Rate Types and Their Characteristics
• Fixed Rates:
Interest and payments remain consistent for the term. The penalty to break a fixed mortgage is the greater of three months’ interest or the Interest Rate Differential (IRD). Fixed rates are generally preferred by clients on a budget who prioritize payment stability.
Variable Rates:
—There are two main types:
◦ Adjustable Rate Mortgage (ARM): Monthly payments fluctuate alongside interest rates. The exit penalty is typically three months’ interest.
◦ Capped/Static Variable: Payments remain stable as long as they cover the interest; however, if rates rise, the amortization period may stretch to cover the interest costs.
• Variable Rate Determinants: These are based on the Bank of Canada’s prime rate. While prime rate changes are announced on a set schedule, lenders may take time to adjust their own rates, often acting quickly when rates rise but slowly when they drop.
• Fixed Rate Determinants: These are largely influenced by the bond yield market, which reflects economic factors like inflation and monetary policy.
Types of Lenders
• Prime Lenders: Generally require debt-service ratios (GDS/TDS) of 39/44, although some exceptions exist. These lenders offer standard products and usually require a minimum 5% down payment and good credit.
• Alternative Lenders: Often serve self-employed individuals, those with non-traditional income, or clients needing debt consolidation. They typically require at least 20% down, charge a 1% fee, and are more flexible with ratios.
• Private Lenders: Focus heavily on the property’s value and marketability as an exit strategy rather than the client’s income. These loans often carry higher interest rates (sometimes double-digit) and lender fees of 2%–4%.
Qualification and Underwriting Nuances
• Insured vs. Uninsured:
◦ Insured: Borrower pays for mortgage default insurance; required for down payments under 20%.
◦ Insurable: Lender covers the insurance; applies to specific scenarios like some transfers.
◦ Uninsured: Not eligible for mortgage default insurance; applies to refinances, rentals, or purchases over $1 million.
• Property Considerations: Location (urban vs. rural) and property type affect marketability. Lenders may restrict loans on specific property types, such as small studio apartments or acreages exceeding five acres.
• Refinance vs. Transfer: Increasing principal or amortization, or adding a HELOC, typically classifies a deal as a refinance. Transfers must generally maintain the original amortization and principal amounts.
• No-Frills Mortgages: Often include “bonafide sale” clauses that prevent refinancing or exiting the mortgage early unless the property is sold; these should be carefully disclosed to clients.
Research and Resources
• Brokers tend to perform independent research using capabilities to differentiate between lenders.
• APR (Annual Percentage Rate): Represents the true cost of a loan by incorporating lender fees, whereas the advertised interest rate is the base cost.
• When clients ask about fixed vs. variable, it is important to consider your risk tolerance (e.g., the “extended warranty” analogy) and your ability to absorb potential payment increases.
Let me know if you’d like to have a discussion. I’m happy to answer any questions you have.
Sincerely
Janet Hong, AMP, CCRMC
Mortgage Broker
NL: 26-08-JH342-1
AB: 671095
📲 Text 709-763-1844/587-487-5010
📧 mortgages@janethong.ca
🔗 www.janethong.ca