Mortgage 101 – Unlocking Homeownership

Todd Veinotte, Clinton Wilkins, and Blair Patterson emphasize the importance of the stress test in ensuring affordability and protecting borrowers from financial shocks.

Todd Veinotte
Welcome back to Mortgage 101. Your guide to home ownership with Clinton Wilkins, our mortgage guru, myself Todd Veinotte, and our guest Blair Patterson. Blair, who works from Clinton. He loves his job. He’s telling me off-air how much he loves it while you’re in the other room.

Blair Patterson
Yeah, love it. And I love helping clients.

Todd Veinotte
Our fine production team went out and got some great questions, and they sound great, by the way. Great job, guys, and we played this question before the break. But for those of you just tuning in, let’s read, let’s re-hit it, and then we’ll have you two extra to answer the question.

Interest Rate Stability and Affordability

Question One
I think the question would just be about how the interest rate grows. I mean, if I’m planning for a, you know, a mortgage, that payment to be, let’s say, $1,800 a month or $2,000 a month in 15 years, will that go up a lot? Will that go up to 3000, 4000? Could it go down? You know, just if they could give me any insight on how quickly it could grow or how quickly even if it could decline.

Clinton Wilkins
By and large, people’s mortgage payments are usually relatively stable. It’s made up of a portion of the interest and principal. We know the interest rates change. You know, five years ago, people were getting mortgages maybe at sub 2% now they’re in the 4% range, but only a percentage of the actual payment is interest. So by and large, most mortgages are about 25 years, and the payments stay around the same. I’m going to stay around for those 25 years. As the mortgage gets paid down, you’re still making that same payment, but more of your payment goes on principle and less goes on interest. Blair, what do you tell people when they come in about affordability?

Blair Patterson
Yeah, when it comes to affordability, you know, payment shock was in the news when rates were going up, what people might not realize is that they’re qualifying at a higher rate, at a 2% higher stress test, yeah. So even if the rate does go up, it’s already built in that they’ve been able to, they can handle that extra payment. So, you know, people do worry about payments going up, what’s your payment going to be in the future when you renew? But by and large, it’s already kind of, you know, worked in that you can’t afford any kind of payment.

The Role of the Stress Test

Clinton Wilkins
And thank goodness for the stress test. I know Todd, like we talked so much about the stress test, but thank goodness for it, because that’s preventing this renewal cliff. I won’t tell you, it’s not without pain, because sometimes people are like, “I can qualify for more.” We’re protecting you from yourself. First off, and these are coming up for renewal, a lot of these clients are in tough shape because they changed their financial position. They bought cars, and they did renovations. Yes, the rates are higher, et cetera, et cetera.

Todd Veinotte
Let’s rewind the clock. We were doing these shows four years ago, five years ago, when interest rates were almost zero, and you were emphasizing at that point, listen, folks, the stress test is necessary, and it could pay off. And you’re prophetic, because it has.

Clinton Wilkins
Thank goodness. Now I think the federal government will likely do something and maybe remove the stress test, but we’ll get another barrier because I think they’re gonna, maybe they might change it. I don’t know if the stress test is outdated, per se. Right now, we qualify people on contract plus 2% or a rate, a qualifying rate of 5.25, whichever is higher. They’re talking about making an income qualifier, like you can only qualify for four and a half times your income and take out the stress test, but we’ll see if that comes to pass.

Todd Veinotte
Blair, do you have is it sometimes difficult to explain that to people, the stress test, or is it pretty clear?

Blair Patterson
For the most part, people don’t know that it is happening in the background, or that we’re adding that 2% they just give us their income documents. We let them know how much they can qualify for. They’re more concerned about getting the house and making the payments, and what the payment is.

Todd Veinotte
Do you have that conversation with them that the stress test is part of this? Or sometimes, do you not?

Blair Patterson
Savvy clients will sometimes want to know what’s happening in the background and why they’re getting that.

Todd Veinotte
It’s not obligatory to tell them what the stress test then?

Blair Patterson,
No, not at all.

Clinton Wilkins
I don’t have a conversation with everyone. It’s above a lot of borrowers’ heads, and it also creates, I think, a lot of anxiety. Be like, Oh, I’m going through another test.

Todd Veinotte
Yeah, the term test might not be the right way of putting it.

Clinton Wilkins
When we have a conventional borrower, they’re being approved by the bank. There is no other one between us and the bank approving. There’s us, there’s the lender, and there’s also the insurer. So multiple parties are getting involved in your approval process to be able to grant you that mortgage. So you know, for us, some borrowers will come in and ask us, because people are listening to us. Mortgage 101, believe it or not, and people are reading our blog posts or hearing us on podcasts, and they’re becoming more educated, to be like, “Okay, I have to go through the stress test.” What does that look like? Okay, that’s not something for you to worry about. It’s something for me to worry about. Can I get you approved? And the way that I approach it, oftentimes, is I tell people what the maximum I can get them approved for, and I also tell them what the maximum they can be approved for and not eat Kraft Dinner.

Todd Veinotte
There you go. We should add another question. Mic drop. Next question, yes. Next question, guys, please.

Question Two
I think, like, I guess, I would ask just like, what the best moves as, like a new homeowner, things that I could do to improve my situation, maybe getting the best value for my home, maybe keeping my home as something for my grandchildren or other family members, and be able to pass that down, because that’s something I may Not necessarily think of initially, but down the line, see the value of that.

Blair Patterson
One thing you’re going to want to consider is the cost of the upkeep of the home. So, along with you know, saving for retirement, you’re going to want to save part of your income for a new roof, for landscaping, things to keep the house marketable, and that will, you know, help you in the future. And if you do want to pass on that home or build future wealth, you know, keeping up with that upkeep on your home is very, very important.

Clinton Wilkins
You 100% have to protect the envelope. As you know, Todd, I’ve owned homes, and you have to be very, very important. I think the one thing that rings true to me when I talk to new homeowners is to keep a good relationship with your mortgage broker, because we’re not one and done. And I think that’s a lot different from a realtor, like when you’re buying a home, you’re doing the transaction. Once you own the home, you don’t talk to the realtor again unless you’re doing another transaction. But let me tell you, these mortgages are coming up for renewal a lot faster than you think. They come up for renewal, and a lot of customers. We talk about the midterm, and we do midterm refinances. We do midterm transfers. They renovate their home, they pull equity out, they get divorced, they’re buying another property. We’re sometimes talking to our customers. We reach out to them at least once a year to do an annual review. But sometimes we’re talking to customers multiple times throughout the year, we have a good relationship with a mortgage professional that you’re going to trust and stay in that relationship with them for 25 years. Will they always be the lowest and the cheapest rate? The cheapest isn’t always best, right? But having a relationship with someone, I think, is more important than five or ten basis points in terms of a rate. Do business with people that you’re going to trust, and with people that are going to have your back and be in a relationship with them for a long time.

Todd Veinotte
Two more questions. Hit me with your next one.

Variable vs. Fixed Mortgage Rates

Question Three
Okay, if you’re looking to renew your mortgage in the next year or so, would you go variable mortgage, or would you go for a fixed-rate mortgage? And why?

Todd Veinotte
I love it. Spicy.

Clinton Wilkins
Spicy, spicy. I love it. Let me tell you, historically, consumers want to do a five-year fixed. Right now, I would say the least consumers are doing a five-year fixed. Clients today want a variable rate, or they want a three-year fixed. Different people have different risk appetites. For me, my mortgage isn’t a variable. So if anybody’s curious, I’m riding that wave. And guess what? My rate today on my variables, in my variable mortgage is lower than any fixed rate you can get. So guess what? I made a good decision. Did I have to weather the storm? Of course, but it wasn’t a very long storm, guys. What was it? 18 months? 24 months of the rates being high and fixed rates have really plateaued, but I think overall rates will come down. So I think it’s a risk tolerance between a variable and a three-year fixed. If you want it fixed, let’s do a three-year plan. Blair, how about you?

Blair Patterson
Yeah, when it comes to rates, essentially, we get people calling in all the time, rate shopping, and those people that were calling in 12 months ago saying, What’s your lowest rate? Well, they’re stuck now in that fixed rate, 4.8, maybe 5% some of them are at 6%. Let’s be honest, rather than getting the right advice from a mortgage broker, and that is to take a variable rate, and it still has room to come down, I believe. And with a variable rate, you can lock into a fixed rate at any time. You’re not at the mercy of the Bank of Canada. So why wouldn’t you want the option of possibly floating that down, and if things you know get too risky, you can lock in.

Clinton Wilkins
Yeah. I mean, I think it’s all upside on the variable personally, because right now, the variable rates and the fixed rates are pretty much.

Todd Veinotte
There are some people, though, who just. Psychologically, they don’t have the appetite for the variable.

Clinton Wilkins
And I think they don’t have a team like us to be able to give them the feedback, like we’re sending an email, SMS, or I’m doing a live stream. I’m on CityNews. Every time the Bank of Canada meets, not everybody is willing to accept and like, absorb that information and know that someone is managing, you know, their portfolio, managing their mortgage, managing their relationship. So I think that’s important.

Todd Veinotte
Hit us with your next question. This is the last one.

Risk Management in Homeownership

Question Four
I would want to ask a mortgage expert all the risk questions, like, what if my home value drops? What happens if I lose my job? You know, like like worst-case-scenario stuff.

Clinton Wilkins
Ooh, Doomsday. House prices have dropped in Ontario, and they have dropped in BC, especially condo prices. Yeah, every condo is 25% off in Toronto. But guess what? They have just had such crazy growth over the last several years. It needed to reset here, though, in Halifax, the average house price, detached home, I think, is hitting 700,000. So here’s the thing: it’s supply and demand, and I think it’s very driven by the marketplace. So I think in Halifax we have a lot of room still for growth, and we don’t. We have more demand in the marketplace than we have

Todd Veinotte
How about the job loss? Yeah, Blair, you take that one.

Blair Patterson
It comes to the risk around that, whether you’re renting or you own, if you lose your job, you lose your job. So it would be better to be a homeowner and, you know, be able to have access to that equity in one way or another. You know, the risk is still there. If you’re renting, it doesn’t matter.

Clinton Wilkins
And if you lose your job, and you’re not getting another job, at least you can sell your home and hopefully have a bit of a cushion if you’re renting. And the big thing is around home ownership, just like that is with renting, you need to have a fallback position. You need to have several months, probably, in terms of savings to be able to make your payments. But the nice thing is, with a lot of mortgage lenders, they’re very flexible, and if something does happen, they will work with you to try to keep you in your home.

Todd Veinotte
I think psychologically, people look at a mortgage and they see a 25-year mortgage, or whatever, they see this big dollar figure. But if you were to put the same amount of certain the same amount of rent on the other ledger, that’s going to cost them, and in the end, they’re not going to have anything.

Clinton Wilkins
You’d better start saving a lot of money on top of that.

Todd Veinotte
Psychologically, though, that is a barrier that I think would be a good teaching tool.

Clinton Wilkins
When we think about a mortgage payment, it’s made up of interest, which is the cost, and it’s made up of principal. Principal is going into your pocket. Also, the property value goes up every month. So every month, property value goes up, in theory, at least in Halifax right now, and the mortgage goes down. So you’re increasing your net worth every month that goes by.

Todd Veinotte
So, no housing bubble here in Halifax?

Clinton Wilkins
I don’t see it happening for a long time now. I think the cost of rent is starting to soften a little bit because a lot of rental units have come on board. But I think, and I hope, some of these people, the little old ladies and little old men, will move into some of these rental units, and then there’s going to be some more homes open up for first-time home buyers. As I said, the average detached home in Halifax at $700,000; we need some houses at a lower price point to be able to get some of these first-time home buyers into the marketplace.

Todd Veinotte
Thanks for this great stuff. Mortgage 101: your guide to home ownership. We will be right back.