20 Apr

Canadian Inflation Spikes to 6.7% in March. – April 20 2022

Latest News

Posted by: Matthew J. Charlton

APRIL 20 2022

Holy Smokes! Canadian Inflation Is At 6.7%

StatsCanada today reported that consumer prices rose a whopping 6.7% year-over-year in March, a full percentage point above the 5.7% reading the month before. Market-driven interest rates shot-up on the news as the prospects increase for another half-point rise in the overnight rate when the Bank of Canada meets again on June 1.

There is no sugar-coating this. Bonds were walloped as the Government of Canada two-year yield shot up to 2.6%, the 5-year yield rose to 2.75%, and the 10-year yield spiked above 2.825% immediately following the data release. The 5-year yield (so crucial for setting the 5-year fixed mortgage rate) has nearly quadrupled over the past year.

Inflationary pressure remained widespread in March, as prices rose across all eight major components. Prices increased against the backdrop of sustained price pressure in Canadian housing markets, substantial supply constraints and geopolitical conflict, which has affected energy, commodity, and agriculture markets. Further, employment continued to strengthen in March, as the unemployment rate fell to a record low. In March, average hourly wages for employees rose 3.4% y/y, raising the risk of wage-price spiralling. 

Excluding gasoline, the Consumer Price Index (CPI) rose 5.5% year-over-year in March, the fastest pace since introducing the all-items excluding gasoline special aggregate in 1999, following a 4.7% gain in February.

The CPI rose 1.4% in March, following a 1.0% gain in February on a monthly basis. This was the largest increase since January 1991, when the goods and services tax was introduced. On a seasonally adjusted monthly basis, the CPI rose 0.9% in March, matching the most significant increase on record.

In March, gasoline prices rose 11.8% month over month, following a 6.9% increase in February. Global oil prices rose sharply in March because of supply uncertainty following Russia’s invasion of Ukraine. Higher crude oil prices pushed prices at the pump higher. Year-over-year consumers paid 39.8% more for gasoline in March.

Month over month, prices for fuel oil and other fuels rose 19.9%, the second-largest increase on record after February 2000. On a year-over-year basis, prices for fuel oil and other fuels rose 61.0% in March.

Food prices continued to surge, as did the prices of durable goods such as automobiles and furniture. It cost considerably more for restaurants, hotel rooms and flights. 

Goods inflation hit 9.2% in March, the highest since 1982. Services inflation rose to 4.3%, the highest since 2003.

Bottom Line

Bond markets sold-off all over the world today. The yield curves flattened as shorter-term yields rose more than their longer-dated counterparts, reflective of the view that central banks will accelerate their tightening.

Today’s CPI report shows inflation pressures were more elevated than the Bank of Canada expected just last week when they hiked the policy rate by 50 basis points. 

This could well mark the top of the surge in inflation, but the return to the 2% inflation target could be prolonged, particularly if inflation expectations become embedded. For this reason, Governor Macklem is likely to tighten aggressively once again on June 1, which will further dampen housing activity.

Please note: The source of this article is from Sherry Cooper


Sign up to receive monthly Home, Lifestyle & Mortgage News here.

<Back to Blog

19 Apr

Canadian Home Sales Begin to Slow in March – April 19 2022

Latest News

Posted by: Matthew J. Charlton

APRIL 19 2022

Canadian March Home Sales Posted Their Biggest Decline Since June

Statistics released today by the Canadian Real Estate Association (CREA) show that rising interest rates were already dampening housing activity well before the Bank of Canada’s jumbo spike in the key policy rate in mid-April. National home sales fell back by 5.4% on a month-over-month basis in March. The decline puts activity back in line with where it had been since last fall (see chart below).

New Listings

The number of newly listed homes fell back by 5.5% on a month-over-month basis in March, following a jump in February. The monthly decline was led by Greater Vancouver, the Fraser Valley, Calgary and the GTA.

With sales and new listings falling in equal measure in March, the sales-to-new listings ratio stayed at 75.3% compared to 75.2% in February. The long-term average for the national sales-to-new listings ratio is 55.1%.

About two-thirds of local markets were seller’s markets based on the sales-to-new listings ratio is more than one standard deviation above its long-term mean in March 2022. The other third of local markets were in balanced market territory.

There were 1.8 months of inventory on a national basis at the end of March 2022 — up from a record-low of just 1.6 months in the previous three months. The long-term average for this measure is more than five months.

Home Prices

The Aggregate Composite MLS® HPI was up 1% on a month-over-month basis in March 2022 – a marked slowdown from the record 3.5% increase in February.

The non-seasonally adjusted Aggregate Composite MLS® HPI was up by 27.1% on a year-over-year basis in March. The actual (not seasonally adjusted) national average home price was $796,000 in March 2022, up 11.2% from last year’s same month. 

Bottom Line

The March housing report is ancient history, as sharp increases in market-driven interest rates have changed the fundamentals. This report also precedes the 50 basis point hike in the overnight policy rate by the Bank of Canada. Anecdotal evidence thus far in April suggests that new listings have risen, and multiple bidding has nearly disappeared.

The rise in current fixed mortgage rates means that homebuyers must qualify for uninsured mortgages at the offered mortgage rate plus 200 bps–above the 5.25% qualifying rate in place since June 2021. This, no doubt will squeeze some buyers out of higher-priced markets. 

The federal budget introduced some initiatives to help first-time homebuyers and encourage housing construction–but these measures are hitting roadblocks. Labour shortages are plaguing the construction industry, and the feds do not control zoning and planning restrictions but at the local government level. The ban on foreign resident purchases will likely have only a small impact, so the fundamental issue of a housing shortage remains the biggest impediment to more affordable housing in Canada. 

Please note: The source of this article is from Sherry Cooper


Sign up to receive monthly Home, Lifestyle & Mortgage News here.

<Back to Blog

16 Apr

Industry Jargon Explained.

Mortgage Tips

Posted by: Matthew J. Charlton

Baffled by some of the phrases realtors and bankers throw at you? Here are some commonly used—but not always understood—words to describe mortgages:

Tip! To search for a specific word or phrase on this page, Use Ctrl+F on a desktop computer or if on your iPhone, Tap the Share button, ➤ then tap Find on Page ➤ Enter the word or phrase in the search field ➤ Tap the Next in Page Result button to jump to other mentions. 


Amortization Period

This is the number of years it will take to repay the entire mortgage in full and is determined when you are approved. A longer amortization period will result in lower payments but more interest overall as it will take longer to pay off. The typical amortization range is 15 to 30 years. Learn more here.

Closed Mortgage

This is any mortgage where you have agreed to pay the lender for a specified period of time. This means that you cannot pay it off, refinance or renegotiate before the mortgage term ends without incurring a penalty. Depending on the lender, there may be options for accelerated payments but it depends on your particular mortgage contract. While these mortgages tend to be a lot stricter, they can often provide lower interest rates.

Conventional Mortgage

In the case of a conventional mortgage, the loan covers no more than 80% of the purchase price on the property. This means, the buyer has put 20% (or more) down on the property. These mortgages do not require default insurance due to the amount down and are classified as Uninsurable (explained in greater detail below). Learn more here.

Debt Service Ratios

  • GROSS DEBT SERVICE (GDS) RATIO: The percentage of a person or household’s gross monthly income that goes to pay the mortgage principal and interest, property taxes and heating costs, plus 50% of any condominium maintenance fees or 100% of the annual site lease for leasehold tenure if applicable. To qualify for a mortgage, the borrower’s GDS ratio must be at or below 35 or 39% (depending on the lender).
  • TOTAL DEBT SERVICE (TDS) RATIO: The percentage of a person or household’s gross monthly income that goes to pay the mortgage principal and interest, property taxes and heating costs, plus all other debt obligations such as car payments, personal loans or credit card debt. To qualify for a mortgage, the borrower’s TDS ratio must be at or below 42% or 44% (depending on the lender).

Default

Failure to pay your mortgage on time will result in defaulting on the loan.

Derogs

Short for ‘derogatory’, derogs refers to an overdue account or late payments on your credit report.

Down

Short for downpayment. In Canada, the minimum downpayment is 5% on any home purchase.

Fixed

A fixed-rate mortgage means you are locked in at the interest rate agreed for a longer length of time. Learn more here.

Flex Down

This refers to a borrowed downpayment program, which allows homeowners to “borrow” money for the downpayment from a credit card, line of credit or other loan. In this case, the repayment of the loan is included in the debt calculations.

Foreclosure

This refers to the possession of a mortgaged property by the bank or lender if a borrower fails to keep up their mortgage payments.

High-Ratio Mortgage (Also known as an Insured Mortgage)

A high-ratio mortgage is where the buyer has provided a downpayment of less than 20% of the purchase price and needs to pay a premium known as Mortgage Default Insurance to one of the 3 mortgage insurers to insure the mortgage against default. This mortgage is also known as an Insured mortgage (explained in greater detail below). Learn more here.

Insured (High-ratio – Less than 20% downpayment)

If you put less than 20% downpayment, you will need mortgage loan default insurance. This insurance protects your lender in the event you, the borrower, default on your mortgage loan. As the perceived risk is lower for Insured loans, you the borrower are generally able to obtain the lowest rates in the market place.

The current mortgage loan insurance companies are CMHC, Sagen and Canada Guarantee.

  • Maximum 25-year amortization
  • Purchase price not over $1M
  • Applies to Purchases & Eligible Switches
  • Must be Owner-occupied (but can have a rental unit)

Insurable (Greater than 20% downpayment while meeting the following criteria)

This mortgage meets all the qualifications of an insured mortgage, however, the LTV (Loan to Value) is equal to or less than 80.00%.

  • Maximum 25-year amortization
  • Purchase price not over $1M
  • Applies to Purchases & Eligible Switches
  • Must be Owner-occupied (but can have a rental unit)

* In some circumstances when dealing with Insured applications, the downpayment required may be greater than 20%. These would pertain to specific niche programs only.

Learn more here.

LTV – LOAN TO VALUE

This is the difference between the value of the property and the amount of mortgage registered against it; Property value $100,000 vs. Mortgage Loan Amount of $80,000 equates to an 80% LTV

MIC

Short for a Mortgage Investment Corporation, this is a group of investors who will lend you the money for a mortgage if a traditional lender will not due to unusual circumstances. Learn more here.

Open Mortgage

An open mortgage means you can pay out the balance at any time, without incurring a penalty.

PIT

Principal, interest and taxes— a calculation representing the amount you can afford to pay monthly on your home. Heating costs are often included in this calculation (PITH).

Pull

Also known as a ‘credit check’ or ‘credit inquiry’ a ‘credit pull’ refers to the act of checking a credit report to determine if the borrower is a viable investment prior to approval of the mortgage. 

Term

Term is the length of time that a mortgage agreement exists between you and the lender. Rates and payments vary with the length of the term. The most common term is a 5-year, but they can be anywhere from 1 to 10 years. Generally a longer term will come at a higher rate due to the added security. Learn more here.

Trade Lines

This refers to any credit cards, loans, wireless phone accounts, or mortgages that appear on your credit report.

Underwriting

This refers to the process of determining any risks relating to a particular loan and establishing suitable terms and conditions for that loan.

Uninsurable (Conventional – downpayment of 20% or more)

If your downpayment is 20% or greater, mortgage insurance is not required, and you, the borrower have access to more flexible terms. In some circumstances where location or condition of the property is a concern, the lender may request mortgage loan insurance as a condition of financing regardless of the LTV. In these cases, you would have to follow the insurers rules. Uninsurable files follow the rules below and are subject to a potentially higher interest rate.

  • Maximum 30-year amortization
  • Purchase prices over $1M (subject to sliding scale, lender specific)
  • Purchase/Refinance/Switch
  • Possibility of exceptions on qualifying ratios
  • Owner-occupied/Cottages/Second Homes/Rentals

Learn more here.

Variable

A variable-rate refers to an interest rate that is adjusted periodically to reflect market conditions. Learn more here.

20/20

A condition that refers to repaying 20% of the mortgage balance OR increasing your payment by 20%, without incurring a penalty.

 

If you are looking into getting a mortgage don’t be afraid to ask questions! At the end of the day, the mortgage contract has your signature on it and it is important to understand any contract you are signing. Get in touch and I would be happy to discuss your situation and answer any questions surrounding mortgage conditions or jargon to ensure the best results for YOU!

 


Sign up to receive monthly Home, Lifestyle & Mortgage News here.

<Back to Blog

13 Apr

Out-Sized Jump In Bank of Canada Policy Rate – April 13 2022

Latest News

Posted by: Matthew J. Charlton

APRIL 13 2022

Bank of Canada Hikes Rates by 50 BPs, Signalling More To Come

The Governing Council of the Bank of Canada raised the overnight policy rate by a full 50 basis points for the first time in 22 years. This was a widely telegraphed action that will be followed by the US Federal Reserve next month. While the BoC was the first G-7 central bank to take such aggressive action, the Bank of New Zealand also hiked rates today by half a percentage point. Considering the surge in inflation and the strength of the Canadian economy, another jumbo rate hike may well be in the cards.

The Bank now realizes that inflation is coming, not just from supply disruptions but also from excessive demand. “In Canada, Growth is strong, and the economy is moving into excess demand. Labour markets are tight, and wage growth is back to its pre-pandemic pace and rising. Businesses increasingly report they are having difficulty meeting demand, and are able to pass on higher input costs by increasing prices.”

The Bank now says that “Growth looks to have been stronger in the first quarter than projected in January and is likely to pick up in the second quarter. Consumer spending is strengthening with the lifting of pandemic containment measures. Exports and business investment will continue to recover, supported by strong foreign demand and high commodity prices. Housing market activity, which has been exceptionally high, is expected to moderate”.

The Governing Council has, once again, revised up its inflation forecast. CPI inflation is now expected to average almost 6% in the first half of 2022 and remain well above the control range throughout this year. It is then expected to ease to about 2½% in the second half of 2023 and return to the 2% target in 2024. There is an increasing risk that expectations of elevated inflation could become entrenched.

With the economy moving into excess demand and inflation persisting well above target, the Governing Council judges that interest rates will need to rise further. The Bank is also ending reinvestment and will begin quantitative tightening (QT), effective April 25. Maturing Government of Canada bonds on the Bank’s balance sheet will no longer be replaced, and, as a result, the balance sheet size will decline over time. This will put further upward pressure on interest rates further out the yield curve. 

Bottom Line

Traders are betting that the overnight rate will approach 3.0% one year from today. In today’s Monetary Policy Report (MPR), the Bank revised upward its estimate of the neutral overnight rate to a range of 2.0% to 3.0%–up 25 bps from their estimate one year ago. This is the Bank’s estimate of the overnight rate that is consistent with the noninflationary potential growth rate of the economy.

The rise in interest rates has already shown signs of slowing the Canadian housing market. The MPR states that “Resales are expected to soften somewhat in the second quarter as borrowing rates rise. Low levels of both builders’ inventories and existing homes for sale should support new construction and renovations in the near term”.

Bond yields have risen in anticipation of the Bank of Canada’s move taking the five-year fixed mortgage rate up to between 3.5% and 4%. This could be a pivotal time, as mortgage borrowers must qualify for loans at the maximum of 5.25% or 2 percentage points above the offered contract rate. We are now beyond the  2 ppts threshold, which reduces the buying power of many.

Please note: The source of this article is from Sherry Cooper


Sign up to receive monthly Home, Lifestyle & Mortgage News here.

<Back to Blog

11 Apr

Another Strong Canadian Jobs Report – We Are At Full Employment – April 11 2022

Latest News

Posted by: Matthew J. Charlton

APRIL 11 2022

Labour Market Tightens Further

Statistics Canada released the March Labour Force Survey recently, reporting a 72,500 jobs gain from the whopping 337,000 surge in February. Employment increased in both the goods- and services-producing sectors. Gains were concentrated in Ontario and Quebec. The unemployment rate fell to 5.3%, its lowest monthly rate since the data series was released in 1976, compared to 5.5% in February.

This adds more fuel to the notion that the Bank of Canada is behind the curve and will likely raise the overnight policy rate by 50 basis points this week. Indeed, Canada’s 2-year government note yield spiked on the news to 2.46%, up 2.38% at last week’s close.

Swap markets are now predicting a 75% probability of a half-point hike next week and an overnight rate of 3% a year from now. The overnight rate was 1.75% in February 2020, just before the pandemic began. Since then, inflation has surged from just over 2% to 5.7% in February. The March inflation data will be released on April 20, and it is widely expected to rise further. Indeed, the gauge of global food prices inflation is currently at a record high, exacerbated by the disruptions associated with the Ukraine war.

Adding to inflationary pressure is the rise in Canadian wage rates coming from the excess demand for labour. Total hours worked rose 1.3% in March. Average hourly wages increased 3.4% on a year-over-year basis, up from 3.1% in February. Illustrating the imbalances between labour supply and demand, employment gains since September (+463,000; +2.4%) have outpaced growth in the size of the population aged 15 and older (+236,000; +0.8%) during the same period.

Bottom Line

This Labour Force Survey was conducted in mid-March, after the February 24th start of the Ukrainian War. Since then, many commodity prices have surged, especially oil, gasoline, aluminum, wheat and fertilizer. This has boosted inflation worldwide, dampening consumer and business confidence and reducing family purchasing power. The Bank of Canada’s recent Business Outlook Survey shows that businesses expect inflation to continue for two years.

The newly released Bank of Canada Survey of Consumer Expectations shows record-high short-term inflation expectations. Despite more significant concerns about inflation, longer-term expectations have remained stable and are below pre-pandemic levels. This suggests that long-term inflation expectations remain well-anchored, and those survey respondents believe the current rise in inflation will not last.

This view is predicated on the Bank of Canada tightening monetary policy significantly. All messaging from the Bank confirms that it will provide this by raising the overnight rate to around 3% over the next year and by quantitative tightening, reducing its holdings of Government of Canada bonds.

Anecdotal evidence suggests that housing markets have already responded to rising mortgage rates. Supply has increased, and multiple-bidding activity has weakened.

Please note: The source of this article is from Sherry Cooper


Sign up to receive monthly Home, Lifestyle & Mortgage News here.

<Back to Blog

8 Apr

Housing A Major Theme of the Federal Budget – April 8 2022

Latest News

Posted by: Matthew J. Charlton

APRIL 8 2022

Affordable Housing Is A Key Theme In Federal Budget 2022

Yesterday’s budget announced a $10 billion package of proposals intended to reduce the cost of housing in Canada (see section below). The fundamental problem is insufficient supply to meet the demands of a rapidly growing population base. Thanks to the federal government’s policy to rapidly increase immigration since 2015, new household formation has risen far faster than housing completions, both for rent and purchase. This excess demand has markedly pushed home prices to levels beyond average-income Canadians’ means.

The measures announced in yesterday’s budget to increase housing construction, though welcome, are underwhelming. The Feds can control the construction of lower-cost housing through CMHC. Still, most home building is under the auspices of the municipal governments, where the red tape, zoning restrictions and delays abound. The federal government increased funds to help local governments address these issues, but NIMBY thinking still prevents increased housing density in many neighbourhoods. 

The headline policy announcement for a two-year ban on foreign residential property purchases may sound reasonable. Still, according to Phil Soper, chief executive of Royal LePage, “It will have a negligible impact on home prices. We know from the pandemic period, when home prices escalated with virtually no foreign money, that our problem is made-in-Canada.”

According to the Financial Post, Soper added that measures like the tax-free savings account for young Canadians would be encouraged to help them achieve their dreams of homeownership in a typical real estate market. However, in a low-supply environment with pandemic-fuelled price gains, these measures would only add more demand without addressing the supply issue. Only a few first-time buyers would be able to take advantage of it. 

The Home Buyers’ Bill of Rights that would end blind bidding and assures the right to a home inspection and transparent historical sales prices on title searches is also long overdue. 

The First-Time Home Buyer Incentive has been extended to March 2025. This program has been a bust. Buyers do not want to share the equity in their homes with CMHC. The Feds are taking another kick at the can, “exploring options to make the program more flexible and responsive to the needs of first-time homebuyers, including single-led households.” To date, the limits on the program have made them useless in high-priced markets such as the GTA and the GVA. 


Budget 2022 Measures To Improve Housing Affordability

Tax-Free Home Savings Account

  • Introduce the Tax-Free First Home Savings Account that would give prospective first-time home buyers the ability to save up to $40,000. Like an RRSP, contributions would be tax-deductible, and withdrawals to purchase a first home—including investment income—would be non-taxable, like a TFSA. 

New Housing Accelerator Fund

  • With the target of creating 100,000 net new housing units over five years, proposes to provide $4 billion over five years, starting in 2022-23, to launch a new Housing Accelerator Fund that is flexible to the needs and realities of cities and communities, while providing them support such as an annual per-door incentive or up-front funding for investments in municipal housing planning and delivery processes that will speed up housing development

New Affordable Housing

  • To ensure that more affordable housing can be built quickly, Budget 2022 proposes to provide $1.5 billion over two years, starting in 2022-23, to extend the Rapid Housing Initiative. This new funding is expected to create at least 6,000 new affordable housing units, with at least 25% of funding going towards women-focused housing projects.

An Extended and More Flexible First-Time Home Buyer Incentive

  • Extension of the First-Time Home Buyer Incentive–which allows eligible first-time homebuyers to lower their borrowing costs by sharing the cost of buying a home with the government–to March 31, 2025. Explore options to make the program more flexible and responsive to the needs of first-time homebuyers, including single-led households.

A Ban on Foreign Investment in Canadian Housing

  • Proposes restrictions that would prohibit foreign commercial enterprises and people who are not Canadian citizens or permanent residents from acquiring non-recreational, residential property in Canada for a two-year period.

Property Flippers Pay Their Fair Share

  • Introduce new rules so that any person who sells a property they have held for less than 12 months would be subject to full taxation on their profits as business income, applying to residential properties sold on or after January 1, 2023. Exemptions would apply to Canadians who sell their home due to certain life circumstances, such as a death, disability, the birth of a child, a new job, or a divorce.

Rent-to-Own Projects

  • Provide $200 million in dedicated support under the existing Affordable Housing Innovation Fund. This will include $100 million to support non-profits, co-ops, developers, and rent-to-own companies building new rent-to-own units.

Home Buyers’ Bill of Rights

  • Bring forward a national plan to end blind bidding. Among other things, the Home Buyers’ Bill of Rights could also include ensuring a legal right to a home inspection and ensuring transparency on the history of sales prices on title searches.

Multigenerational Home Renovation Tax Credit

  • Provide up to $7,500 in support for constructing a secondary suite for a senior or an adult with a disability, starting in 2023.

Doubling the First-Time Home Buyers’ Tax Credit 

  • Double the First-Time Home Buyers’ Tax Credit amount to $10,000, providing up to $1,500 in direct support to home buyers, applying to homes purchased on or after January 1, 2022.

Co-Operative Housing Development

  • Reallocate funding of $500 million to a new Co-Operative Housing Development Program to expand co-op housing in Canada. Provide an additional $1 billion in loans to be reallocated from the Rental Construction Financing Initiative to support co-op housing projects.

There is also a laundry list of other programs to create additional affordable housing for Indigenous Peoples, Northern Communities, and vulnerable Canadians. Enhanced tax credits for renovations to allow seniors or disabled family members to move in; and for seniors to improve accessibility in their homes. As well, money is provided for long-term efforts to end homelessness. 

To combat money laundering, the government said it would extend anti-money laundering and anti-terrorist financing requirements to all mortgage-lending businesses within the next year.
 
For greener housing initiatives, the government is planning to provide $150 million over five years starting this year to drive building code reform to focus on building low-carbon construction projects and $200 million over the same timeline for building retrofits large development projects.


Bottom Line

Nothing the federal government has done in yesterday’s budget will make much of a difference in the housing market. What does make a difference is the spike in interest rates that is already in train. Fixed mortgage rates are up to around 4%, and variable mortgage rates have begun their ascent. There is still a record gap between the two, but the Bank of Canada will likely hike the policy rate by 50 bps next week. The Bank will probably hike interest rates at every meeting for the remainder of the year and continue into the first half of next year.

It is also noteworthy what Budget 2022 did not do. It did not address REITs or investment activity by domestic non-flipping purchasers. Some were expecting a rise in minimum downpayment on investor purchases or restrictions on using HELOCs for their funding. 

Budget 2022 did not raise the cap of $1 million on insurable mortgages. It did not reinstate 30-year amortization, a favourite of the NDP. And, it did not follow the BC provincial government in allowing a “cooling-off” period after a bid has been accepted, technically giving would-be buyers more time to secure financing.

Please note: The source of this article is from Sherry Cooper


Sign up to receive monthly Home, Lifestyle & Mortgage News here.

<Back to Blog

5 Apr

Purchase Plus Home Improvements?

Home Tips

Posted by: Matthew J. Charlton

When it comes to shopping for your perfect home, it can be hard to find the exact one ready to go! In fact, most homes come with flaws of a sort whether it is old paint or flooring, outdated fixtures or perhaps more extensive repairs are needed. While some buyers have no issues dealing with these deficiencies in a home or perhaps do not consider them dealbreakers, other house hunters might.

If you’re thinking of purchasing a home that requires improvements, there is a mortgage product known as Purchase Plus Improvements (PPI). This type of mortgage is available to assist buyers with making simple upgrades, (not major renovations where structural modifications are made). Simple renovations include paint, flooring, windows, hot-water tank, new furnace, kitchen updates, bathroom updates, new roof, basement finishing, and more.

If you’re interested in renovating or updating your new home, the Purchase Plus Improvements mortgage might be for you.

The Purchase Plus Improvements mortgage is a great option if you’re interested in incorporating the costs of your home renovation into your mortgage loan. This option allows you to immediately increase the value of your home, receive money to cover renovation costs at a great interest rate, and complete major upgrades right away.

Here’s how the program works:

  • The amount allowed for improvements is typically 10–20% of your home’s purchase price, or up to $40,000. The money must be used for “improvements” or “upgrades”, not necessary repairs like leaks or structural issues. It also must be for something that adds value to the home, such as completing a full bathroom and kitchen renovation.
  • We would need an official quote(s) of all the work that is going to be done upfront, at the time of file submission in order to add the quote(s) to the purchase price to determine the “value” of the home the lender will consider. The down payment is now based on this new higher value. Note: If you have an accepted offer, you may need to request an extension on your Condition of Finance in order for this work to be done.
  • The mortgage is funded based on the contractual price, but the money allocated for improvements is held at the solicitor’s office until the work is complete.
  • The renovations and updates can be done by yourself or a company/contractor, but heavy labour cannot be reimbursed. If you do the work yourself, only the cost of materials is released. If a contractor or company does the work, simply provide the invoice and they will be reimbursed directly for the full amount.
  • An inspection report from an appraiser is required once the project is done so the lender can confirm the completion and acceptable quality of the work done.
  • If the final costs are less than the initial estimate, the leftover money is applied back against the mortgage. This program is available at competitive rates, both fixed and variable.

The main difference between a regular mortgage and a purchase plus home improvements program is the need for quotes. As part of the verification process, I along with the lender will need to see a quote for the work that is planned for the improvements. The quotes will provide us with the cost and plan details required to secure the final approval.

  • The lender will release the full funds directly to the lawyer with instructions to hold onto the portion for improvement costs until the renovations are completed. You would need to pay the contractor(s) and then, once the renovations are complete, and the lender has approved and waived the holdback, the lender will allow the lawyer to release the additional funds.

 

To get started with this type of mortgage program, the first step is to get in touch with me to understand how this mortgage product would apply to your application and specific situation. Understanding what you qualify for and the types of improvements that can be included in the financing, will help you better understand which potential properties might work great for you and how much financial room you have for the cost of improvements.

Learn more about the Purchase Plus Improvements mortgage here.


Sign up to receive monthly Home, Lifestyle & Mortgage News here.

<Back to Blog

1 Apr

Mortgage Amortization Explained: What Is It & How Does It Work?

Mortgage Tips

Posted by: Matthew J. Charlton

Amortization. Term. Payment schedule. Renewal and Refinancing.

These are all phrases you’ll hear over the lifetime of your mortgage, and they’re all connected. One frequent question people have about mortgages is “What does amortization mean?”

First, what exactly is amortization? The mortgage amortization period explained:

So, what is the amortization period? It’s the total amount of time it takes to pay off a loan. The mortgage amortization period is the total number of years it will take to pay your mortgage in full. Typically, this is 20, 25 or 30 years. This seems like a very long time but as with any long-term goal, break it into smaller, more manageable steps.

In the case of your mortgage, these smaller steps are called “terms”, explained below.

How does mortgage amortization work?

In Canada, you do not negotiate the interest rate for the entire mortgage amortization period, but rather, negotiate it in terms.

Terms are periods of time, commonly six months to five years, where you borrow money from a financial institution at an agreed upon interest rate. At the end of each term, you can renew for another term, move to another financial institution with a new mortgage, or pay your mortgage in full. You continue to renew terms until your mortgage is fully paid.

Your mortgage amortization is also affected by your payments. A portion of each payment goes toward paying down your principal (the original amount you borrowed before interest). The rest goes towards paying interest on your mortgage loan. Even though the payment is the same each month, the ratio of principal to interest will change with each payment. This is because the more you pay on your principal, the less interest is charged. The more money you can put toward your principal, the shorter your amortization will be.

How can you calculate your mortgage amortization?

Amortization is most easily calculated with an amortization calculator or pre-built amortization schedule because the calculations change after each payment. Download my mobile app “My Mortgage Toolbox” to gain access to premium interactive calculators in order to easily generate your Amortization schedule.

5 ways to reduce your amortization period

Being mortgage free—that’s the dream for most homeowners. Even if you need a longer amortization period to qualify for a mortgage, there are ways to shorten it. Over time you may get a raise, a bonus, a tax return, or other money that you want to put towards your principal.

Here are 5 ways to chip away at your mortgage:

  • Make a larger down payment: While you don’t want to overextend yourself, keep in mind that a larger down payment means you’re borrowing less. Even $5,000 can save you thousands in interest.
  • Make bi-weekly payments: When you pay your mortgage once a month, you make 12 payments a year. If your bank offers an accelerated bi-weekly payment option, you will make equivalent of one extra payment per year, which will further shorten your amortization period by paying off your mortgage faster.
  • Leave your payment the same if you renew your term at a lower rate: If you renew your mortgage term at a lower interest rate, you will have the opportunity to make lower payments. You could do that but why not keep your payments the same, and more of the payment will be applied to your principal which means you will be mortgage free sooner.
  • Increase your payment amount: Many mortgages have an option to increase your payment amount once a year. This is ideal, if you can afford it, because those extra funds go directly toward your principal. Even a small increase can make a big difference in the long run. Let’s say your monthly mortgage payment is $1,376 per month. Why not round it up to an even $1,400?
  • Take advantage of prepayment privileges: The ability to make a prepayment depends on the mortgage features. With an open mortgage, you can make additional payments at any time. However, with a closed mortgage (most mortgages are closed), check if you have prepayment options allowing extra lump sum payments. Also, there may be an option to make a lump sum payment at the end of the current mortgage term before renewal time.

Mortgage Amortization FAQs

What is the longest amortization period allowed on a Canadian mortgage?

If mortgage insurance is required, the longest amortization period that can be requested is 25 years. Without this insurance, 30-year amortization is possible.

Do I want a longer or shorter amortization period?

The answer depends on your financial situation. A shorter amortization has higher mortgage payments, but over the long term, you save thousands of dollars in interest. If you need the lower payments now, take a longer amortization and be sure you have the option to make extra payments later to decrease the amortization period.

Can you extend the mortgage amortization period if necessary?

The amortization period can be extended, but this is treated as a new application and you will have to qualify for the mortgage all over again. Now, an extra risk factor exists – needing a longer amortization to lower payments.

Feel free to get in touch if you have more questions about mortgage terms, amortization and your specific situation.


Sign up to receive monthly Home, Lifestyle & Mortgage News here.

<Back to Blog