After a cooling summer in the Canadian housing market, the coming fall could see some prospective homebuyers wondering whether now is the time to get pre-approved for a mortgage and take the plunge into homeownership.
But before making an offer on the house of your dreams, experts say you’re best to meet with a mortgage professional to understand what you can afford and what loan might be right for you.
Victor Tran, mortgage expert with rates.ca in Toronto, Ont., tells Global News that buyers who haven’t checked in with a professional to know exactly what’s possible for their financial situation could be surprised to find the home they thought was in their budget actually isn’t.
“I’d say the financing piece is the most important piece of the puzzle, and it should be the very first thing that any first-time homebuyer or any homebuyer, for that matter, should start doing,” he says.
As the Bank of Canada gears up for another interest rate decision on Sept. 7, here are some of the questions to ask before signing on the dotted line to avoid any shocks in your monthly payments.
What kind of mortgage professional am I working with?
The person who helps you find and negotiate an offer for the home of your dreams — your real estate agent — is not typically the same person who helps you get a mortgage.
But some of the terminology around mortgage professionals can be confusing, so know who you’re dealing with before you start the conversation.
A mortgage specialist is typically a professional employed directly by a bank or other specific lender. They’re able to sell mortgage products at that institution but won’t typically have access to mortgage rates and offers outside their lender, says Eitan Pinsky, owner of Pinsky Mortgages in Vancouver.
Pinsky is a mortgage broker and members of his team in B.C. are called sub-mortgage brokers (in Ontario, typically you see the term “mortgage agent.”)
Mortgage brokers and their agents are able to access products from a wide range of banks, credit unions and alternative lenders and are not tied to one particular institution.
Brokers are also regulated by provincial bodies, and specialists cannot call themselves brokers without being properly licensed.
Pinsky says that anyone can call themselves a mortgage “adviser” or “expert,” and those terms could apply to either specialists or brokers, so confirm which is the case with your contact.
Mortgage starter questions to set the stage
Both Pinsky and Tran have a series of questions they’d pepper an expert with to set expectations.
Tran says it’s a good idea to know your professional’s experience in the industry, what the turnaround time is to get pre-approved, what kinds of lenders they most often work with and whether there are any fees associated with their services.
Typically, there won’t be any fees for homebuyers with a good financial standing and steady employment status, he says, but those who have had their credit damaged or are self-employed might face more hurdles.
Taking out a mortgage from an “A lender” such as a major bank usually will not have any fees, but setup fees could come into play when you need to get a mortgage from an alternative lender.
Pinksy says one of the pieces of the transaction that often gets overlooked is the cost to close on the home: legal fees, land transfer taxes and other costs that can come as a surprise at the end of a purchase.
“You’d be surprised at how many people come to us and say, ‘Nobody went over this information’ … So that’s why we provide them with the education upfront,” he says.
What happens if interest rates rise?
Perhaps the biggest unknown looming over the Canadian housing market right now is how high the Bank of Canada’s interest rates will go.
The central bank sets the policy rate from which all banks and lenders determine their prime lending rates. When the Bank of Canada raises interest rates — as it has done five times already this year — it makes certain mortgage products more expensive.
But not all mortgages react immediately to these hikes and some react in different ways.
A fixed-rate mortgage is not actually tied to the Bank of Canada’s rates — it’s determined by the bonds market.
Once you take out one of these mortgages, your contract rate holds steady over the course of your term, providing some certainty in payments and letting homeowners largely ignore the external lending environment until they have to renew.
Variable-rate mortgages, which exploded in popularity over the course of the COVID-19 pandemic as interest sat at historic lows, are more reactive to the Bank of Canada’s decisions.
There are two options here: a mortgage with an adjustable rate will see your monthly cost go up or down as the central bank rate changes; a variable rate with fixed or static payments will see your costs stay the same, but you’ll instead be paying off more of the interest and the overall length (or amortization) of your mortgage could expand as a result.
Pinsky says that the latter also comes with a so-called “trigger rate,” at which time you’re no longer paying off the principal of your mortgage. What follows that is the trigger point, where your mortgage is increasing and size and hits 80 per cent of your property value.
“A trigger point actually requires the client to increase their payments quite drastically or pay a lump sum,” he says.
“Every single client that we put in a variable rate in the last three years, we’re actually calling and we’re having meetings with them to explain it better.”
What happens if I break my mortgage?
When you’re busy preparing an offer and looking ahead to the days you’ll spend in your new home, it’s easy to forget that your living situation can change in a hurry.
In fact, upwards of two-thirds of Canadian homeowners break their mortgages early, Pinsky and Tran both told Global News.
When exiting the mortgage prematurely, there are penalties you’ll have to consider depending on the type of loan.
For variable-rate mortgages, the penalty is always equal to three months’ worth of interest on the loan.
In the case of fixed-rate mortgages, you’ll pay either three months’ interest or a special amount called the interest rate differential (IRD), whichever is higher.
The IRD is calculated by looking at the difference between what you’d pay on the remaining principal on your current rate and at today’s posted interest rate. Tran says it can be tricky to determine the IRD, and one your mortgage agent should go through with you, especially as these amounts often surpass the standard three-months’ interest.
“When you hear (about) large penalties being charged by lenders, that’s generally the IRD,” he says.
While going for a variable mortgage in a rising interest rate environment might be counter-intuitive, Tran says the solace of knowing you have a more affordable “exit strategy” might still make this option attractive.
Some homebuyers or refinancers might choose a mortgage term length of two or three years rather than five to hedge against major penalties or in hopes of renewing when interest rates are on their way back down, he adds.
So while there are a number of questions you need to ask your agent before signing up for a mortgage, it’s equally important to ask questions of yourself, Tran says.
“(There are) so many questions to ask yourself when it comes to selecting a mortgage product that would make sure that you don’t get stuck with the large penalties if a big life event happens.”
Editor’s note: This article as updated after publishing to better reflect the difference between the trigger rate and trigger point.