How the Bank of Canada’s Interest Rate Hike Affects Variable Rate Mortgages
How the Bank of Canada’s Interest Rate Hike Affects Variable Rate Mortgages
The Bank of Canada recently raised its interest rate from 4.25% to 4.5%. This is the fifth consecutive rate hike and has big implications for Canadians who have variable-rate mortgages.
Understanding how an interest rate hike affects your mortgage is key to managing your finances responsibly and making sure you don’t get overwhelmed with payments. Let’s break down what you need to know.
How are Mortgage Rates Calculated?
Mortgage rates generally move in conjunction with the Bank of Canada’s overnight lending rate, which is determined by the Bank of Canada’s target rate and adjusted based on economic conditions. When the Bank raises or lowers its target rate, lenders adjust their prime rates accordingly (lenders can choose whether or not to pass on the full cost of the change to customers). This, in turn, affects variable mortgage rates across all lenders and products.
Varying Impact Depending on Your Mortgage Product
The effect of the interest rate hike will depend on the type of mortgage product you have. Fixed-rate mortgages remain unchanged—they are locked in at their current interest rate until maturity—so these borrowers won’t see any change due to this hike. However, those with variable-rate mortgages will be impacted. The new higher prime rate means that monthly payments will go up as well as your total cost over the life of your loan. It is important to note that this increase may be gradual if your lender has chosen not to pass on the full impact of the interest rate hike right away.
How You Can Prepare for Higher Payments
It is always a good idea to plan ahead when it comes to managing your finances and make sure that you can afford any additional costs associated with higher payments before they take effect. One way you can do this is by speaking with a financial advisor about budgeting options that would work best for you and help you manage any changes in payment size more effectively.
Additionally, if you are looking for ways to save money on your mortgage payments, there are many innovative products available through our associated lenders that allow for flexible payment structures, such as biweekly payments or lump-sum prepayments without penalty fees.
Conclusion:
The recent increase in interest rates by the Bank of Canada has varying impacts depending on what type of mortgage product you have – fixed-rate mortgages remain unchanged while those with variable-rate mortgages may see their monthly payments go up due to higher prime rates set by lenders.
It is important to plan ahead and consider budgeting options that could help manage any changes in payment size more effectively so that homeowners aren’t caught off guard when they receive their statements each month or year. By understanding how an interest rate hike affects your mortgage, you can make informed decisions about how best to manage your finances responsibly!
When it comes to managing your finances and understanding how interest rate hikes affect your mortgage, 8Twelve Mortgage Solutions can provide you with the advice and guidance you need. With years of experience in the mortgage industry, their team of knowledgeable agents will be able to answer all your questions about the Bank of Canada’s recent rate hike and provide sound financial advice.
Recent Posts at 8Twelve
8Twelve Enters into Mortgage Solution Agreement with Top-Tier Canadian Banking Institution
8Twelve Enters into Mortgage Solution Agreement with Top-Tier Canadian Banking Institution
TORONTO – 8Twelve Financial Technologies Inc. (“8Twelve” or the “Company”) is pleased to announce that it has entered into agreement to provide mortgage solutions to declined customers at a top tier Canadian banking institution (the “Bank”).
8Twelve streamlines the home financing process by providing its partners a one-stop financing solution for all their mortgage needs. 8Twelve’s proprietary technology platform INFIN8 identifies the best possible mortgage from Canada’s largest marketplace of bank, alternative, and private mortgage products.
8Twelve’s unique service model has earned the distinction of being named Digital Innovator of the year in 2022, and the company boasts a 5 star Google rating in over 450 reviews and counting.
“The tech platform we have built provides full transparency and analytics in a regulatory compliant environment,” said Akber Abbas, President & Chief Information Officer of 8Twelve. “We have access to over 65+ lenders and 7000+ mortgage products empowering us to find the right solution for these turned down borrowers.”
8Twelve industry partners include: lenders with a limited product offering, insurance companies, wealth management, financial planning firms, real estate brokerages, and other financial institutions. Given the volatility and uncertainty caused by rapidly rising rates, 8Twelve partners have the confidence knowing that they are providing their clients the highest chance of success in finding the best mortgage solution using the 8Twelve platform.
About 8Twelve Financial Technologies
8Twelve is transforming the home financing experience by providing consumers with one convenient platform to solve all their mortgage needs. Gone are the days of needing to search for a mortgage through multiple providers such as banks, mortgage brokers, and private lenders. Borrowers can now access Canada’s largest selection of mortgages in one convenient marketplace. 8Twelve’s proprietary cloud platform INFIN8 utilizes real-time analytics, AI, and workflow automation to identify the best possible financing solution in the Canadian market (from over 65 lenders and over 7000 mortgage products).
Read the Press Release Here: https://www.globenewswire.com/news-release/2022/12/12/2571840/0/en/8Twelve-Enters-into-Mortgage-Solution-Agreement-with-Top-Tier-Canadian-Banking-Institution.html
Recent Posts at 8Twelve
Lower home prices, no recession, major inflation relief: Predictions for Canada in 2023
Lower home prices, no recession, major inflation relief: Predictions for Canada in 2023
Inflation will fall swiftly next year and Canada will narrowly avoid a recession, Goldman Sachs says in a new – and overall quite upbeat – outlook for the country in 2023.
The outlook, contained in a report authored by senior economist Daan Struyven and managing director Sid Bhushan, also predicts further pressure on housing – but with prices ultimately stabilizing to above levels prior to the pandemic. Part of the reason is that the U.S. banking giant believes the Bank of Canada is nearing the end of its interest rate hiking cycle, though not before a further 75 basis points in interest rate hikes by early next year.
Goldman sees Canadian housing prices ultimately falling 18 per cent from their peak in February. They’ve already fallen 10 per cent, based on MLS Home Price Index data up until October. That means if the bank’s views turn out to be correct, prices will be subject to a further drop of eight percentage points before flatlining and possibly rising once again.
- “Inflation appears to be making genuine progress, and the housing market – the largest vulnerability – is making a controlled descent. We expect the BoC to achieve a soft (enough) landing in 2023.”
- “We expect below-trend +0.7% Q4/Q4 growth in 2023 and think Canada will narrowly avoid a recession because growth momentum is stronger than it appeared a few months ago, the negative impulses from financial conditions and real income growth have likely bottomed, excess savings can cushion negative housing wealth effects, and structural demand should support residential investment. If there is a recession, it would most likely be mild.”
- “We are also confident that recent improvements in inflation will be sustained and forecast 2.8% year-over-year headline inflation in December 2023. We expect falling house prices to weigh on shelter inflation and for sequential core goods inflation to remain soft. In fact, we expect sequential ex. food, energy, and mortgage interest cost inflation to be below 2% by next summer. Further, we think that both wage-sensitive services and goods inflation would need to materially surprise for sequential core inflation to be above 3% at this point.”
- “As a result, we believe the BoC will stop hiking soon. We expect another 50bp hike in December as growth is holding up, BoC-preferred core inflation measures edged up in October, and the BoC likely wants to see more labor market rebalancing. We expect a final 25bp hike in January for a 4½% terminal rate but see a high risk that the cycle ends in December even if the BoC hikes 50bp then.”
- “We do not expect any BoC cuts next year. Even in a resilient growth environment, the market may continue to price cuts as underlying sequential inflation pressures weaken. We think the BoC will look through this as growth should be picking up and some negative inflation impulses should be fading at this point, but the risk of a cut is higher than in other G10 economies.”
- “The main risk to our soft landing forecast is a more severe housing downturn. However, we are not too worried about this risk yet because sequential house price declines are getting smaller, strong demand from high population growth should absorb new constructions, and the risk of mortgage delinquencies is low. We now expect an 18% peak-to-trough decline in house prices because downward momentum remains strong, mortgage rates have risen sharply and valuations remain stretched, and because the large number of houses under construction should boost supply next year. That said, the level of house prices should remain above its pre-pandemic trend at the end of next year because of high inflation, elevated nominal wage growth, and because housing supply will still not be loose by historical standards even after accounting for the better supply outlook.”
Recent Posts at 8Twelve
Understanding Modern Mortgage Options
Understanding Modern Mortgage Options
Why the “Bank of Mom & Dad” should only be a last resort
Amid high housing prices and increasing interest rates, home ownership is a growing challenge, especially for first-time buyers. But it’s not just the price tag that creates barriers. Buyers must also contend with:- Stricter government real estate qualifications for bank loans
- The mortgage industry’s outdated, paper-based processes
- A general lack of education around viable financing options
Homebuyer issue #1: real estate qualifications
Assuming a buyer can save up enough to afford a down payment, securing a mortgage from a traditional institution like a bank often comes with the dreaded “stress test.” 8Twelve CEO Gary Fooks explains: “This is where the government wants to know that although you qualify for the mortgage today, will you actually be able to service that mortgage several years down the road when rates eventually go up?” In recent years, the intensity of the stress test has increased. This forces buyers to either find more money for a down payment, or seek out a co-signer to satisfy the bank. Many people turn to the ‘Bank of Mom and Dad’ for help—but this is not an option for many.Homebuyer issue #2: an outdated industry
The mortgage industry has not kept up with the pace of technology. Perhaps there has not been enough pressure to do so. “The way mortgages are done historically you’re using manila folders and Excel sheets,” says 8Twelve CFO Jason Baibokas. “It’s a lot of paper meeting people in person, lawyer’s offices, it’s a very clunky, inefficient experience.” This inefficiency can be wasteful, frustrating, and expensive for homebuyers. The added stress and unpleasantness does not inspire one to fully engage with the process (one which should be fun and exciting, especially for first time buyers!) Failing to engage with process means people can miss out on options, leading us to the third issue.Homebuyer issue #3: a lack of buyer education
“Traditionally, clients have always been used to walking into their banks for their mortgage needs because that’s all they knew,” says Zeynep Babir, Director of Business Development at 8Twelve. “However, there are a lot more non-bank lenders out there that are available and that have more competitive products, for clients that offer better flexibilities, better penalty structures, better solutions overall.” The world of finance, including mortgages, has never been entirely accessible. There is complex math, endless jargon, and reams of forms and paperwork. Many people simply default to the ‘known,’ as Zeynep explains. Better insight into all options, including a thorough assessment of risk, would result in more homebuyers being able to afford what they want.The 8Twelve solution: digitized and accessible lending alternatives
Even though the industry at large has not felt the need to digitize, 8Twelve strongly believes that there is a massive opportunity in delivering a superior, education-driven experience. “We’ve digitized [the mortgage process] with our proprietary software called INFIN8,” says 8Twelve President & CIO Akber Abbas. “It is a brokerage management platform that takes the entire transaction from lead to flower delivery at the end of the close for transaction.” With the entire lending process wrapped in an end-to-end digital experience, 8Twelve can hit all three issues:- Options outside of banks are made more accessible and comparable, especially through AI-matching for buyers and solutions.
- Paper-based processes are all but eliminated, and information can be accessed, compared, and transmitted much faster
- Buyer education and customer experience can be a deeper focus, thanks to the accessibility of abundance of information presented by a digital platform
Recent Posts at 8Twelve
How to Get a Mortgage When You’re Self-Employed
How to Get a Mortgage When You’re Self-Employed
Who Qualifies as Self-Employed?
First, take a look at the list below to see who’s classified as “self-employed” when it comes to getting a mortgage:
- You own a sole proprietorship or any type of unincorporated partnership.You work independently and do not have anyone “supervising” you as you work (this also includes seasonal work, contract, and freelance work).
- You work for whomever you choose, and you may provide services to multiple customers or companies at any given time.
- You accept or decline work as you see fit.
- You use your own facility, equipment, and tools to do the job.
- You pay provincial and federal taxes but have certain perks, such as costs you could deduct as business expenses. Think business lunches, transportation, professional courses, Internet, and so on.
- To quote the CRA (Canada Revenue Agency) directly: “The working relationship between the payer and the worker does not present a degree of continuity, loyalty, security, subordination, or integration, all of which are generally associated with an employer-employee relationship.”
Types of Mortgages Available to the Self-Employed:
The two main types of mortgages available to those who are self-employed are a “Qualified Business for Self Mortgage” and a “Stated Income Mortgage.”
While the Qualified Business for Self Mortgage is what most people want to fall into, it’s a little more of a stringent one to qualify for. That said, it provides the most favourable rates, terms, conditions, and features.
On the other hand, the Stated Income Mortgage provides more flexibility in the qualification process, because it allows for the consideration of other sources of income that may not have been appropriately declared in your tax returns. For example, most of the time it will take into account any provided internal financial statements or plans, business contracts with customers, bank statements with additional cash going into your personal or business bank account, accounting records, and/or other forms of income verification that in general, most banks will not consider. As such, this also makes it a great option for a First Time Home Buyer or someone looking to refinance their home.
Who Can Qualify?
The good news is that pretty much anyone can qualify. But just like with any mortgage or loan, there’s a list of requirements you must satisfy.
How to Get Prepared for the Mortgage Process
- Have a credit score over 680 and evidence thereof.
- Have a good debt-to-income ratio (i.e. spend less than what you make).
- Make sure your financial paperwork is well organized; you’ll need two years of personal income tax returns (T1), including ideally two years of business statements (T2125).
- Have your most recent notice of assessment (NOA) from the CRA.
- Provide proof that your GST/HST (Goods and Service Tax / Harmonized Sales Tax) is paid in full.
- Proof you are the owner of your business as well as a business license.
- Proof of liquid savings and/or assets for a down payment and closing costs.
- Year-to-date profit and loss (P&L) statement.
While you may not require each and every one of these documents in all circumstances, the more prepared you can be to meet your Mortgage Broker, the better. Then it’s simply a matter of signing the application and you’re off to the races!
At the end of the day, each person’s financial profile is unique. It’s best to speak to an expert Mortgage Agent who can give you specialist advice and work out which mortgage best suits your specific situation.
Recent Posts at 8Twelve
Need relief? 5 programs homeowners should know about
Need relief? 5 programs homeowners should know about
Posted January 25, 2021
Canadian wallets have taken a wallop as a result of the COVID-19 pandemic. According to a recently released Financial Literacy Month survey from the Financial Planners of Canada:
- 41% of Canadians feel in a worse financial position than at the start of the pandemic;
- Only 54% feel their financial position is strong enough to withstand the second wave;
- Half of Canadians under age 35 have already borrowed money to make up for financial shortfalls.
(Source: Coping With Covid’s Financial Impact survey, FP Canada)
Although the country’s economic recovery is underway, many Canadians may feel uncertain about their employment prospects, especially as local coronavirus flare-ups disrupt business activity.
Planning ahead can offer some peace of mind during uncertain times. Here are 5 coronavirus relief programs every homeowner should be aware of: four government programs that can help make up for financial shortfalls arising from illness, childcare responsibilities or lost wages; plus one additional option – mortgage deferral – that’s worth thinking hard about with the help of a mortgage professional.
Employment Insurance (EI)
Who qualifies: Workers who logged a minimum of 120 insurable hours during the past 52 weeks, who lost their job through no fault of their own, or who left work temporarily due to maternity or parental leave, sickness, etc.
Approximate benefit amount: At least $500 per week, $300 per week for extended parental benefits
How to apply: Get more program details on the federal government’s Employment Insurance and Leave page.
Canada Recovery Benefit (CRB)
Who qualifies: Workers who aren’t eligible for EI (including self-employed freelancers and gig-economy workers), who can’t work, or whose income has dropped by 50%, as a result of the COVID-19 pandemic. This benefit replaces the Canada Emergency Recovery Benefit (CERB), which ended in late September.
Approximate benefit amount: $500 per week for up to 26 weeks
How to apply: Learn more about CRB on the federal government’s Canada Recovery Benefit page.
Canada Recovery Sickness Benefit (CRSB)
Who qualifies: Workers who are unable to work because they caught COVID-19; or who must self-isolate due to COVID-19-related reasons; or who must stay home due to another condition or medical treatment that makes them more susceptible to COVID-19.
Approximate benefit amount: $500 per week, with a two-week maximum
How to apply: Find out if you qualify for CRSB on the federal government’s Canada Recovery Sickness Benefit page.
Canada Recovery Caregiving Benefit (CRCB)
Who qualifies: Workers who have to stop working or who must work less than 50% of the week due to caregiving a child/family member under age 12 whose school or daycare is closed due to COVID-19, or who is sick or required to quarantine for COVID-19-related medical reasons.
Approximate benefit amount: A maximum of $500 a week for up to 26 weeks per household
How to apply: Learn if you qualify for this income support program on the federal government’s Canada Recovery Caregiving Benefit page.
TIP: Don’t forget that some COVID-relief benefits are considered taxable income.
Finally, let’s take a look at one non-government COVID-relief program that was in the news a lot this last year:
Mortgage Payment Deferral Programs
Who qualifies: Homeowners experiencing financial hardship can apply for up to six months of mortgage-payment deferrals from participating lenders. Deferred payments (including principal and interest) are added to your mortgage and repaid (by you) down the road. This means that you’re likely to end up paying more over time than if you had not sought a deferral.
One alternative worth considering is mortgage refinancing .
Refinancing at today’s lower interest rates may lower your monthly payments, with or without extending your amortization period.
If you’re also carrying high-interest consumer debt , refinancing allows you to pull equity from your home to pay it off. You’re trading high-interest “bad” debt for low-interest “good” debt and eliminating a couple monthly bills that may have been causing you financial stress.
A mortgage professional can help you determine what mortgage solution is best for your situation.
Approximate savings: Varies
How to apply: Visit the 8Twelve Mortgage site for more info or to reach a Mortgage Strategist who can offer personalized advice tailored to your circumstances.
If you have concerns about your financial health and wellness this November, research your options today – you’ll feel more secure knowing what help is available should you need it.
Trust your 8Twelve Mortgage Broker to help you get the ‘best’ mortgage!
Browse Topics By Interest
Recent Posts at 8Twelve
Share this Article
Financial Literacy in Canada: 5 things you need to know in 2021
Financial Literacy in Canada: 5 things you need to know in 2021
Posted January 18, 2021
Canadians have faced surprises and uncertainty in 2020, reinforcing the value of basic financial awareness and planning. Here are 5 things you need to know right now to get ahead in 2021.
Need-to-know #1: How much money you owe
FAST STAT: Canadian households owe $1.77 for every dollar of disposable income. (Source: Statistics Canada)
If the idea of tallying up your debt makes you want to bury your head in the sand, first, know that you’re not the first person to feel this way. Second, fight the urge and add it all up.
The most common forms of debt include mortgages, car loans, personal loans, lines of credit, credit cards , student loans and money owed to Canada Revenue Agency (CRA). Knowing how much you owe – and at what interest rates – allows you to prioritize debt reduction goals and strategies .
Need-to-know #2: Your bottom line
FAST STAT: The average Canadian household spent just over $86,000 on living expenses in 2017, the most recent year for which data was collected. (Source: Statistics Canada)
Subtracting your fixed and variable expenses from your income will help you determine whether or not your spending habits are sustainable and if they align with your short-, mid- and long-range goals. Check online for budget worksheets or download one to your smartphone to get started.
If you’re not doing this already, adjust your budget so you can allocate savings to a household emergency fund to cover you in the event of job loss, illness and other unforeseen circumstances. The FCAC recommends saving three to six months of income or of living expenses (whichever you prefer).
Need-to-know #3: Your credit score
FAST FACT: 29.2% of mortgage holders increased their credit score in the first quarter of 2020. (Source: Canada Mortgage and Housing Corporation)
Strong credit benefits you in a number of ways. If you’re a homeowner (current or aspiring), it’s your ticket to the best mortgage rates . If you’re a tenant, it can make or break your rental application. As a consumer, it can impact whether or not you’ll be approved for a credit card , car loan or line of credit.
According to Equifax, one of Canada’s two primary credit reporting agencies: “credit scores from 660 to 724 are considered good; 725 to 759 are considered very good; and 760 and up are considered excellent.”
Monitor your credit score regularly to ensure you’re on track with your financial goals.
Back this up by ordering your credit report annually and checking to ensure all listed creditors are legit; this can alert you to potential identity theft.
Need-to-know #4: What Covid-19 relief programs can help you
FAST STAT: Canadian employment income fell by nearly 9% in the second quarter of 2020, but household disposable income grew by 11% as a result of government support programs. (Source: Statistics Canada)
As Canada experiences the second wave of the COVID-19 pandemic , the government and many financial institutions continue to address financial concerns stemming from illness, reduced income and/or job loss.
Plan ahead by knowing what support you may be entitled to if your income is impacted by the pandemic:
- Check your bank or lender’s website to see if you qualify for deferred payments or reduced interest on your credit card, line of credit, other consumer loans or mortgage;
- Reach out to a mortgage broker if you have concerns about your debt payments or mortgage – they may be able to find solutions that can reduce your monthly debt obligations and interest charges;
- Check the federal government’s Covid-19 Economic Response Plan page for updated info on the programs you may qualify for.
Need-to-know #5: Your Plan B
FAST STAT: Canada regained 378,000 jobs in September 2020. Pandemic-related job losses are down to (a still-significant) 720,000 jobs compared to pre-pandemic February 2020. (Source: Statistics Canada)
The good news is that Canada is well on the road to economic recovery. But, as the country continues to respond to regional virus surges with actions including business restrictions, it’s good to plan for the unexpected.
This may include an honest assessment of your employment prospects: the restaurant, entertainment, hospitality and tourism sectors don’t look great right now, while tech, gaming, groceries and home decor all are booming.
Consider what skills could help you transfer to a new industry, or if now would be the time to get more training or education. Consider how you might fund more education – mortgage refinancing or a CHIP reverse mortgage are two options.
Could you build your income by taking on a side hustle like food or grocery delivery, starting an Etsy shop or starting your own business walking dogs or tutoring online?
A Plan B can provide peace of mind during uncertainty, but another side benefit is, it may just lead you to fulfilling new opportunities you hadn’t even considered.
Want to learn more about financial literacy? Visit the FCAC’s Financial Literacy Month site.
Trust your 8Twelve Mortgage Broker to help you get the ‘best’ mortgage!
Browse Topics By Interest
Recent Posts at 8Twelve
Share this Article
What is Home Equity (And How Can I Use It?)
What is Home Equity (And How Can I Use It?)
Posted January 11, 2021
Home equity is one of those terms you hear a lot. You may have a general sense that it’s a good thing that’s tied to homeownership, but not know the nuts and bolts of it. No fear: here’s an explain-it-to-me-like-I’m-12 look at home equity.
Definition
Home equity refers to your ownership stake in your home. It’s calculated as the home’s current market value less what you owe on the property via your mortgage and any liens.
For example: If your home’s market value is $500,000 and there’s $240,000 remaining on your mortgage, your home equity is $260,000 or 52% of its value.
How Home Equity Changes Over Time
Home equity changes over time. Examples of how this works are:
- You gain equity as you make mortgage payments; each payment reduces your home loan a little bit;
- You gain equity as the value of your property increases due to home improvements or changes in the real estate market;
It’s also possible to lose equity, say, if housing values drop or if the home itself loses value due to disrepair or bad renovation choices .
If that $500,000 home we talked about earlier now has a market value of $450,000 and the same $240,000 mortgage, your home equity is now $210,000 or 46.6% of the property’s value.
Fortunately, home values generally tend to appreciate (increase) over time.
How to Use Your Equity
Home equity can be used as collateral in a home equity loan or a home equity line of credit (HELOC), also known as a second mortgage.
Another way to use your home equity is to borrow additional funds at mortgage renewal time, or by refinancing your existing mortgage.
Canadians over age 55 can leverage their home equity with a reverse mortgage .
Because these types of loans are secured against home equity, they are offered at interest rates well below unsecured loans such as credit cards or personal lines of credit. Many Canadians leverage their home equity to boost their overall financial health. Examples of this include:
- Paying off high-interest consumer debt;
- Funding university, college or a training program;
- Paying for home improvements;
- Freeing up money for a down payment ona second home or other investment.
Although you’re adding to what you owe on your home, it’s money well spent because, to use the examples above, you’d either be saving money outright (elimination of high-interest debt), be boosting future income (education and training) or building home equity in the mid- to longer term (the other two examples).
Bottom Line
Home equity is a financial tool you can leverage if it is needed – or simply watch grow!
With today’s low-interest environment, 2020 can be a great year if you’d like to utilize some of the equity you’ve built in your home.
Got questions? Contact 8Twleve Mortgage for personal advice and product recommendations specific to your needs and lifestyle.
Trust your 8Twelve Mortgage Broker to help you get the ‘best’ mortgage!
Browse Topics By Interest
Recent Posts at 8Twelve
Here’s why the Bank of Canada interest rate should interest you
Here’s why the Bank of Canada interest rate should interest you
Posted January 5, 2021
The Bank of Canada (BOC) is Canada’s national bank. It’s a Crown corporation that operates independently of whatever political party is in power in Ottawa. The central bank exists to promote Canada’s economic stability and financial welfare.
You may already know the BOC issues the bank notes you tuck into your wallet, but did you know it indirectly determines the interest rate you pay on your mortgage or consumer debt, too?
How Lenders Set Interest Rates
While the BOC doesn’t set mortgage rates, credit card rates or any other consumer lending rates, it sets a target for the “overnight rate” (also known as the “policy interest rate”), which is what major financial institutions charge one another in their daily short term (or “overnight”) transactions. The big banks use the overnight rate ( currently targeted at 0.25 %) to set their prime lending rate, the interest rate they give to their best customers, (i.e. those with stellar credit and a solid income).
A variety of factors play into the interest rate you’ll pay for your mortgage, including:
- Your credit score;
- Your income;
- Is it a fixed or variable rate interest mortgage?
- Is it an open or closed mortgage?
- Do you have mortgage default insurance?
- Is it a primary mortgage, second mortgage, third mortgage or a reverse mortgage?
Check out this informative article by Bank of Canada , for more insights into the process.
What Does This Mean for Me?
Interest rates are low right now, so borrowing money to buy a house can be done “on the cheap.”
If you’re house-hunting in a hot market like Victoria, Toronto, Ottawa or Montreal, home prices won’t be dipping in 2020 ( so long, coronavirus-related price drops ), but you’ll find some great mortgage rates, given the lending climate the Bank of Canada has promoted.
If you own your own home and have no plans to move, now might be a good time to consider refinancing your mortgage. Making a switch in order to take advantage of today’s low interest rates could save you thousands of dollars over the next few years.
Want to learn more? Reach out to 8Twelve’s team of skilled mortgage professionals. You can trust your 8Twelve Mortgage Strategist to help you get the best mortgage for your needs.
Trust your 8Twelve Mortgage Broker to help you get the ‘best’ mortgage!
Browse Topics By Interest
Recent Posts at 8Twelve
Share this Article
Is a second mortgage or reverse mortgage right for you?
Is a second mortgage or reverse mortgage right for you?
Posted January 5, 2021
The COVID-19 pandemic has forced many Canadians into a financial reckoning. One recent poll of 1,500 Canadians found two-thirds would be in (or already were in) a “severe financial crisis” due to job loss or income reduction. A full 30% said they would skip credit card payments if they absolutely had to. No one wants to be in the situation of having to choose between their mortgage and credit cards, or, for that matter, any other monthly essentials, so let’s take a look at one strategy that may help “crisis-proof” your finances.
Use Your Equity
One of the advantages of homeownership is the ability to tap into the equity you’ve put into your home. A second mortgage, third mortgage or reverse mortgage all allow you to borrow money at interest rates lower than what you’d pay on a credit card or unsecured line of credit.
Used correctly as a short-term solution that is part of a longer-term strategy, these types of mortgages can help homeowners get out of debt sooner.
Here’s a quick overview of three mortgage options and how they may work for your needs.
Second Mortgage
A second mortgage lets you borrow money using your home equity as security. To qualify for a second mortgage, a homeowner must have at least 20% equity in their home and can borrow up to 80% of the home’s appraised value. (Equity is the difference between your home’s appraised worth and what you owe on your existing mortgage. Your home equity increases as you pay down your mortgage, and/or as the value of your home goes up.)
A second mortgage exists independently of the first mortgage. Expect interest rates to be a bit higher, too. You’ll be making payments on both mortgages concurrently. Most second mortgages have terms of between 3 and 18 months.
Use your second mortgage to consolidate and pay off high-interest consumer debt, or for a major investment like post-secondary education or home renovations. When your primary mortgage is up for renewal, you should use this opportunity to pay off your second mortgage by rolling it into your primary mortgage.
This strategy reduces the amount of interest you pay on your debt load, improves your credit score by lowering your debt-to-income ratio, and will get you better mortgage rates when it’s time to renew your primary mortgage.
Reverse Mortgage
For homeowners over age 55, a reverse mortgage can provide an additional income stream to augment retirement savings or work income. If you have a mortgage remaining on your home, you’ll have to use your reverse mortgage funds to pay it off. The remaining funds can be used to cover your debts, or, for that matter, fund home improvements, investments, post-secondary education for your children or grandkids or other priorities.
Bottom Line
Second mortgages, third mortgages and reverse mortgages aren’t for every situation, but used correctly, could help you save thousands of dollars in interest, get debt-free faster, and stay on track with your financial goals.
Want to learn more? Reach out to 8Twelve’s team of skilled mortgage professionals. You can trust your 8Twelve Mortgage Strategist to help you get the best mortgage for your needs.
Trust your 8Twelve Mortgage Broker to help you get the ‘best’ mortgage!