It was only days ago that the Federal Government announced that it would provide increased flexibility to lenders to defer mortgage payments during the COVID-19 crisis. Shortly thereafter, the big 6 banks announced they would be allowing up to 6 months of mortgage payment deferrals to assist those impacted by COVID-19. The monoline lenders followed suit. Since then, they have all been doing as best they can to accommodate the massive volume of calls and emails, while implementing new programs daily to help handle these inquiries. I have been completely immersed in trying to help my clients who are seeking payment relief during these times. Lenders are updating us daily/hourly as to what the best course of actions is, and I encourage you to contact your mortgage advisor, or me, if you don’t have one, for current advice. Here is what I have learned so far:

• Many people are under the impression that the government is offering mortgage payment forgiveness or mortgage compensations of some kind. This is not the case. Any deferred payment will be added to your mortgage in one way or another, with interest. A payment deferral will cost you a lot more in the long run. ***This is not “free” or “government” money***

• I have heard about 2 clients being offered 6 months of deferred payments with no questions asked. Understand this is not the norm. You will likely be asked about your employment status and other reasons for requesting deferral. Many lenders will ask about your net worth status and liquid assets available. (If you do your regular banking with the same lender that holds your mortgage, they can likely assess this internally). Whether or not your mortgage is default insured, collaterally charged, your loan-to-value ratio, and if you have been set up on accelerated payments or applied any lump sum payments in the past will be considered. Many clients are offered a one-month deferral only and encouraged to re-apply with new status each month. ***PS to Alberta residents *** I’ve had clients in the oil and gas industry asked by the lenders if their layoff was directly due to COVID-19, or other factors. GREAT QUESTION. I believe the answer is circumstantial to your working environment, but I’m trying to find out more.

• Regardless of how urgent your situation is, it is going to take time to get a response. It can be frustrating to wait on hold, or wait for an email response, but please contact them before you miss a payment, as to not damage your credit.

• Mortgage distress, like any kind of distress, is relative. For some people, mortgage distress is due to worry about the coming disastrous economic effects of COVID-19 on their job or business. For other people, mortgage distress is being suddenly laid off with no income and unable to pay their Mortgage on Tuesday. Both are valid concerns, however, some lenders are prioritizing and only dealing with those not able to pay their mortgage payment due within the next 7 days. If you don’t have concern about missing your next payment, consider sending an email or filling out a form for a call back later. I know waiting can be frustrating. In these times, exercising a little patience and freeing up the phone lines could help your friends and neighbours keep their home.

• If you believe you have some equity in your home, you might be able to avoid all of this by speaking to a mortgage advisor and setting yourself up to access equity for fallback more affordably. You should do this before there are any negative changes to your income or home value. I would suggest NOW. You may be able to refinance to draw out an emergency fund, set up a home equity credit line, a reverse mortgage, or even private financing to bridge the gap at this time.

• Self employed and commissioned workers: Many lenders require “proof” that you’ve been laid off or impacted by COVID-19. in order to defer payments. For many of you, that is something that you won’t be able to document for months. I encourage you to speak with a mortgage advisor NOW to explore your financing options outside of deferred payments.

I hope this information helps! Do not hesitate to call or email me for further advice.

Sarah

The Bank of Canada announced a 50bps cut to the overnight rate on Friday at an unscheduled meeting. The overnight rate, or policy rate, can have an impact on the Prime lending rate at the banks, as we saw 2 weeks ago at the BOC’s regularly scheduled meeting. The banks have not responded to this second cut yet, and we are not sure if or by how much they will correspondingly reduce the prime lending rate. It is unlikely to be a full 50 bps. Furthermore, there is another scheduled meeting in April, and many economists are expecting another drop in the overnight rate. This also may or may not drive the Prime rate down further. Changes to the Prime lending rate impact variable rate product borrowers and credit line holders.

Variable Rate Mortgages:

A variable rate mortgage product is issued with a set differential to the prime rate for a specific period of time (ie: Prime less 0.60% for a 5 year closed term). This means that with changes to the prime rate, your monthly payment (sometimes) and overall cost of borrowing fluctuates. Home Equity Credit lines are similar, however they are usually priced at Prime PLUS a differential, have no set term and require interest only payments (no amortization).

The prime lending rate may go down, but the differential (the set discount to prime over a 5 year closed term) offered for new mortgages is, and will likely continue go up in the short term if the Prime lending rates continue to fall.

In my opinion, waiting to see if the Prime rate falls again BEFORE you secure a variable rate mortgage product does not really benefit you, unless you time this absolutely perfectly.

Fixed Rate Mortgages:

A fixed rate mortgage term is issued with a guaranteed rate, payment, and cost of borrowing for a set period. The most common period is 5 years. 5 year fixed mortgage rates are impacted in most part by the 5 year bond rate, along with a few other factors related to the lender’s cost of doing business. I will get into that another time. The sharp 5 year fixed rate drop we had last week was a quick response to corresponding bond yields. Almost as quickly, many lenders who dropped their 5 year fixed rate, have already gone back up slightly.

In short, my recommendation is that if you are considering a new purchase within the next few months, getting pre-approved and securing a “ceiling” rate right now would be a good idea. If you have been thinking about an early renewal to take advantage of new lower fixed rates, you should be calling your mortgage advisor ASAP. 

Here is a short glossary of some of the other “interest” terms you might be hearing about in the news:

Benchmark Rate:  The Bank of Canada conventional 5 year rate. This rate is meant to be a cross-section of posted bank rates. Historically much higher than contract rates available, this rate is used in qualifying applicants.

Contract Rate:  The actual interest rate that the mortgage holder pays.

Overnight Rate:    The interest rate at which major financial institutions borrow and lend one-day (or over-night) funds among themselves; The Bank sets a target level for that rate. The target for the overnight rate is often referred to as the Bank’s Policy Interest Rate.

Prime Rate:   The annual interest rate that Canada’s major banks and financial institutions use to set interest rates for variable loans and lines of credit.

Qualifying Rate:   The rate used by mortgage stress tests to determine an applicant’s affordability. Typically the benchmark rate, or the contract rate plus 2%

As always, do not hesitate to call or email if you have questions.

Sarah