Mortgage 101 – The Mortgage Advice Your Bank Won’t Give You

Clinton and Dan discuss the current state of the mortgage market, shifting consumer preferences toward variable rates, and the importance of professional financial advice.

Dan Ahlstrand
And we are back to Mortgage 101. He’s Clinton Wilkins. I’m Dan Ahlstrand. We talked about it in the first segment, and in the second segment, market instability is having an effect. Governments are borrowing a lot of money now. If you’ve been watching what Mark Carney has been doing, He’s been going across the country to spur the economy. $4.5 billion for train cars in Ontario, and the list goes on and on and on. That money has to come from somewhere, and governments borrow money by issuing bonds.

Clinton Wilkins
Correct.

Dan Ahlstrand
And how does that impact the mortgage market, Clinton?

Clinton Wilkins
Well, bonds are where the fixed mortgages are leveraged off of. So, high cost of bonds, high cost of mortgage rates is really the way that it works, and fixed rates are edging up. I’m just going to give it to you straight. I’m going to tell our listeners that we were getting really excited that the fixed rates were getting into the threes. They’re really kind of not happening. I think it’s there’s the odd one that’s maybe happening, but it’s not as prevalently available as it was maybe a month or two ago, and it’s actually kind of getting worse. And that being said, historically, 60% of consumers will take a five-year fixed. Historically, three years ago, I would say it was probably 60% who were taking a three-year fixed. Today, I will say that probably close to 90% are taking a five-year variable. It’s been a huge, huge shift in appetite. I think risk tolerance and product choice have really shifted over the last few months. One being Banky Canada lowered the key overnight rate. Now we’re in a period of stability where we’ve been on a plateau. But the way that consumers are looking to say, okay, I take a variable rate; the fixed rate, maybe the next best, is 40 or 50 basis points, or maybe higher. I have a lot of runway to even be in a break-even position with where the fixed is. The nice thing is with the variable, if you were to break your mortgage early, i.e. sell your house or refinance mid-term, it’s a penalty of only three months’ interest. But the other real upside on a variable is you can always convert it into a fixed rate down the road with no penalty. So it really gives consumers more options, more flexibility, and I think the reason why maybe our customers take more variable-rate mortgage terms than maybe someone walking into a bank branch is that we’re giving those consumers advice. Those consumers are hearing us on the FM, on the streaming, on Facebook, on email, giving the advice when the Bank of Canada meets.

Dan Ahlstrand
Right.

Clinton Wilkins
Like, we just did a live stream here on Facebook in October for the last Bank of Canada decision. It’s not October, sorry, September. I don’t even know what month it is anymore. September, and we did a live stream right from our studio based on that decision. We watched it live on my computer; we had our operations guy gearing up our email and our SMS, and we pushed out that communication live. We watched that we watched the results, and then we did a live stream at 11 a.m., and we had people that were our friends on Facebook, I guess, and they were watching our stream, which was really, really, really great. If someone’s dealing with the bank, they don’t get that. The money from the bank is, by and large, to return profitability to the shareholder. For us, I really do not care which lender we’re doing business with. I want the lender to make the most sense for that consumer. It’s not just the lower rate, and I think that sometimes people will reach out and say, “Okay, I just want the lowest rate.” And I talked about this on a national call today where I was able to share some insights. I think sometimes when a customer calls us and says, “I just need the best rate,” they’re feeling the pressure. They’re feeling the pressure from a cash flow perspective; they feel they need the best rate because they can’t maybe afford the rate that’s offered. And I really push myself and my team to gather more information in those scenarios, get an application, review the client’s income, their assets, and their credit, and then put together the best proposal for that customer. Because sometimes, Dan, it’s not really about the rate. Sometimes it’s about the unsecured debt that they’re carrying, or sometimes it’s about their amortization. The amortization needs to be longer. So I think it’s our job as mortgage professionals to ask our customers more questions, and it’s not. And I think for customers, they need to seek the advice of an advice mortgage professional and not just sign that renewal that the bank offers. I would say probably something like 50% of customers just renew at the branch, or renew at the bank, or renew with their lender that they have, and a large portion of those customers that just do the renewal could be better served getting that advice because maybe an adjustment to their current product might make sense for them.

Dan Ahlstrand
One of the things that attracted me to coming to work for you was the philosophy of you and your team that it’s not just about getting the transaction done and then seeing you in five years. It’s about establishing a relationship, and I think with the way things are changing by the hour.

Clinton Wilkins
It’s insane. It’s like people need more advice today.

Dan Ahlstrand
Correct, and yeah, sure. It’s easy to wait for that renewal to come in the mail from your bank, and then you just sign it. You don’t think about it. Bob’s your uncle. Off you go, right? But the days of easy lending are, I think, done.

Clinton Wilkins
I think the pendulum swings both ways. And, I think we’re in a plateau situation. You’re almost like in the middle; it’s been very challenging. It’s been very easy, and it’s been somewhere in the middle. But I think that being said, overall, I think customers are struggling, and they need the advice more and more. And I think people are waiting till closer to the renewal to go and get the advice and get the help because they’re scared. I think there’s a lot of uncertainty, and we need to remove some of that stigma. I even see it sometimes with our own customers. I say to them, “I’m like, okay, you’re not in the best situation today. We can fix this, but like, why didn’t you reach out to me six months ago or a year ago? And they had this idea in their head to say, “I had given you a five-year fix at 2%, 1.89, 1.99, whatever it is; we just really wanted to ride out that term because it was so low. But they had $100,000 of credit card debt, and their and their house is only they’re only leveraged on their home for like 50% Like I could have solved your issues, reduce your cost of borrowing so significantly, having a higher interest rate on the mortgage really wouldn’t have made a difference because you’re paying $3,000 a month in cash flow to make the minimum payments on those $100,000 worth of credit card balances, and I know that might seem extreme to be like, oh my god, 100,000! These people are bankrupt. No, they have a ton of equity in their house. They’re getting paid a lot of money every month, but they had a few bumps in the road, and they drove up their credit, and it’s costing them a lot of money. So, I think we really need to ask more questions as mortgage professionals, and I would challenge customers to go and get advice every time that they are doing a renewal, doing a refinance, buying a home. Go seek the advice of an unbiased mortgage professional. We deal with like 20, 30, 40 lenders every day, and all lenders are not equal.

Dan Ahlstrand
You mentioned refinancing, and you mentioned the good times and the tough times. And I know that there are a lot of people who, when the interest rates were really high, bought their more bought got their mortgages with a fixed rate and then for a shorter term to try and ride out those high interest rates. Those are all coming due now. Your advice to those folks: do we continue to go for shorter terms, given the turmoil that’s out there, or is now the time to go back to the more traditional five years?

Clinton Wilkins
Really, I don’t think a five-year fix is the way to go. Really, really, truly, I do not. We have a lot of three-year terms coming up for renewal. We have a lot of five-year contracts coming up for renewal, and I think that’s partially why we’re so busy. Even though we’re not seeing as many purchases maybe this year as we have in the past, I’m still optimistic the fall is going to be busy. Anyway, in Nova Scotia, we are up close to 5% because we’re seeing more customers, and I think customers are needing more advice from an actual term standpoint. If you absolutely, absolutely want to have a fix and you’re not open- your mind is not even open to a variable- we don’t want to hear anything about it, then I would do a shorter-term fix. I would do, like, a three-year. But there are different types of variable-rate products, Dan, and I think, from a customer’s standpoint, I think one of the biggest fears that I sometimes hear is that their payment is going to adjust when the prime rate adjusts. So if the prime rate goes down, the payment goes down. Even though, like most people, we would enjoy a lower payment, I think that gives some uncertainty to the consumer.

Dan Ahlstrand
People like to have that. They want to know what they’re paying. What that number is. They want to know what they’re paying.

Clinton Wilkins
There are variable-rate mortgage products that have a static payment. So what that means is, when the prime rate changes, the amortization adjusts. So let’s say, for example, the prime rate goes down; the amortization would get shorter. If the prime rate goes up, amortization gets higher. Now, with the lenders that we use, they won’t allow you to owe more than what you borrowed. So eventually, it would reset. If prime went up and up and up, you’d be hearing from us way before that, because we’re just very, very involved with our customers. Like we’re doing annual reviews with our customers every single day, and we’re pumping out a lot of communication on email, on SMS, on social media. And I’m not above picking up the phone and calling our customers either.

Dan Ahlstrand
What’s the market like, Clinton? We saw some stats from July this year that showed that Halifax had been insulated for months and months with this downturn in housing prices, but that seems to have caught the market now.

Clinton Wilkins
Yeah, I think from a transaction standpoint, it’s light. I saw a stat a realtor put out this week that in August there were only 84. Transactions closed from single-family homes and condos in Halifax and Dartmouth. That is very low compared to previous Augusts, and we were seeing delays. what I mean? Like, the spring wasn’t as busy, and they’re like, “Okay, the summer is going to be really busy, and then maybe the summer is not as busy as we thought it was going to be, and now maybe we’re saying it’s going to be busy in the fall. More inventory, I think, creates more choice, and I think maybe from a price standpoint, we’re going to see the increases be less. We were seeing 2, 3, 4, 5% increases still, even though a lot of places in the country were down 25%. We are still seeing increases here in Atlantic Canada, and we’re not just saying Halifax. I’m talking Nova Scotia, New Brunswick, PEI. We’re still seeing the property values increase. I’m cautiously optimistic. I think that if you’re looking at doing a transaction, sometimes the best time was yesterday.

Dan Ahlstrand
If you’re a renter, what does that mean? What does the market mean for you? We’re going to discuss that when we come back. You’re listening to Mortgage 101.