How to Feel At Home With Your Mortgage

EVP and CFO, Carolyn Graham and EVP of Banking, Stephen Murphy discuss the new Canadian mortgage rules and how to avoid common mortgage mistakes.

The beginning of this year marked the effective date of new mortgage rules in the form of a stress test for Canadians looking to qualify for a new mortgage or to move an existing mortgage to a different federally-regulated financial institution. The stress test requires lenders to use the Bank of Canada’s five-year benchmark rate for qualifying conventional mortgages (i.e., those having down payments of 20 per cent or more). With these changes, Canada’s federal financial regulator aims to reduce the average indebtedness of Canadians.

Putting the new mortgage stress test rules into perspective

Canadian Western Bank’s (CWB) Executive Vice President and Chief Financial Officer, Carolyn Graham, explains that the intent of the stress test is to make sure that borrowers can withstand an increase in interest rates. “It does impact the maximum amount that an individual can borrow, which would mean they might need to think about a larger down payment, or wait a bit longer to get into a first-time home or potentially look at a mortgage that’s a little bit smaller than they might have been before the new rules.” 

Carolyn also highlights that mortgage rates are always a reflection of what’s going on in the market at the time. Therefore, rates are usually impacted by the Bank of Canada’s benchmark rate or the yield on Government of Canada bonds. “As those fluctuate, the pricing of mortgages will also change,” she explains. “I think at its heart, the prime rate is based on the underlying perception of the strength of the Canadian economy — when the Canadian economy is believed to be strong, rates can rise. When the economy is weaker, rates are generally low in an effort to support spending, which will help kick-start the economy.”

Choosing a mortgage — a balance of risk

The type of mortgage you choose — whether it’s a fixed rate versus a variable rate – can also have an impact on your personal bottom line. Carolyn says, “A fixed rate mortgage can give you payment security over whatever term you choose, regardless of what will happen to the market interest rates.” Stephen Murphy, Executive Vice President of Banking at CWB, adds,

“It’s also about being able to manage your risks as housing takes up a lion’s share of most people’s discretionary, take-home income. If you can’t afford for your mortgage rate to go up, then it’s worth it for you to lock that in and make sure that you take that downside risk out of the equation if rates move against you. 

Conversely, a variable rate mortgage can yield benefits if you’re able to handle the associated risks. If variable interest rates are lower than fixed ones or go down, more of your mortgage payment goes to principal rather than interest, resulting in more home equity. “It’s about how important payment security is to you, how much room you have in your budget and whether or not that’s a risk you’re prepared to take,” says Carolyn. 

Stephen points out that the changes not only arose from concerns about debt levels, but also perceived risks in certain markets with housing values. “In the greater Vancouver and Toronto regions, home prices experienced unprecedented appreciation. Provincial governments also took measures to control prices.” Carolyn adds, “Alberta was in a recession for a couple of years, which had an impact on housing markets too. Overall with so many economic risks around like NAFTA, as well as recent regulatory changes, it might be a good time for a new home buyer to be conservative.”

Avoiding mortgage missteps — for individuals and business owners

In terms of common pitfalls people make when choosing a mortgage, a big one is underestimating the full cost of having a house and mortgage, including closing costs, maintenance, furniture, utilities, etc. Stephen also mentions the issue of overstretching to make it work without being realistic about spending habits, such as eating out at restaurants. 

For business owners, they need to take into account many more interconnecting factors at play. “It may be that if they’ve got variable rates in the business, they may want to hedge by fixing the interest rate on their personal debt. They might need to think more holistically about their financial picture, including all aspects of their life,” offers Stephen. Also, business owners may need to think about their need for quick available cash. “It’s more likely that there would be financial surprises for a business owner than for a salaried employee, so they may need a cushion of liquidity such as through a home equity line of credit (HELOC).”

Another misstep can be undervaluing the importance of your relationship with your financial institution. Stephen thinks people should ask themselves several questions.

“Does my banker take the time to understand me and my needs? Do they provide integrated advice across all of my needs, which is essentially true for business owners? Do they value my full relationship?”

Moving forward on what’s right for you

At the end of the day, Stephen says, “While a mortgage is a product that every bank has, it’s about finding the best financial partner to work with. One that brings the right experience, value and advice — that makes it the best fit for you.” 

Through all of these changes, Carolyn emphasizes that CWB Financial Group continues to look for opportunities to help clients achieve their financial goals. 

For more information about how the CWB team can help you reach your financial goals, including home ownership, get in touch with us today.