HELOC, Refinance or Second/Third Mortgages? Which one should you choose to go with? If you have decided to tap into the equity in your home, the three can seem to be interchangeable at times and for many consumers can be a difficult decision on which one to select. We have laid out seven questions to guide you through the decision, for your unique situation. We’ve also broken this down into three categories, Equity, Payment and Availability.

PAYMENT

1. HOW WILL I RECEIVE THE MONEY?
• HELOC: Home Equity Line of Credit-withdraw as needed
• Refinance: Lump Sum
• Private Second/Third Mortgages: Lump Sum

2. WHAT IS THE INTEREST RATE?
• HELOC: Prime Rate + premium 0.5%-1.5%
• Refinance: Best fixed or variable rate (dependent on what you and your broker decide)
• Private Second/Third Mortgages: 6.95%-19.95% typically with lender/broker fees

HOW IS THE INTEREST CALCULATED?
• HELOC: interest accrues on what you withdraw from your home’s equity.
• Refinance: interest accrues on the full loan amount that was taken out.
• Private Second/Third Mortgages: interest accrues on the full loan amount that was taken out.

3. WHAT IS MY PAYMENT?
• HELOC: You pay back the interest only, however, most banks will have a minimum rule so even if your HELOC value is $0 you will still have to pay a nominal fee each month.
• Refinance: You will pay the interest, plus the principle principal loan amount.
• Private Second/Third Mortgages: You can pay interest only payment or pay the interest plus the principle principal loan amount.

EQUITY

4. HOW MUCH EQUITY DO I NEED TO HAVE IN MY HOME IN ORDER TO ACCESS IT?
• HELOC: 20% minimum
• Refinance: 20% minimum
• Private Second/Third Mortgages: 5-10% minimum

5. HOW MUCH EQUITY CAN ACCESS?
• HELOC: You can access up to 80%
• Refinance: 80% of your home’s equity is accessible
o HELOC portion can be up to 65% of your home’s equity
o Mortgage portion must be 15% – as per Bank of Canada guidelines
• Private Second/Third Mortgages: 1st mortgage + 2nd/3rd mortgages up to 95% of home value

AVAILABILITY

6. ARE THERE FEES ASSOCIATED WITH IT?
• HELOC: No fees associated with it
o At times
 Appraisal fees
 Legal fees
• Refinance: Prepayment penalty of Interest Rate Differential or 3 months interest* depends on your current mortgage terms.
o At times
 Appraisal fees
 Legal fees
• Second/Third Mortgage: There are several fees associated with a second mortgage including:
• Appraisal fees
• Legal fees
• Lenders fees
• Broker Fees

***One final note on refinancing: With the new stress-testing you will have to qualify at a higher rate and you will also have to consider that lenders can no longer insure the product… meaning there are many different rates with different lenders.

Once you answer each of these questions and review your options, you can decide which one is best suited for your needs. You can also always call a Dominion Lending Centres Mortgage Broker and discuss it. DLC brokers are well versed in each of these options and can direct you towards the best option for your situation. We’ve seen a variety of situations with our clients and have helped each of them reach their goals.

Five-year fixed mortgage rates continued their upward march last week as the five-year Government of Canada (GoC) bond yield they are priced on hit its highest level in seven years. Meanwhile, five-year variable-rate discounts deepened, further widening the gap between five-year fixed and variable rates.

When I started working in the mortgage industry in 2005, variable rate mortgages saved you more money than fixed rate mortgages 95 out of the past 100 years. First time home buyers were worried about what their home costs would be and avoided variable rate mortgages (VRM’s) because of the risk of rates going up higher than the fixed rate, but experienced home owners often took a VRM at mortgage renewal time.

However, in the past 5 years, most people have gravitated towards fixed rates because the gap between fixed and variable rates was small enough that the cost of uncertainty outweighed the potential reward for most borrowers.

Once again , the gap is widening. While fixed rate mortgages are going up due to the bond yield, variable rate mortgages have moved in the other direction.  Two years ago a VRM would be offered at Prime rate + .20%,  but later it reverted to Prime – .30% . In recent months, rates have dropped even further with some lenders offering Prime -1.0% !  You now have a choice between a 5-year fixed rate of 3.44-3.59% depending on the lender and a variable rate with a discount that calculates out to 2.45% . With a gap this large, it’s worth considering if you are risk tolerant enough to have a VRM.

Even if you are skittish, you can ask your Dominion Lending Centres mortgage broker to notify you if rates are going up and switch you to a fixed rate if they go above a certain percentage. Will your bank do that for you? I don’t think so. Be sure to have this discussion with your broker when your mortgage comes up for renewal or if you are considering a home purchase.

ARE YOU IN A VARIABLE RATE MORTGAGE? ME TOO.

Are you in a Variable Rate Mortgage? Me too.

If you’re in a fixed rate mortgage, this news does not impact you. Mind you ‘impact’ is too strong a word to use for the subtle shift that occurred Jan 17, 2018.

Short Version

The math is as follows:

A payment increase of ~$13.10 per $100,000.00 of mortgage balance. (unless you are with TD or a specific Credit Union, in which case payments are fixed and change only at your specific request)

i.e. – A mortgage balance of $400,000.00 will see a payment increase of ~$54.40 per month

Personally, we are staying variable, for a variety of reasons…

Long Version

Qualification for variable rate mortgages has been at 4.64% or higher for some time. This required a household income of greater than $70,000.00 for said $400,000.00 mortgage .

Can 99% of said households handle a payment increase of $54.40 per month? Yes.

Will 99% of households be frustrated with this added expense? Yes.

Ability and annoyance are not the same thing.

Have these households enjoyed monthly payments up to $216.80 lower than those that chose a fixed rate mortgage originally? Yes.

Are 99% still saving money over having locked into a long term fixed from day one? Yes.

Should I lock in?

A more important question is ‘why did we choose variable to start with’? And this may lead to a critical question ‘Is there any chance I will break my mortgage before renewal’?

The penalty to prepay a variable mortgage is ~0.50% of the mortgage balance.

The penalty to prepay a 5-year fixed mortgage can increase by ~900% to ~4.5% of the mortgage balance. A massive increase in risk.

There are many considerations before locking in, many of which your lender is unlikely to discuss with you. It’s to the lenders advantage to have you locked into a fixed rate, rarely is it to your own benefit.

At the moment decisions are being made primarily out of fear. Fear of $13.10 per month per $100,000.00

What about locking into a shorter term?

Not a bad idea, although this depends on two things:

Which lender you are with as policies vary.
2. How many years into the mortgage term you are.

If your net rate is now 2.95%, and have the option of a 2-year or 3-year fixed ~3.00% – this may be a better move than full 5-year commitment.

Do not forget the difference in prepayment penalties, this is significant.

Bottom line – Know your numbers, know your product, stay cool, and ask your Dominion Lending Centres Broker.

These are small and manageable increases.

P.S.

It was a bit disappointing to see logic and fairness fail to enter the picture, after the last two Federal cuts to Prime in 2015 of 0.25% each the public received cuts of only 0.15% each time.

Every single lender moved in unison, not one dropped the full 0.25%.

Amazingly, not a single lender saw fit to increase rates by the exact same 0.15% on the way back up. Every lender has instead increased by 0.25% – a full 100% of the increase passed on to you, the borrower.

Not cool man, not cool at all.

We share all the pain of increases, and get only part of the pleasure of decreases.

I am disappointed by this, not surprised, but disappointed.

8 THINGS YOU CAN DO TO GET THE BEST RENEWAL

With 47 per cent of homeowners scheduled to renew their mortgages this year, 2018 is a year of change for lots of Canadians.
Here are the top 8 things you can do to get the best renewal:

1. Pull out your mortgage renewal now, and start early. When you are proactive instead of reactive you can see if there is anything on your credit score or lifestyle that we can modify to ensure you are positioned for the best renewal. You are only in a position to do this when you start early- in the last year of your mortgage you will have the most amount of options available. For example, there can be an inaccuracy in your credit report or you may be considering an income/job change that would impact your options. We can look at timing accordingly for you.

2. Do not just sign the renewal offered. Lenders can change the terms of your mortgage, and the renewal you are signing can cost you up to four per cent of your equity if you are with the wrong lender for your current life stage.

3. Most people think the best rate is the best renewal – WRONG. The terms are most important and with all terms moving or selling is the only reason most people think they would ever break a mortgage- THIS is simply not the case, a change in the interest rate market, divorce, health, job change, investment opportunity and many other reasons would contribute to a future modification being beneficial for a consumer.

4. Take into consideration lender history. The lender can have a higher prime then anyone because they know the cost to leave outweighs staying the course. The lenders are very smart with their calculated risks- and this is not something they have an obligation to disclose.

5. Remember your lender has a bias – their job is to handcuff you so they can make as much profit off you as possible- don’t be a victim.

6. Do not shop each lender on your own, it takes points off of your credit score. All lenders have different rates based on your score and you want to position yourself to get the best. By using a mortgage professional, they can shop multiple lenders protecting your credit using only one application, while the rate variation can be on average a half a percent!

7. Don’t get sucked into the online rate shopping- any monkey can post a rate online and you can drive yourself crazy looking at something that does not exists. In today’s complex mortgage market there are significantly different rates based on – insured mortgage vs uninsured mortgage, switch vs refinance, purchase or renewal, principal residence vs rental, salary or self-employed, 600 credit score or 700 credit score, amortization of 20 years to 30 years, type of property condo vs house, and leased land or freehold. The variations can mean a difference in thousands of dollars. Like diagnosing a medical condition, you can’t go online, you do have to put in the appropriate application and supporting documents to verify which options are available to you that will result in the lowest cost in borrowing.

8. Remember your mortgage is the largest debt and investment most of us have, when you contact an independent mortgage professional, we are going to invest all the work and expertise and advise you in your best interest regardless if we get your business. We may after our review advise you to stick with your existing lender, or make another recommendation for you. We are only here to enhance your finances and save you money, and there is no cost for our service.

A recent article featured on www.mortgagebrokernews.ca brings up some interesting points to consider.
With approximately 47% of mortgages in Canada coming up for renewal in 2018 and in a rising rate climate, it would be wise to consider the impact on our personal mortgage. What will these increases mean for you?
70% of Canadians are in 5-year fixed rate mortgages and the rates these people secured in 2013 are still similar to what is being offered in 2018, so a possible increase in payment that comes along with a slightly higher rate could be quite easy to handle.
However, in 2019 rates will likely be significantly higher than what consumers locked into in 2014. The payment shock could be substantial. Not to mention that increases in the Prime rate will also affect unsecured credit such as lines of credit and credit cards. And the Bank of Canada is certainly in an upward trend with the Prime.
Translation… as rates go up for mortgages and other credit accounts, so do payments.
What can you do? If your mortgage is maturing this year or in 2019, it is highly advisable to contact an experienced Dominion Lending Centres Mortgage Broker to evaluate your position. You will likely have seen a healthy appreciation in value in your home in the past few years, so perhaps it’s time to get ahead of the “rate train” and consider consolidating your unsecured credit with your mortgage and lock in at today’s still low rates before you start to feel the pinch.
The latest rule changes that came into effect January 1, 2018 could also have an impact on your ability to qualify for what you need, so getting a free evaluation will be more valuable than ever.
As always, feel free to contact a mortgage professional for any questions you may have.