B, and if you are going to be living in house B, the interest would not be tax deductible.
Best,
Dave
SO HELPFUL. THANK YOU.
Glad you found the post useful Emma!
Best,
Dave
Hi Dave
Trying to close a deal on a property with a list price $50K over assessed value (from July 2017) and offering $50K over that which my realtor assures me is not mental (Vancouver condo market). Genworth wants to appraise the unit which is not unreasonable. Two questions: 1. How long do you think it will take for Genworth to complete their appraisal (in other words how many subject days should I write into the offer)? 2. Is a partial underwriting possible, i.e., could Genworth come back to the lender and say “we will underwrite only $495K; your borrower will need to pay the difference ($15K) out of his own pocket (or arrange different financing for that portion)”?
Thanks
Phil
Hi Phil,
Appraisals typically take anywhere from 2 to 5 business days, but that depends in part on the availability of the current occupant.
Genworth and the lender will lend on the lower of the purchase price or the appraised value, so unless there is a material defect that is uncovered in the appraisal, they will simply underwrite at the appraised amount and you will need to make up the difference from your resources.
Best,
Dave
Very interesting.
Thanks for the info!!
I have mortgage for my primary residence home i.e. 125,000.00. I did refinance and got $660,000.0. I invested in rental house for $660,000.00
My question is am I be able to deduction interest expense for 660K-125K
Hi Anjan,
Yes on the $660k (because you used those funds to purchase the investment property), but no on the $125k (because you used those funds to buy your principal residence).
Best.
Dave
Hi there. For a first time home buyer, can you claim the interest on mortgage payments on income tax? The house was bought 6 years ago. Thanks
Hi Bonnie,
If your mortgage was used to finance the purchase of your principal residence then there is no way to make the interest tax deductible.
Best,
Dave
Hello David,
My wife and I bought a home 5 years ago and only put down 10% at the time, so we are now paying the CMHC. Our maturity date is coming up next month, and we’ve recently put down a $50,000 lump sum towards the principal of the loan. This now means me have more than the 20% put in towards the loan.
My question now is, upon renewal next month, do we still have to pay into the CMHC insurance, or will it be taken off?
Thanks
Hi Stefan,
The default-insurance you paid for when you bought was a one-time charge, so there is no additional cost for you to keep it in place at renewal (and that coverage attached to your mortgage even if you switch to a new lender at renewal).
FYI – that default-insurance entitles you to lower rates with many lenders so you are well advised to keep it in place for as long as you can!
Best regards,
Dave
If you go back 30 years, people were paying 2 or 2.5 times the average income (or even lower than 2 if you were willing to fix her up a bit). It was like that for most of the 80s, 90s and even early 2000s.
Obviously, I’m talking about my general area, so that ratio might not be exact in all cases, but the trend should be about the same.
In short, the further you go back, the more people could afford an extra point on the mortgage. I mean, if you qualify at 8% (early 90s), is 9% that big of a deal ? You probably paid a good bit in the last five years anyways so that increase won’t hurt much.
Now, considering people are easily paying 3-4 times (even more in the hot areas) the average income at around 3, 3.5%. At those rates, a point is an increase of around 30% (!!) vs 12% for an increase from 8 to 9.
There’s also the fact that old school planning was 25% of income for housing, so yeah, bring on an increase. Now, very few people only spend 35% of their income on housing. Can you afford a 4.5% mortgage when you spend 45% of your income on housing ?
So it’s not clear cut to me. Obviously, if rates go up because wages are rising significantly, you may still end up being right!
Thanks for your note Francis.
If rates go to 8% or 9% then I agree that borrowers are far less suited to afford that kind of increase today than they were in decades past, but for my part, I don’t see a return to those rates any time soon (for reasons that I have outlined in many of my posts but that are too numerous to detail here!)
Also, I don’t think most folks spend 45% of their income on housing. If they did, I couldn’t qualify them for the mortgages I typically offer and for my part, most of the borrowers I work with are closer to the 35% range. Still higher than yesteryear for sure, so I’m not dismissing the point, I’m just not seeing the gap as wide as you are.
Best,
Dave
Hello David,
Thanks for the analysis. I agree with the logic completely. The other inflationary factor which concerns me is the price of energy which is clearly skewing the inflation data upwards. Regardless, the price of fuel and associated green energy tax factors into the cost of almost everything we buy thus contributing to inflationary increases. Once we cross the 2.5 – 3.0 % inflationary threshold, the BoC will act and the effect won’t be pretty for many who are over leveraged with consumer debt.
Following some protracted negotiation with BMO, I was able to lock into a 3.14% fixed mortgage for 5 yrs. I’ll just adjust the amortization period to offset the differential from my current rate of 2.09 so payment increases are not unmanageable. With the flexibility to contribute more to my mortgage as the situation permits, I can offset most of the effect of increasing the amortization period. At least this gives me the option to adjust to changes on my own terms.
Think your analysis was brilliant.
Regards,
Scott
Thanks for your note Scott.
Best,
Dave
Hi Dave,
I have a high ratio mortgage. Next summer I can renew. I am not sure how the renewal process works. Will it become a conventional mortgage now?
Hi Melissa,
If your mortgage balance is now less than 80% of its current value then it would become a conventional mortgage at renewal. That said, if you just roll the balance and don’t make any changes to it when your existing term expires, your default-insurance policy will remain in place (even if you switch lenders).
That’s important because in many cases, that default-insurance policy will entitle you to lower rates on your next mortgage.
Best regards,
Dave
Excellent article!
well i feel like a bit of a dweeb ,,,, iv been locked in variable rate mortgage for last
10 years. and have really done well with it , but just recently i locked in for 7 years at 3.80
because im retired now and would like the predictability of it . i also went over 30 years
to get my payments down , ( im not really in a big hurry to bay it off , why should i be )
anyway,,,, vancouver bc
Hi Kelly,
Given your age and stage, buying a little “rate insurance” at this point often makes sense.
I wouldn’t have recommended the seven year, for several reasons, but fixing your rate at a payment you can afford is an inherently prudent move.
Best,
Dave
Great article Dave. Given we are 5 months into your original forecast, does your stance remain the same with respect to fixed vs variable for buyers currently looking to get a mortgage. Namely, is the “insurance protection” on the fixed still worth it over the variable?
Regards,
Will
Funny you should ask Will. Stay tuned for this coming Monday’s post! (May 14)
Informative article.
nice article.
Thank you Dave. I read your posts and they are always full of information. Keep up good work.
Thanks Amol!
This is some of the best analysis of mortgage rates in Canada today. Thank you!
Thank you for this very informative analysis. Our mortgage is due for renewal, this will surely help. Thanks.
Good article!
Unique article, usually people think 20% down-payment will save them some money.
Hi Dave,
Very informative post. Something which people usually will not know, especially First Time Homebuyers like me.
Question – Does this Collateral Charge option apply for Variable Rate mortgages too? Will the banks let us choose Standard Charge option or they have made it mandatory to choose Collateral Charge option?
Thanks,
Sagar
Hi Sagar,
Some of the Big Six Banks will require that your variable-rate mortgage be registered as a collateral charge but others will offer you the choice (although you may have to ask).
The key, as always, is to shop around (or let a broker do that for you)!
Best,
Dave
Thank you, Dave!
Hi Dave!
I have been following your blog for sometime and find it interesting. Your detail analysis of both Canadian and US economy is very good. Hopefully the Variable rates will come down in 2019.
Thanks for your feedback Nikhil.
Best,
Dave
Thank you Dave for the excellent information
Just went through this ordeal myself getting a mortgage and HELOC set up at TD bank. Shockingly the mortgage specialist processing my application could not even tell me the difference between a standard charge vs collateral charge. When pressed she suggested that I contact a lawyer for the information instead. Her main objective was to maximize the amount of the collateral charge that I would agree to. When I specifically asked about any disadvantages of the collateral charge, she stated that there are none and that it was to my advantage should I decide to borrow more in the future (as you stated in your article as well).
Also love how you called out Jay above for posting from a TD bank IP address.
Cheers,
Amanda
Thanks for you note Amanda – and glad that you found the post useful.
Best regards,
Dave
What a great article David. Unbelievable read
Thanks Mike.
Dave
Great article David. I always appreciate your detailed analysis which is also easy to read and understand.
Thank you.
Thanks for your note Rob.
Best,
Dave
Thank you very much this is extremely well laid out and explained . I am looking into buying my first house, and this was very helpful. Thank you again.
Best Regards,
Margarita
Thank you for your note Margarita.
Best,
Dave
Hi David, I have a principle home with very little mortgage left. I have a HELOC on this principle house. I have used some money from the HELOC towards down payment of a rental property. Currently I have some cash. Which is better to pay of mortgage left on my principle property or pay of the money I have borrowed from the HELOC. Thanks
Hi Jan,
The interest cost on the money that went toward your rental property is tax deductible, whereas the interest cost on the money that was used to purchase your principal residence is not.
Given that, my advice would be to pay off the mortgage portion of this loan first.
Best,
Dave
Great answers and article!
Question is : we didn’t want to pay chmc insurance and had 20 pc down however appraisal came in 60k bellow offer price. Now we are forced by the bank to roll that 60k in and go below 20 pc down (ie 14 pc down) so we are having to pay insurance fees.
Not happy about this but question is how easily can we get out of chmc loan after say a yr or two. provided the value and appraisal supports an increase in value say to 900k. Then can we refinance at 80 pc LTV and get out of paying cmjc ins premiums?
Essentially how easy is it get out of cmhc mortgage to a non cmhc on the same property (owner occupied)
Thanks in advance!!
Hi Manu,
Thanks for your email.
In answer to your question, CMHC charges a one-time fee that is non-refundable.
Best,
Dave
My mortgage is paid off, could I just use my existing Homeline plan to purchase a rental property and write the interest off or do I need to get a specific business loan for the property?
Hi Stacy,
You should be able to write-off the interest if you use your existing Homeline to purchase a rental property. (FYI – You don’t need a special type of loan in order to qualify under CRA’s rules.)
Best,
Dave
Hi Dave,
My primary residence has 450,000 mortgage on it and I have a rental property on which I have an equity of 280,000. I can probably get $220 K (80% of 280,000) as equity loan from my rental property.
I am thinking of using this $60 K for making 15% lumpsum annual payment to my primary mortgage and use rest $160 K for investing .
Is the interest part on the equity loan that I am planning to take out of rental property tax deductable?
Hi Manoj,
The test determine whether the interest cost on the additional funds you are borrowing is tax deductible is what the funds were used for.
In the scenario you describe, the interest on the $160k you borrow to invest should be tax deductible provided that you purchase eligible investments (see my post for more details on eligible investments and talk to your financial planner), and the interest on the $60k would not be tax deductible because you would be putting that money toward the mortgage on your principal residence.
Best,
Dave
Haha marketing is right! The rep at the bank couldn’t even tell me how accelerated payments are calculated… Instead of marketing this scheme they should’ve just marketed mortgage payment increases. So silly…
Thanks for the insight and update
Thank you for the insightful commentary as always!
Thanks for this post David!! Definitely helped clarify a number of things for myself!
Thanks for the post.
I chose a big 5 because I was sold on better client service, bricks and mortar and a probable better experience. Well after learning how much I have to pay to break the mortgage, the amount of time I remain on hold when I call in and the fact that I can’t remember the last time I went into a branch, I’ll never use a Big 5 again for anything mortgage related unless their rates are DRASTICALLY different than other lenders which I think is unlikely.
Hi Oscar,
There are plenty non Big-Six bank options available and, very often, at better rates.
It certainly pays to shop around.
Best,
Dave
Thanks!!! Great article!!
Informative post.
I recently purchased a home for $640k. I had $350k and needed a mortgage for the balance.
I had no idea until I went to the lawyer on signing day that TD had registered the mortgage for $640k. They had used all of my cash and inferred that they had mortgaged the property in totality.
The lawyer believed I had fully mortgaged the property.
I told him that was outrageous as I had more than half the value as collateral. He then told me that he worked for me and the bank and if there was a conflict he would be dealing with the bank so I would have to find another lawyer.
I have two words…being nice of course….caveat emptor.
TD shame on you!
Great post.
Great article Dave!! I recommend Dave
Hi David, I have been following your blogs regularly since the last few months. They are very informative. I think you have been predicting the state of the Canadian economy pretty accurately. Looking forward to your next blog.
Regarding the yield inversion section in this blog, is the 10 year yield compared against three months or three years?
Hi Gurpratap,
Thank you for your email and glad to hear that you have been enjoying my blog.
In answer to your question, both of the U.S. and Canadian 10-year government bond yields recently fell below the yields offered for three-month treasuries.
Best,
Dave
Hello David,
I always enjoy reading your weekly blog! I have been reading your weekly post faithfully for the past year. I just want to send you my much appreciation for the wealth of info you provide here.
Thank you!
I love the insight and objective angles. Very useful while I look at whether to accept my bank’s offer of an early renewal – they’re trying to influence me into accepting a 3yr rate. I think I will look at a 5 yr rate – but I’m not due until October. It looks like it may be worthwhile to wait until at least the July 10th update from the BoC.
Thank you.
My question relates to the sellers side of things. We have buyers who has offered above what we know the appraisal will come in at. There were no conditions as the buyers have access to a large amount of funds but are still going through a financial institution – I don’t know, of course, how much they’re borrowing. Their agent has justified their actions by saying that they loved the house and area and it’s exactly what they want – we did have 13 offers…
Is there any risk to us, the sellers in this case, if the appraisal comes on lower than the offer?
Hi Manon,
If the appraisal comes in low the lender will still lend to the buyers, but only based on the appraised amount. That means that they would need to bridge the gap between the appraised value and the purchase price and then still be able to meet the lender’s minimum down payment requirements. If they have a large amount of funds this will **likely** not be a problem.
Best,
Dave
David nicely written, very informative and I will keep you in mind for my next mortgage switch
Hi Dave
Thanks for the interesting article. we are currently purchasing a house and have not sold our current home yet. We have been considering an open mortgage in order to allow us to pay the bulk of the mortgage off as soon as our current home sells. Is there another type of mortgage that would be suited for something as short term as 3months
Hi Heather,
Over what is likely to be a very short time period, an open mortgage is definitely the way to go.
Best,
Dave
Very well written commentary, genuinely helpful to those of us considering our fx positioning.
Thank you!
1. Is there a time limit to sell a house with a Reverse Mortgage after the owner has died?
2. Does the interest rate go up at any time after the death and before the sale?
Hi John,
In answer to your questions:
1. CHIP’s contract requires that they be notified within 30 days of the last surviving home owner’s passing, and that the mortgage be paid back within 180 days of the date of death.
2. Possibly. If the term was about to reset and the rates are higher, then yes, new rates would apply but if the existing contract is mid-term, the rate would not change.
Best regards,
Dave
thanks for sharing this.
Hi David,
Will the new immigrant qualify for this program for the second time? If they decided to sell the first one and wanted to upgrade for a larger house?
Hi Lina,
As long as you are selling the property you initially purchased and you still meet the criteria required under the lender’s New to Canada program, you would be allowed to upgrade to a larger home.
Best regards,
Dave
Hi,
Great articule, and clear understandable answers….hoping you can clear things up for me.
We just bought a new house with 5% down. The mortgage lender chose to pay the CMCH fee as a lump sum payment (we weren’t consulted on this) and at this time are still unsure what benefit or loss this results in as 1st time home buyers. The lump-sum payment was $12,4500, we have a 25yr mortgage.
1) Does this lump sum represent the insurance premium for the 25yrs of the loan?
2) Wouldn’t it make more sense to pay this as a monthly premium because the principal on the mortgage will go down over time?- are we able to make this change after having signed the mortgage agreement?
3) If we sell our house and buy another in a few years with 20% down ….is a portion of this money refundable?
4) If we bought another house at less than 20% would we have to pay this fee all over again on the new house ?
Hi Brianna,
1. High-ratio default-insurance fees must be paid in full and upfront. Once the fee is paid, the insurance remains in place over the full 25-year amortization of the loan, even if you switch lenders at renewal.
2. You do not have the option of paying the default-insurance premium monthly.
3. The default-insurance premium is not refundable under any circumstances.
4. If you sell your current home and buy a different home down the road, as long as the gap between your buy and sell dates is within the range allowed by the default insurer (which I believe is 120 days), then you would be able to port your default-insurance policy over to the new property. FYI – If you needed to increase your loan amount as part of that transaction, you would have to pay a default-insurance top-up fee on any additional funds borrowed.
Best,
Dave
I just wanted to start off by saying, this article is superb, and has helped me get a better understanding of how the internals of CMHC and its competition are conducting themselves. I would also like to say thank you for all of the answers you have provided in the comment section. as a just starting off real-estate investor things are starting to become a lot more clear, and its folks like you David that don’t get enough recognition with the kindness you spread.
Thank you Again.
Nateram Jaisingh
Thank you for your note Nate. Very kind of you to write in.
Best,
Dave
Hi Dave
Whats happens to CMHC in case of the death of one of the borrowers?
Me and My wife own a property and have CMHC, I just want to know if after my death does this insurance covers cost of my house?
Thanks
Shail
Hi Shail,
High-ratio default insurance only protects the lender in the event of a credit default.
There are other forms of insurance that can cover you against disability, illness and death, but those are different.
Best regards,
Dave
Hey Dave, I do not have a mortgage on house A. I want to buy a newer house B in the near future, designate it my new principal residence, and rent house A. How can I get structure the purchase in order to deduct interest on house A (to offset the rent income)?
Alternative question:
Suppose I have a principal residence with a $ 300K mortgage. If I start renting it out next year, can I deduct the mortgage interest and offset it against the rental income ?
To address the first situation, can I then refinance my house with a $ 300K mortgage, and in a couple of years, start renting it out so that I can deduct the mortgage interest to offset the rental income ?
Thank you
Hi Peter,
If you are using the money borrowed against house A to buy house B, and if house B is going to be your principal residence, then there is no way to structure the loan to make the mortgage interest tax deductible.
It is the use of the funds, not the property they are borrowed against, which determines whether the interest can be tax deductible. As such, any money borrowed for the purchase of buying a principal residence would never be eligible.
In answer to your other question, if you convert a property from being your principal residence to a rental property then the interest would be tax deductible for that day forward (but on the flip side, at that point the property would no longer be eligible for the capital-gain exemption applied to principal residences).
Best regards,
Dave
Very helpful article for me, David! Thank you!
Thanks!
Came across this site (Mar 7,2020) while doing my research on my current refinance with TD. Still very useful. Thank you Dave
Hi wondering about Mr. Samar T. Pants
Just wondering he had p-0.96 and kept his payments with prime as 3.95 if he’d come out ahead.
P.s. these simulations are very helpful
Thank you
Alysha
Hi Alysha,
I will be updating this analysis next Monday (March 16).
Best,
Dave
Hi Dave,
I have a tax question about the interest deduction for rental income.
Assume that House A is my principle residence, and Condo B is my investment property. I have 100K HELOC on House A. The mortgage rate on Condo B is very high.
I would like to allocate 100K HELOC to a new mortgage segment with much lower interest rate, and use this 100K to prepay the mortgage on Condo B. No prepayment penalty will be introduced. In this case, can I deduct the interest cost on 100K mortgage for tax?
Thanks,
Feng
Hi Feng,
You would be able to deduct the interest as long as you could show a complete paper trail to confirm that the funds were originally used to purchase the investment property.
Best,
Dave
Good Stuff Dave..look forward to reading your Monday updates..cheers and keep washing those hands
What is someone waived conditions with covid -19 quarantine under way and a house listed to sell as one of the waived conditions.. and zero viewings because of covid… any special rules here?
Thanks
Jen
Hi Jenny,
I suggest that you speak with your real estate lawyer. Hopefully some special accommodations can be made for you given the difficult of the current situation.
Good luck.
Dave
As of this morning, Bonds are already back down to the 0.6 range. So you’re already proven true on that. We’ll see what follows for rates!
Thank you for sharing this pertinent information.
Dave Larock rocks!! There is no better place to stay informed than right here and Dave proves that week in and week out.When you read his weekly commentary you know what I mean. You are right again Dave as BOC just lowered rates another 0.5 percent.
Thanks for all the awesome information you provide free to the people! The world needs more professionals like you.
Cheers
Thanks for your note Ed.
Best,
Dave
Great Read!
Kindly correct me if I am wrong, how come the risk of mortgage deferment or default of many borrowers justify the lenders’s rate increase, when the CMHC is taking this risk by purchasing 80% of insured mortgages? Shouldn’t this mean that the lenders are guaranteed their capital and profits with no risk? Also, I read but can’t remember exactly that some entity whether CMHC or BoC or Gov will be extending the purchases to cover the uninsured mortgages as well.
So how come the lenders are hedging for any risk! Is it the remaining 20% + the uninsured mortgages justify the rate increase???
Would NOT these actions by the lenders antagonize the relief efforts made by the Gov and BoC, and stop these measures from trickling down to the average person and consequently slowing the economy even more??
Hi Mourad,
CMHC is purchasing the insured and uninsured mortgages that are already on the lender’s books, not new ones through the door (that said, it’s still a bailout in my book).
Defaulted loans are still very bad for lenders even if they are insured and/or off balance sheet. (For a host of reasons that require a longer explanation than I have time for here.) Bottom line, lenders aren’t going to compete for new business when 1 million Canadians have filed for EI with more people lining up behind them each day.
Our regulators are trying to facilitate ultra loose credit conditions for lenders in the hopes that they will keep lending because they know how scared lenders are at the moment. That said, they can’t force them to lend (and if you and I were in their shoes we would be pulling back as well).
Best,
Dave
I enjoyed your post a lot David. You explain things very clearly and easily for readers to understand. Thanks a lot
Thank you for your note Jane. Nice of you to say.
Dave
Great info you provide. Thx.
What are the chances the discount on variable rates will continue to widen to previous levels? They sure compressed quickly as the BOC cut rates.
Hi Mike,
Very tough to predict. So much unknown at the moment.
Glad you enjoyed the post.
Best,
Dave
thanks
Awesome article Dave.. Watching with keen eyes as to how this plays out.
Thanks Neil.
Thanks Dave.
Very useful.
Thanks Paul.
Excellent article Dave!
David your blog is awesome, always find the info/ point of view helpful.
Great way to start week.
Dennis
Hi Dave,
I’m a new mortgage broker in Montreal. I just had my permit in January. Everything is so new, lots of questions and lots to learn for me.
Luckily, I discovered you few weeks ago. I read your post ever since. When reading your post, it is like you are answering all questions that I have in my mind. You are like my “virtual mentor” LOL.
Again, you explain everything very clear and easy to understand. I’m learning a lot by reading your post. Can’t wait to read it every Monday.
Thank you so much for writing those blog Dave,
Stay safe and sharp!
Jane
Thanks for your note Jane. Glad you have been enjoying my posts.
Best,
Dave
Great post Dave!!
Thanks.
Very well summarized David.
I am shocked and don’t agree with the calculation method the banks are using. I was under the mistaken assumption that if I renegotiate a new closed mortgage before the end with the same lender at a lower rate, that they would calculate the penalty on the difference between my old and new rate. They gave me an unreasonable penalty (no calculation details) while in the same email asking me to give then a chance to compete for a new rate. Seriously delusional if they think I’m going to stay, if I’m paying full penalty as if I’m leaving.
Keep this up, we need more people like you.
Thanks Mario. And sorry to hear that you aren’t able to refinance down to a lower rate.
Dave
I’m trying to figure out just exactly what I have.
I purchased a presale condo last year (out here in B.C.) and took advantage of the builder’s lender’s capped rate program. Basically, I submitted to them my agreement to purchase said property and provided them with my income documents and bank statements and was told I was “approved” for a mortgage. However, the letter states that is a “preliminary” approval, but also states that financial info will not need to be re-verified again. The one caveat that I see is that they do have the right to deny funding if there’s been a “material change” in circumstances i.e. income or value of property.
So what do I have, a pre-approval or a semi-firm mortgage?
Hi Jason,
I’m not sure what exactly to call what you have but I know for certain it isn’t a firm approval, which is really the only thing that matters.
It’s strange that the documents would say that your financial info won’t be verified again but that funding can be withdrawn if there is a material change. Those two statements are contradictory. If financial info isn’t re-verified how would a material change come to light?
I suggest you call the lender directly to ask for clarification.
Best,
Dave
Best,
Dave
Excellent illustration
Thanks!
David,
I have question about your IRD discounted method calculation. Can you tell me more how you arrive to $19,278 for all of the three rates ?
Hi Vicente,
This post I wrote explains how mortgage penalties are calculated in detail (I also linked to it in the post):
https://www.integratedmortgageplanners.com/buyer-beware/what-every-canadian-borrower-needs-to-know-about-fixed-rate-mortgage-penalties-april-27-2015/
The penalty you reference was calculated by using the Discounted method I outline.
FYI – I used TD’s posted five-year fixed rate of 5.59% on May 3, 2018 and TD’s three-year posted rate of 3.89% on May 3, 2020.
Best,
Dave
Thanks for the article! How often do you see buyers extending the finance conditions and does that typically mean they will in fact get financing approved if they ask to extend for a couple days?
Also, during covid 19 do you see that self employed (realtor) people would be having a tough time getting financial approval with all that’s going on now with the economy?
How often do you see deals not happening due to financial conditions in place ?
Thanks!
Hi Connie,
Extending financing conditions isn’t overly common but can certainly be done in cases where buyers need more time.
Commissioned sales people are having to provide more detail to confirm how their incomes have been impacted by COID-19, but if they are able to answer the lender’s questions to their satisfaction they are still being approved.
In my personal experience it is rare that a deal with a financing condition doesn’t ultimately go through. That’s because we do a lot of the work upfront and that helps eliminate any last minute issues that might otherwise scuttle a deal.
Best regards,
Dave
Hi. Great article. At renewal do I need to keep remainig amortization or can I set it to 25 yrs again to keep mortage insurance?
Hi Umii,
To keep the default insurance in place you must leave the amortization unchanged at renewal.
Best,
Dave
Love your post Dave ?
In your opinion, which insurer offers more flexibility to self-employed?
Hi Jane,
Both Genworth and Canada Guaranty have good programs for self-employed borrowers.
An experienced mortgage broker can work with the lender to find the best fit for you.
Dave
Hi Dave, Interesting article. We have seen real estate values pullback in April but they have rebounded and recent values in the downtown core are still strong. As long as active listing don’t skyrocket and home owners don’t sell their home out of free– “let’s get out now before the market tanks” then hopefully the market will be stable.
Is there a penalty if I were to use CMHC Loan and then flip the house a few months later?
Hi Sheldyn,
There is no penalty for the CMHC fee if you break the mortgage early – but there is also no refund for this one-time fee either.
Best,
Dave
great column
I’ve been watching specific houses @ $600k in the Hamilton area since September.
During the pandemic I saw a steady decrease of approximately 10 houses I was interested in drop 10-12.5%.
This is a great article, thanks for providing insights into what’s hidden on the terms and conditions when breaking a mortgage.
Nice Article…Very interesting to read this article. I have learned some new information. Thanks for sharing.
Good one Dave. Keep it up and have a great day.
G.
Thanks George!
Thank you for your insights on today’s Town hall.
Andrew
It is amazing to visit your blog! Thank you for sharing the great home buying tips on this article. It will definitely helpful to the first time home buyers.
Hi, I have default mortage insurance for the house which I bought 2 years back. Now I want to sell the house so do I get the default insurance money back(approx. $19,000) even though I haven’t completed the amortization(25 years)?
I’m not buying a new mortgage and don’t want to transfer the mortgage as I’m moving out of country.
Hi Ravi,
Unfortunately the fee is non-refundable.
Best,
Dave
hello ive purchased a home last year with 20% and still endup paying for mortgage insurance is it even possible?
Hi Saeed,
In special circumstances mortgage-default insurance can be required on purchases where the down payment is a much as 35%.
So in answer to your question, yes, this is possible and legitimate.
Best regards,
Dave
Thanks David. This is very useful info. It’s really surprising banks don’t have to openly publish the formulas they are using for this. I couldn’t find them anywhere.
Follow-up question, what happens to these calculations if the interest rates increase after you sign your mortgage? For example, I’m shopping for a 2.19% fixed rate 5 year mortgage right now. How would you calculate the penalty in 3 years if interest rates have increased by then? For the standard IRD, would it be zero given the result of the calculation is negative (and therefore would be charged 3 month interest instead)?
Many thanks.
Hi Edouard,
Prepayment penalties are calculated when payouts statements are ordered based on the rates available at that time.
If rates rise between now and then, the IRD penalty amount will shrink. If they rise to a level where the IRD penalty is zero, then the penalty owed would revert to three months’ interest.
Best,
Dave
Hi Dave,
If I use the HELOC ~ 110K from my investment property as downpayment for a second investment property (preconstruction) would the interest on $110K be tax deductible?
Regards,
Anna
Hi Anna,
Under the scenario you describe the interest should be tax-deductible, but if there is no income associated with the property (because it is not built yet) there wouldn’t be anything to write it off against, at least initially.
Given that, I suggest that you check with your accountant to confirm whether the interest expense can be deferred to future years.
Best,
Dave
Hi Dave, if i buy a new home with less than 20% down, i am getting a lower interest rate vs 20% down. does this continue over life of mortgage?
Hi Vipul,
If you pay for high-ratio mortgage default insurance it will remain in place even if you switch lenders at renewal (and the coverage is even portable to another property).
The only way the insurance will be voided is if you refinance the existing loan.
Best,
Dave
Hi
First of all thank you for helping the public making better Mortgage decisions.
My question is as follows : I have a collateral mortgage with TD that is around 125% the value of my house . I also have credit card debt and a line of credit with them. It says in the mortgage contract that i signed ” The Mortgage granted to us may not secure more than one agreement for a loan or a line of credit at a time “. So lets say i default on my unsecured TD credit card or line of credit can TD take it from my house ?
Hi Salamon,
I believe that TD would be able to take your house if you don’t pay your line-of-credit because of another clause in their mortgage contact call cross-collateralization.
You can learn more about it in this post: https://www.integratedmortgageplanners.com/buyer-beware/the-americanization-of-canadian-credit/
Best,
Dave
Great article, found it very helpful.
I fear I am in trouble, where might I find the information on the CIBC website for terminating early?
I pulled my mortgage docs and it’s all greek to me. We have to sell due to separation, and I am trying to educate myself as much as I can.
Thank you.
Hi Cindy,
Sorry to hear about your situation. CIBC will provide you with a penalty quote if you call their mortgage customer service line.
Best,
Dave
Great post. Thank you very much. We have had to break our mortgage due to selling the house. Our penalty is $15, 000. My credit union couldnt ecplain how they came to this number. Grrrrrr
Hi Richard,
Thank you for your note and sorry to hear that your lender could not readily explain their penalty calculation.
In such circumstances I suggest that you escalate your file to a manager. Somebody should be able to walk you through it!
Best regards,
Dave
I loved this article! It FINALLY explained to me WHY my mortgage penalty amount was such a shock to me and every broker I’ve been shopping with. I was uninformed and got a horrid CIBC 5 year mortgage 3 years ago. So frustrating!
Anyhow, at least now I understand what’s going on with this 23,575.00 penalty!!!!
Thank you!
Thank you, David, for an informative piece on Mortgage rates are here to stay. It touches all aspects of mortgage rates. Variable mortgage rates are priced on lender prime rates, which move in lockstep with the BoC’s policy rate. Fixed mortgage rates are priced on the Government of Canada bond yields. Thousands of buy-and-sell orders typically determine these yields in the open market and usually respond only indirectly to the BoC’s policy-rate actions and commentary. I’m planning to buy a house, so this was really informative. I was doubtful whether to buy the house when the mortgage rates are the lowest or to get the variable or fixed rates. Now I’ve a clearer picture.
Very informative and easy to understand!
Thanks Charlene.
Loved your segment on the Vancouver Real Estate Podcast, looking forward to your weekly insights.
Thanks Kyle.
Is collateral mortgage for a fixed term (5 year, 3 year etc.) or for the entire amortization period. Can this be changed to regular mortgage ?
Hi Jagvijay,
Once a mortgage is registered by the lender they won’t change it.
You can change the way the mortgage is registered if you switch to a different lender, but not for as long as you stay with the original lender.
Best,
Dave
We want to get a bridging loan as we are selling our home and closing on Nov 30, but need down payment on Nov 27 for the new home- however we plan to switch from our exisiting mortgage provider and go with a new provider from Nov 27th.
In this case, will the bridging loan be provided by my current bank or the new one with which I’ll take the new mortgage?
Thanks
Hi Yesha,
Your bridge loan should be provided by the new lender (since they have a mortgage waiting for them when your purchase closes).
Best,
Dave
Good morning, we have a renewal coming up in two months and plan on selling this property in 5 months, paying off the mortgage at that time what would be our best way to handle this ?
Thank you
Peter
Hi Peter,
Given the short amount of time involved, I recommend that you roll your mortgage balance into either a home-equity line-of-credit or an open mortgage.
The key is to choose an option that doesn’t involve any prepayment penalty, even if the interest rate is higher.
Best regards,
Dave
Thanks so much for your help!
Very clearly explained and very important to know!
Glad to hear you found the post useful Maria.
Very insightful, thanks.
Thanks David. Glad you found it useful.
“If I’m listing five things that are on my mind these days, I can’t leave off without listing humanity’s fight against this virus. When your moment comes, please do you part, and I promise you that I will do mine.”
Proud to be a reader of this blog!
Thanks for your note Ben. Very kind of you to say.
Best,
Dave
With respect !!!
Thanks Dave always enjoy reading your excellent blog posts to keep up with whats happening with the economy and mortgage rates.
Thanks Ed. Glad you have been enjoying my posts.
Best,
Dave
Such a thorough explanation! I was doing some research on fixed rate penalties, and this was very well explained. Thanks
We are going to offer on a house in Toronto and waive the financing conditions given the hot market. Part of our income comes from an investment property we have owned for 10 months and receive regular rental payments. How likely is it that an underwriter might not qualify a buyer who is in a situation like this?
Hi Kirsten,
If you provide a copy of the signed lease and a 90-day history from the bank account the rental payments are deposited into then that would normally be accepted as sufficient confirmation.
Best,
Dave
What if the property has lawsuits and potential assessments, the lawyer review period is expired, the offer is firm, the mortgage condition was waived off then you get to know that the mortgage can’t be approved because the property is risky. I mean now it is not the mistake of the buyer or his financial standing but the seller’s property…
Hi Shazaib,
I think this question is best put to your lawyer.
Generally speaking, if you make a firm offer and issues with the property are later discovered, you would still be responsible for completing the purchase, but there may be exceptions in cases where there was a material omission (because there are some defects that sellers and real estate agents are legally obligated to disclose).
Best regards,
Dave
This is great information and so clearly illustrated David! I am going to post on my SM sites – too many clients have a hard time understanding all the ins and outs of mortgages and as a REALTOR, this will help me explain to them.
Thank you!
Thanks for your comment Anne-Louise and glad you found the post useful.
Best,
Dave
Hi Dave,
I have a mortgage on my Principal Residence of 320K and just refinanced it to 520K. So i got 200k paid out to myself because I wanted to invest this 200k in a savings account earning interest or in the stock market. As long as I invest this money, can I deduct the interest on this 200k?
I read the other comments and this was already asked but for a situation where it was on a rental property. This is my principal residence so is this still allowed?
Thank you!
Hi Mitchell,
The fact that you borrowed the money against your principal residence is not an issue. It’s the use of the funds that matters.
My understanding is that the funds must be invested in something that either pays a dividend or has the realistic prospect of paying a dividend. Under that definition, interest from a savings account would not be eligible.
That said, I advise you either call CRA or check with an accountant to be sure.
Best,
Dave
Hello Dave, very interesting article. However I have a question about HELOC on rental property. Does CRA allows to deduct interest from rental property against investments like Stocks and Mutual funds. Let’s say HELOC interest is 2.95% now,investments will generate 5% return ,marginal tax rate is 20%.
Thank you,Robert
Hi Robert,
If you are using a HELOC on your rental to purchase investments then the interest should be tax deductible provided that the investments either pay a dividend or have a realistic prospect of paying a dividend. (To be sure, I suggest that you ask your financial advisor or call CRA to confirm.)
Best,
Dave
Excellent as always, David! Thank you
Thank you sir. I am trying to understand the game before entering it, and your blog is really helpful!
You are welcome Bastien. Glad you found my post useful.
Best,
Dave
Can a buyer waive their financing and not show proof that they have the money. We just had a deal fall through 4 days before closing because the buyers of our house waived their financing and then didn’t have the funds when it was time to meet with their lawyer. We had to provide a letter from our mortgage broker stating we had our financing in place. We had no idea these people buying our house just waived their financing. In short we lost our dream house and our deposit and we incurred other expenses. We are not at fault but we feel we were blindsided and not represented well. Who is at fault? Why did we have to provide an approval letter and the ‘buyers’ of our home didn’t. We are living a nightmare right now.
Hi Hollis,
Very sorry to hear about your tough situation.
In answer to your question, there is nothing stopping a buyer from waiving their financing condition.
In the case you describe it certainly sounds like the fault lies with the buyers who committed to purchasing your property but could not subsequently complete the transaction. In such cases I believe that you would have the right to take legal action for damages incurred, but I will leave it to your lawyer to advise on that front.
Best regards,
Dave
Hi Dave
I have a qn.
1. I had a mortgage for 600,000 4.5 years ago and my down payment was less than 20%. So I took the CMHC insurance
2. Now post 4.5 years, the mortgage balance is 450,000 and when renewing I wanted to ask for 550,000. How do I keep my CMHC loan intact? So I can a slight premium to keep it intact? What are my options?
Thanks in advance for your advise.
Regards,
Karthik
Hi Karthik,
There is no way to preserve your default-insurance if you refinance your existing mortgage.
The only option would be to add a second mortgage, but that would be significantly more expensive, and likely not practical.
Best,
Dave
Thank you for your analysis.
Quick question – why the insistence that the Bank of Canada won’t raise rates before the US Fed? Has this never occurred in the past?
Always enjoy your blog – it is thorough and well though-out. Read it every Monday morning.
Thanks for your note Jeff and glad that you have been enjoying my blog.
In answer to your question, if the BoC hikes before the Fed that will push the Loonie higher against the Greenback and make our exports less competitive.
The last time we saw this was in 2010 after the Great Recession. The BoC raised, the Fed didn’t, and our export sector was hammered. Businesses didn’t just reduce production, they shut down. Some of the hardest hit parts of export sector were simply wiped out.
I don’t see the BoC making that mistakes again, especially when the consequences from last time should be fresh in their minds.
My two cents.
Dave
Does CMHC insurance not cover your mortgage right till it’s repaid?
If so then would it not be more accurate to amortize the insurance over the full amortization period, or term of ownership?
Hi Leslie,
The high-ratio default insurance fee is rolled into the mortgage, and as such, its repayment is spread over the full amortization period.
Best,
Dave
Hi Dave,
Great info! We are coming up for renewal and our home is now likely worth more than $1 million (who would have thought…). It’s our 3rd term (2nd time renewing) and we had CMHC insurance the first time and I guess we kept it when we last renewed. Now, will we get stuck with a higher rate b/c I read that you can’t get CMHC on a property worth more than $1 million ?
Hi Danielle,
If you are going a straight renewal (with no changes to your mortgage) then your existing default insurance policy will remain valid and you will be eligible for the best rates available.
Dave
This is a very researched an informative content. Great work!
For an ARM, when the interest rate rises is your new payment calculated based on the original principal or what is owed at the time of the interest rate increase?
Hi Jeff,
Your new payment will be based on the current balance owing at the time of the rate change.
Best,
Dave
Thanks for the insight -This is awesome. Rakesh
Glad you found it useful Rakesh.
Thank you.
Excellent insight, Thanks
Thanks Rakesh.
This is excellent Dave. My take away from this is that the withdrawal of QE and increases to fixed rates (together with all the other factors you mention (rising energy costs and supply issues)), will be such a drag on growth that the overnight rates won’t need to move nearly as much as people fear.
Hi Alex,
Thanks for your feedback – and in response to your comment, yes, I think the fixed-rate rises that are linked to QE tapering will lessen the need for BoC rate hikes (because they have a very similar on the economy).
I also think we’re going to see less growth and more labour capacity come back online because of our federal government’s very recent decision to curtail its emergency stimulus programs.
Time will tell.
Best,
Dave
Hello David,
Always enjoyed reading your analysis. I am a consistent reader of your blog, keep up the good work!
I thought you might be interested in this article
https://www.businessinsider.com/when-will-supply-shortages-end-inflation-cool-shipping-crisis-manufacturers-2021-12
Thanks for your note and for the link Mourad. I will check it out!
Best regards,
Dave
Great
Love your weekly blog. Congrats on 500! That’s amazing. And a wonder Christmas season to you and yours, and all the best in 2022!!
Thanks Luke. Happy holidays to you and yours as well!
Dave
Congrats on the milestone Dave. And thanks for another great post.
Thanks Alex!
Congrats on the 500th. I also look forward to your level headed comments and hope to see more great stuff in 2022.
Thanks Ken!
I read this every Monday. Thank you for all the work you put in to your blog.
Thank you for your note Marc. Glad you find the posts useful!
Best,
Dave
Congrats and happy holidays Dave! You’ve been an indispensable asset to the community.
Thanks Stevie. That’s kind of you to write.
Best,
Dave
Well done Dave and congrats on the milestone. Love the content.
Thanks
Thanks Sean.
Congrats on 500, Dave! Im not an industry professional, just an average homeowner, but I always look forward to your poignant insights and detailed analyses. Your explanations are always thorough yet still within the grasp of the layman. Looking forward to more in 2022.
Thank you for your note Mike.
You are my target audience and I am encouraged to hear that you find my posts useful.
Best regards,
Dave
Hi David,
If my original amortization was 25 years, after a 5 year term I would have 20 years left. If at this point I refinanced to 25 years again without borrowing any more money, will this affect the insurance?
Hi Anthony,
The existing default insurance remains in place if you renew with your existing lender or switch to another lender without making any changes.
If you want to re-extend your amortization, that is considered a refinance and you would void your default-insurance coverage.
Best,
Dave
You called it!
🙂
Thank you David!!
This is how I explain the penalty differences my clients when they are deciding between a variable or fixed mortgage for their home. I really appreciate the illustration, as we know – clients don’t believe it till they see it!
An awesome tool to steer first time home buyers in the variable rate direction if they have plans of breaking their mortgage early.
Amazing insight as always, and great call on the last BoC meeting and the policy rate staying where it was. Thanks for sharing!
Thanks Paul.
Is it the responsibility of a mortgage broker to warn a client about high penalties before signing mortgage documents?
Hi Natasha,
Any broker worth their salt should be providing each borrower with a detailed breakdown of the terms and conditions their mortgage contract, including a thorough explanation of how the lender’s penalties are calculated and a candid assessment of how those penalties compare with alternative options.
Best,
Dave
Thanks for your insights, Dave! After hearing your episode on the ILMB podcast I’ve been following your blog regularly. Your perspective is always refreshingly sensible compared to some of the rate drama out there. 🙂
Great comments Dave. I agree with you. Will be an interesting spring/summer.
Have been following you for years – always excellent commentary – thank you.
Thanks Tom.
Hi Dave,
Long time reader, first time commenting.
I always hear the saying that what goes up must go down. Given the upward trajectory of mortgage rates and if the BoC does not hike the rates more than expected, will the rates remain as high as they are now or will we see a gradual decline?
Thankyou.
Hi Marlee,
The recent run-up in bond yields is based on the belief that the BoC (and the Fed) will hike rates repeatedly over the near term.
If those hikes don’t materialize to the extent expected, bond yields, and fixed mortgage rates, should fall from their current levels.
Best,
Dave
Hi
I’ve been reading your Monday interest rate update for a number of months now; thank you for your analyses.
Just like you mention, BoC’s response to inflation is pure fantasy. I have a bad feeling that an additional 2 or 3 0.5 calibre rate hikes is all it’ll take to trigger a nasty recession. At that point, the housing market might experience a brutal contraction and they’ll have achieved next to nothing in terms of inflation control.
Hi Frank,
We’ll how many more rate hikes materialize. The BoC’s actions don’t always match its words (often for good reason) and if our economy
slows more than anticipated (likely) they may adopt of more cautious approach.
We live in interesting times (whether we like it or not).
Thank you! excellent information
Thanks Andrew. I’m glad you found the post useful.
Best,
Dave
Thank you for your insights. I am a lay person (on this subject), and I’ve been following your blogs for some time now and find the information very helpful.
Thank you for your note Monique – and happy to hear that you have enjoyed my posts.
Best,
Dave
Great info. Thanks.
Hi David, great insights as usual. I read somewhere that the US manipulates its consumer price index to keep it low. for example replacing a steak with ground beef and claiming it is the same. while this is technically still beef it is not the same. Do you know if the same is done in Canada and if so what our real CPI is?
Hi Nalaka,
The CPI is regularly adjusted in both the US and Canada.
Some items are removed/added to the index, or reweighted as consumer spending habits change. These are referred to as hedonic adjustments, and they are often debated (and criticized).
In answer to your question, since CPI is always changing there is no “real CPI” that everyone will agree on, beyond the officially reported statistic.
Best,
Dave
As always, great explanation and perspective! Currently regretting not going fixed rate a year ago. That ship has sailed though and I’ll ride this rollercoaster out. I feel that the BoC is over estimating, I think we are much closer to a recession than they realize and I am anticipating a rate correction by this time next year. Time will tell
Thanks Mitch. We’ll see what happens, but I agree with your general view.
Best,
Dave
Excellent analysis Dave. We are in uncharted territory here so it’s nice to read material that flushes out the signal from the noise.
Thanks Steven. Interesting times for sure.
Best,
Dave
Some valuable information here. Thanks for sharing and looking forward to the next one
Thanks Rob.
Great info!
Thanks Wendy.
Great read!
Thanks Joey.
Love your updates, I learn so much from them.
Ramona
good call on the 0.5% rate hike. a lot of the big banks were only expecting 0.25%.
What do you think for 2023? Do you still think there will be a pause on the rate hikes and possibly some drops in the second half of the year?
Thanks Nalaka.
You can check out my post from this morning for the answer to your question. 🙂
Best,
Dave
Awesome post!
Thanks Leigh
Loved your chat with John Pasalis a couple weeks ago and glad to have found your newsletter! Keep it coming 🙏
Thanks Keaton.
Really enjoy your articles David!
Thanks Julie. Glad you find them useful.
Nice post !
Thanks Corey.
“rates take the elevator on the way up and the stairs on the way down”
Actually is the other way around! People will be shocked how quick will the interest rates fall between Sep 23 – Jun 24.
Thank you, Dave. A very informative article as always.
In wake of the most recent rise in interest rates last week, and considering your other article dated 17 July on BoC’s perception of future, can you please share your updated recommendation to choose between two-year fixed and three-year fixed mortgages as the “safe, middle-of-the-fairway pick”?
Hi Bahman,
My advice to individual borrowers will always be specific to their individual profile and risk tolerance, but generally speaking, I still view the three-year fixed as a safe “middle-of-the-fairway” pick and the two-year fixed rate as a more aggressive bet.
Best regards,
Dave
Well written article!
Thanks Ajay.
Very well written and structured article.
Contrary to the comment on here, I agree that rates will be taking the stairs down in the near term.
Thanks Armin. We’ll see!
Dave,
Just my opinions
– BoC will not increase the rates any further.
– Boc will most likely start cutting rates in Sep, pretty aggressively.
We’ll see…
And I forgot… Will surprise many
I do expect by next summer the 5y Fixed Mortgage Rates to be around 3.50% !!!