Mortgage 101 – what you need to know about midterm renewals | August 2022 Part 3

In this episode of Mortgage 101 with Clinton Wilkins and Todd Veinotte, as heard on CityNews 95.7 and CityNews 101.1, the guys talk about what you need to know about midterm renewals. From considering your amortization to knowing what it’s like to qualify for a rate right now, you’ll get info you need to reduce stress when it comes to your renewal.

Mortgage 101 with Clinton Wilkins & Todd Veinotte: What you need to know about midterm renewals

Don’t feel like watching the video? Check out the transcript below.

Transcript:

Midterm renewals: What you need to know

Todd Veinotte: [00:00:00:01] So let’s talk about midterm or no, yeah. Midterm renewal. That’s what you wanted to discuss first.

Clinton Wilkins: [00:00:05:00] You know, a lot of people are coming up for renewal, Todd. You know, obviously, I think that in 2017 it was quite busy as well. And majority of Canadians take a five year term.

Todd Veinotte: [00:00:15:11] Right.

Clinton Wilkins: [00:00:15:29] And whether that’s a variable rate mortgage or whether that’s a fixed rate, that’s kind of the norm. And when people are coming up for renewal right now, let me tell you, they’re getting a little bit of shock. The rates are obviously higher now than they were even a few months ago or a year ago.

And, you know, if you were in a low fixed rate and you’re coming up and you’re looking at where the rates are now, you’re going to really have a big payment shock as well. And those consumers that are feeling the payment shock, it’s not just the payment of the mortgage that they’re really concerned about, Todd. And sometimes that’s the least of their worries.

What they’re concerned about is everything else that’s outgoing from their wants and their needs that are coming out of their bank account on their credit card every month. And what we’re doing and we’re having a lot of these conversations with customers, and this is why a lot of people are taking a variable rate right now. The variable obviously is lower than where the fixed rates are. And we believe that obviously the bank account is going to lower the key overnight rate in the coming months and years when inflation comes under control.

You will pay for the security of a fixed rate

If you take a fixed rate right now, you’re paying for that security. But what happens when things go down? You may really be sad that you’re in this rate over the next five years. So right now, a good fixed rate is, you know, maybe a little bit under 5 per cent.

Clinton Wilkins: [00:01:33:00] Some are paying as low as maybe like 4.75. Some are paying as much as five, 5, 5.25, 5.50 per cent. If you do take the fixed rate right now, you’re stuck with that. And with the variable, we may still see some more increases.

You know, the Bank of Canada is meeting again in September and some economists think that we’re going to see another increase, but things are going to start levelling out. At least that’s what we think. And then when the Bank of Canada decreases the overnight rate, guess what? If you’re on that variable rate, you’re going to start appreciating a lower interest rate. And what happens if fixed rates do come down? Certainly the bond yields haven’t been as crazy as they have been.

You need to consider your amortization

So I think we’re going to start seeing some softening in the fixed rate. So I think that’s something to watch. But regardless of your variable rate or your fixed rate, when you’re coming up for renewal, your amortization is staying in line with where you’re at. A lot of customers are coming in to see us and they’re wanting to do a refinance and to they’re not necessarily want to do a refinance, pull out any equity.

They’re doing a refinance and they’re extending the amortization to 20, 25, 30 years, to lower their principal and interest payment. And it’s not so much that they can’t handle the mortgage payment. It’s to give more payment relief for everything else that they’re spending right now.

What’s it like to qualify for your rate now?

Todd Veinotte: [00:02:55:24] Right. What about the stress test? Because that must be…

Clinton Wilkins: [00:02:59:23] That’s really interesting. And we’ve been talking about this a lot. So even if you take a variable rate, because the variable rates now obviously are higher than what they were.

Todd Veinotte: [00:03:08:08] Right.

Clinton Wilkins: [00:03:08:18] We’re qualifying, I would say, 100% of transactions at whatever the contract rate is, plus 2%. So it’s a lot harder to qualify today than it was even a couple of months ago. So, for example, if you take a fixed rate at 5%, we are qualifying you at 7%. That is aggressive.

Todd Veinotte: [00:03:28:07] Yeah, that’s aggressive. That’s putting a number of people out of the mortgage market.

Clinton Wilkins: [00:03:33:23] I agree. And that’s why with some of these consumers, you don’t requalify when you’re up for renewal, especially if you are just renew with your existing lender. The challenge is existing lenders know that.

Todd Veinotte: [00:03:46:11] Yeah.

Read your renewal offer

Clinton Wilkins: [00:03:46:20] And that’s why typically when renewal offers go out, they are above what’s available in the market. So some people get stuck, some people wait too long and then the renewal comes up and maybe their lender doesn’t offer an open term and they just have to renew with their existing lender.

Todd Veinotte: [00:04:01:29] Yeah.

Clinton Wilkins: [00:04:02:17] Other consumers take the renewal. Because they really can’t be bothered. You know, those ones typically spend more money. I’ll be honest with you.

Todd Veinotte: [00:04:10:18] Some don’t open their mail. They don’t even know it renewed.

Clinton Wilkins: [00:04:12:22] And they auto renew!

Todd Veinotte: [00:04:13:26] They don’t even know it renewed.

Clinton Wilkins: [00:04:15:02] They auto to renew into an open at like eight per cent.

Todd Veinotte: [00:04:16:28] Same as their house insurance and their vehicle and they don’t even know and it’s going up and up and up every year.

Clinton Wilkins: [00:04:22:11] Sometimes those things lapse. And, you know, there’s some lenders that.

Todd Veinotte: [00:04:25:26] I shouldn’t laugh.

Clinton Wilkins: [00:04:27:14] Honestly, it happens. There are some lenders that if you don’t renew, it’ll actually put your mortgage into a default position.

Todd Veinotte: [00:04:33:25] Oh, Lord.

Clinton Wilkins: [00:04:34:14] Open your mail. We, our customers, get a postcard from us six months before renewal, and we really start getting on to them at like four months.

Todd Veinotte: [00:04:41:14] And you guys do reviews as well.

Strategies some borrowers are using to combat uncertain times

Clinton Wilkins: [00:04:42:27] We do an annual review with our customers, and oftentimes during these annual reviews, like we’re talking to people about inflation, you know, and we’re giving a lot of advice right now and we’re giving advice even if we’re doing a transaction or not doing a transaction, which I think has a value.

Some clients are choosing to break their mortgage early, maybe not people in a fixed rate because usually, you know, they’re okay right now, but some people that are in a variable rate are choosing to break their mortgage early, Todd, and extending their amortisation and they’re not taking a new fixed rate. They’re taking a new variable, but they’re taking a longer am.

Todd Veinotte: [00:05:16:09] And that’s to get their payment down?

Clinton Wilkins: [00:05:17:22] Yeah. And it’s and they tell me they’re like “Clinton, this is just for a year or two years.” And then they’re going to take advantage of a lump sum payment or payment increase when the consumer goods kind of come under control.

Todd Veinotte: [00:05:31:17] That, it’s not for everybody. There must be some scenarios where you look at them and you say, “this is not the right move for you.”

Clinton Wilkins: [00:05:36:28] Like, stay the course. Like, I have some customers that are in very, very low variable rates. I have a lot of customers at prime -100, prime -110, or better. And I tell these customers, unless you’re really in financial hardship, don’t break your mortgage. Your rate now is below what’s available in the market.

Typically in a refinance situation, we’re somewhere around prime -40 or so right now. So you’re looking at a rate at 4.3%. And if you have prime -100 or -110, if you can swing the payments and you’re okay, ride it out. Because if you can ride it out, it’s obviously going to be cheaper for you.

And maybe it’s something that we revisit kind of down the road. But there are certainly some consumers that we just tell them to be like, “you just need to stay the course.” And that’s okay, too.

Avoid unnecessary stress by reviewing your renewal offer

Todd Veinotte: [00:06:29:19] Yeah. There’s so many moving parts right now. I mean, it’s just people need to be informed. And that’s why, in all honesty, not to pat ourselves in the back, because it’s your commitment to this.

It’s really your commitment to this that’s made this happen. But, this is extremely important, this information that people have. People listening right now could literally save themselves massive headaches just by if they took a little advice from the last 5 minutes.

Clinton Wilkins: [00:06:54:27] Yeah, exactly. It’s like first open your mail.

Todd Veinotte: [00:06:57:17] Yeah.

Clinton Wilkins: [00:06:58:13] To let’s look and see how much you’re spending every month.

Todd Veinotte: [00:07:01:02] And engage with your lenders.

Clinton Wilkins: [00:07:03:18] Yeah, exactly. Are you in the best product?

Todd Veinotte: [00:07:06:03] Right.

Clinton Wilkins: [00:07:06:14] And you know, is that amortisation meeting your needs in terms of paying it down, but also your monthly output? Because the interesting thing is, a lot of things change in people’s lives.

Todd Veinotte: [00:07:18:14] Yeah.

Your needs may have changed when you first started your mortgage term

Clinton Wilkins: [00:07:19:02] You know, they get married, you know, they have kids, they get separated, you know, they do career changes. A lot of Canadians are becoming self employed. The needs are different today than maybe they were a couple of years ago. And that’s okay.

But I think evaluating where you’re at is important and you can’t always do it because, you know, you might lose sleep at night. And we certainly do have some, and I’m going to say very few, clients that are in a variable rate mortgage that are losing sleep at night. And maybe some of our listeners are, Todd.

Todd Veinotte: [00:07:53:26] Right. I’m sure they are.

Clinton Wilkins: [00:07:54:08] People are concerned.

Todd Veinotte: [00:07:56:00] But again, I think if people are educated and I don’t say that in a negative way, at all,

Clinton Wilkins: [00:08:00:27] It relieves a lot of stress.

Todd Veinotte: [00:08:01:10] Because knowledge is power. Cliché time here on Mortgage 101. But it’s true, isn’t it?

Clinton Wilkins: [00:08:06:06] Knowledge really is power. And the one thing that I do tell customers, if you are losing sleep at night and you’re okay paying more money, you can convert into a fixed, but it may be converting at a rate at 5, 5.50 per cent.

Do I think that’s the best thing for people? I personally don’t. But if you are losing sleep at night and you’re okay paying more just to have that peace of mind, maybe that has a value.

Todd Veinotte: [00:08:37:02] What if people want to refinance and do improvements? And all of that is, might have missed the boat a little bit. Some people on that?

Clinton Wilkins: [00:08:45:18] You know, I think it depends on what market you’re in. You know, the values in Halifax are still quite high compared to maybe some other areas of the country. So it could be a really good time to refinance.

If you’re one of our listeners in Ottawa and really across Ontario, the market really has slowed and what happens when the market slows? The values also maybe have decreased, maybe a little bit. When we look at doing a refinance, it’s up to 80% of the market value of the home. And the market value is determined by what comparable sales look like for similar real estate in your market, in your street, in your neighbourhood.

So I think that’s something to take into account, you know, if you bought a house two, three, four, five years ago, typically you do have enough equity that you can do a refinance and it would make sense. That’s not everybody’s situation you know across the country. Some markets, the values haven’t grown as much as they have here in Halifax and I know obviously in Ottawa as well.

So it’s something to think about. Think about what the market value is of your home if you were to sell it, and that’s the value that we would use and then take 80% and then you have to pay out your existing mortgage and any secured debts. And that’s the basically equity you would have to use.

If you have any questions, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.

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