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Fixed? Variable? Or Should I Just Defer My Mortgage?

Emergency rate cuts, bond yields plummeting, economies around the world screeching to a halt, yet mortgage rates are on the rise?! Top Mortgage Broker and Owner of The Mortgage Hub, Ray Macklem, joins Adam & Matt for an in-depth strategy session. It’s time to make sense of the current state of the mortgage market and where you can find the opportunities… and trust us, there are some HUGE opportunities! Whether you are a variable rate borrower, a fixed rate borrower, or a stretched borrower opting for a mortgage deferral, we have got you covered! This episode will save you money! Listen up.

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Episode Summary


Who is Ray Macklem?

Ray is a Mortgage Broker and owner of The Mortgage Hub, a franchise of Dominion Lending Centres in Vancouver, BC.


What is happening with mortgage rates in Canada due to COVD-19 (Coronavirus)?

The Bank of Canada has just issued another 0.5% emergency rate cut which has now been passed on by all the big banks and private lenders. The prime lending rate for borrowers is down to 2.45% in most cases, save for TD Canada Trust which is at 2.6%. What we are actually seeing is an increase of credit spreads with banks. Even though we are seeing prime rates drop, mortgage rates are going up. The risk for banks has increased overall for mortgages and the mortgage rates have increased to reflect this risk.


Why are mortgage rates increasing when the Bank of Canada is cutting rates?

For existing borrowers in a variable rate mortgage tied to prime, they will see the benefit of rates being cut by the Bank of Canada. They are currently paying 2.0% or less for their mortgages. New borrowers will not get the same benefit because big banks are facing a liquidity crisis right now.

All mortgage rates have a component of risk to them. The cost of funds for banks has increased. The banks have various sources of funds that they pull from to lend money, including short term deposits like bank accounts, savings accounts, high interest savings accounts and long-term deposits, like GICs and fixed term investments. Right now, there are people laid off that are living off their savings and these funds are not available to the banks. The banks need to increase their returns to bring in more funds to offset the loss of funds. Banks also need to increase the rates to be more attractive to investors, in light of the recent risk associated with banks. Banks are responsible to their shareholders and they are designed to make profits.


Do COVID-19 (Coronavirus) related rate cuts provide an opportunity for home owners to revaluate their mortgage terms?

Yes, this is a good time to revaluate your mortgage terms. There will certainly be opportunities presented to borrowers, but it is situation specific. If you have variable rate mortgage right now, you are in a good position. Some people are paying as low as 1.45% on their mortgage right now. If you are in a variable, you will want to ride this out because we don’t see prime increasing anytime soon.

If you are in an existing fixed rate mortgage, this is a good time to contact your mortgage broker to discuss options. When you break a fixed rate mortgage, it is normally associated with a penalty, the greater of 3 months interest or an interest rate differential. When fixed rate mortgage rates are on the rise, the potential of the interest rate differential decreases. We are already seeing situations where people can break their fixed rate mortgage, incur a penalty, and still see substantial savings by moving to variable rate mortgage. If you have an interest rate greater than 3.0% in a fixed rate mortgage right now, you should be looking to see if you can break it and save some money. It is also important to remember that variable rate mortgage holders can always lock in at any time if they are worried about rates going up. You might not time the bottom, but you could get close.


What is your advice to a new borrower looking to get a mortgage right now?

The best advice is a variable rate mortgage. As Dustan Woodhouse says, “Life is variable, your mortgage should be as well”. Anyone getting into a mortgage right now should go variable. The rates are much lower and variable rate mortgages provide a lot of flexibility in these uncertain times.

Fixed rate mortgages are tied to bond yields. You can track fixed mortgage rates against bond yields and see a correlation. The past doesn’t always predict the future, but we should see fixed rates come back down after this uncertainty due to COVID-19 (Coronavirus) has passed and it might be a better time to look at fixed rate products.


What is your advice for people concerned about meeting their mortgage payments due to COVID-19 (coronavirus)?

If you are stretched for cash right now, there are options available to you. First, if you have the ability to refinance, look at that option right now before it becomes too late. Getting in before you are in a situation where you absolutely need funds is the best. Banks are less likely to loan you money if you are totally stretched.

The Government has now introduced a mortgage payment deferral program. It is on a case-by- case basis, which allows people to defer their mortgage up to 6 months. This does not affect your credit score as long as the bank agrees to defer your mortgage. One word of advice, many people will be undertaking this option, which increases the chance of a credit report error. So if you do undertake to get your mortgage deferred, keep good records, including records of the bank confirming that this was the arrangement. Mortgage brokers see mistakes on credit reports all the time and it is always easier to get a mistake corrected with the proper supporting documents.


How should landlords navigate collecting rents from tenants and should investors look to defer mortgages on their investment properties?

The deferral program is designed for cases of need. If you are laid off, or you are a landlord and your tenant is laid off. It is a case by case basis and the lender will make the call if the borrower is qualified. This is not a universal program for everyone to miss mortgage payments. Also, it is a deferral program and not a payment forgiveness. The missed payments will get tacked on to the end of your mortgage.

Talk to your mortgage broker to make sure you know your options. Going directly to the bank may be difficult right now as their phone lines were not designed to handle the extreme volume of calls. If you don’t need the help of the program and can continue to make your payments, you should try to do so. This will help all of us get through this liquidity crunch together and see a recovery as quickly as possible. That being said, if you need help, look into your options.


What are your predictions for the Vancouver Real Estate Market for the next 3 months, 6 months, or 1 year out from now?

Canada is designed to weather these things better than some other countries. Our population density is such that the social distancing and other measures should be easier to enact to contain this pandemic. For Canada, hopefully it will be 2-5 months to get back to something resembling normal. Canada relies on the USA and other countries for trade, so there will be a slower recovery there. The economic impact overall will be big, but Canada should get back to business as usual quicker than most and we may have a busy fall real estate market in Vancouver.


Find out more about Ray Macklem.

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