|Welcome to this month’s edition of the monthly News and Rate Advisor.
I hope everyone is keeping warm this week. It has certainly been a shock to the system over the past couple of weeks, with changing the clocks back (who likes it being dark at 4:30 pm? ) and the far too early cold spell we are having. While I enjoy the winter, a more gradual transition would be nice!
Here are some highlights from this month in the mortgage and real estate industry. I hope you enjoy!
Another Rate Hike From the Bank of Canda
The Bank of Canada made yet another 1/4 percent increase to its overnight lending rate at its October 24th meeting, increasing the target for the overnight lending rate to 1.75%. The change marks the fifth increase in rates from the Bank of Canada in the past 15 months, for a total of 1.25% in rate increases since July of 2017.
After a new trade agreement was finally reached last month with the U.S. and Mexico, most economists expected that this would give the BOC the green light to increase rates further, so the increase on October 24th came as no major surprise. What’s in store for interest rates moving forward is difficult to say. While the economy appears to be performing well at the moment which could potentially trigger some further rate increases, whether or not this momentum continues is yet to be seen. There is still some uncertainty about how protective trade policies and tariffs, particularly policies between the U.S. and China, will impact the Canadian and global outlook. Furthermore, global markets appear to be losing steam over the past month, which could also create some uncertainty for the Canadian economy. It’s also important to note that the last time the Canadian economy was tested with any increases in interest rates was in 2010, and since then the level of average household debt has steadily increased to record levels. The debt factor could put some stress on the economy as we see rates rise. We are certainly in a period where it’s very difficult to predict where interest rates are headed.
As is normally the case, the increase in rates from the Bank of Canada caused banks and mortgage lenders to increase their prime rate by the same 0.25%. Here are a few notes on the impact of the prime rate change and what you should be doing about it (if anything).
The Impact Of This Months Rate Increase
If you have a variable rate mortgage or Home Equity Line of Credit, your interest rate has increased by 0.25% as a result of the recent rate increase. In most cases, an increase in a variable mortgage rate will also result in an increase in your payment, as most variable rate mortgages will keep the same amortization and adjust the payment when there is a rate change. I have explained the math on this before, but in case you missed it, a 0.25% increase in rate translates to an increase of roughly $13 in monthly payment for every $100,000 in mortgage balance. So, if you have a variable rate mortgage of $300,000, the monthly payment increase is roughly $39 per month. Below is a table I have used before to illustrate the impact on a few different mortgage amounts:
||Increase in Monthly Payment
There are also some variable rate mortgages that DO NOT see a change in payment with a change in interest rate. With these mortgages, the amortization is adjusted when there is a change in interest rate, but the payment remains the same. It’s important to pay close attention to this. In the case of a 0.25% increase in rate, if the payment remains the same then the amortization is increased. It is then taking you LONGER to pay off your mortgage. If you have a variable rate mortgage with TD Canada Trust then your mortgage is likely setup this way. If this is the case for you, you may want to consider making an increase in your payment to avoid extending your amortization period. We can help with calculating what your new payment should be in order to keep the same amortization, so please reach out to us if you would like some help with this.
As far as fixed mortgage rates go, as this increase was widely expected on October 24th, the rate increase had already been priced-in to fixed mortgage rates before it actually happened. As such, we have not seen many increases in fixed rates AFTER the rate announcement, but we certainly did see some increases leading up to this rate announcement.
Strong Ottawa Market Continues Into Fall!
The Ottawa housing market has had a strong year overall, and the October statistics indicate that the market is continuing that strength through the fall. Here are some of the highlights from the Ottawa Real Estate Board’s October statistics:
- Members of the Ottawa Real Estate Board sold 1,383 properties in October, an increase of 11.8% over October 2017′s 1,237 properties sold.
- October home sales included 1,059 residential class properties (No condos), an increase of 8.5% from a year ago, and 324 sales in the condo class, an increase of 24.1% from a year ago!
- Year-to-date average days on market is down 14% for residential class properties to 39 days, and days on market down 24% for condos to 51 days on average.
- Compared with 2017, condo inventory was down 34.5% in October and residential class inventory was down 17.5%.
- The average sale price of residential class properties in October was $449,005, an increase of 5.7% from October 2017, and the average condo sale price increased by 0.6% to $271,350.
Inventory continues to be a problem for the Ottawa housing market. Inventory levels are down significantly from 2017 levels, making the market for homes quite competitive. While it’s certainly a good market be selling a home in, on the buying side there continues to be multiple offer situations in many of the more popular neighborhoods.
While a separation is something we never like to see, the fact is that about 38% of marriages in Canada will end in divorce, and the statistics are even higher for common law partnerships. Many of us know somebody going through a separation, so this month I thought I would send out some information about the process for dealing with the sale of a home and purchase of a new home in hopes it can help reduce a little bit of the stress for somebody going through it.
The Separation Agreement
The most important aspect of a separation, at least from a financing perspective, is a separation agreement. If either party has intentions of keeping the current home, or purchasing another home, a separation agreement is critical as it will be a requirement of pretty well every lender. There are several reasons that a lender requires a separation agreement, but the key reasons are that it outlines any support payments required by either party, and it also outlines the division of assets and in particular how the home is to be handled.
However, before a separation agreement is finalized, it’s important to sort out a few details…..
Keeping the Matrimonial Home?
In many cases one partner may want to keep the current home, in which case he/she will likely need to pay a certain amount to the other partner to “purchase” the other partner’s share of the home. The money that needs to be paid to the other partner will often need to come from refinancing the home. In this case, the first step should be to speak with your Mortgage Broker. Your Mortgage Broker will start with taking a look at mortgage qualfying for the person who plans to keep the home. Since there will now only be one applicant carrying the home, it’s important to make sure that person is able to qualify on his/her own before making any final decisions.
Spousal buyout programs in Canada allow a person to refinance a home up to 95% of the value of the home for the purpose of buying out a spouse’s share of the property.
Your Mortgage Broker will advise on mortgage qualifying, and if all looks good, you can proceed with finalizing this aspect of the separation agreement. Your real estate lawyer will handle the transfer of title of the home once the separation agreement is finalized and financing is in place.
Selling the Matrimonial Home, Purchasing a New Home
In some cases a couple may decide to sell the matrimonial home and one, or both parties, purchase a new home. Again, the first step should be to speak with your Mortgage Broker. Your Mortgage Broker can help to come up with an estimate of what the proceeds from the sale of the house might be, and also determine where both partners stand with regards to mortgage qualifying for a new home purchase. Your Broker will also help with getting mortgage pre-approvals in place and help with the right strategy for the timing of the sale and purchase of new home.
We have plenty of experience helping people through the separation process and can certainly help to take some of the stress out of the situation! Please don’t hesitate to contact us if there is anyone we can help!
**Information provided by:
Jamie Small, AMP 613-591-3591 x108
The Mortgage Advisors firstname.lastname@example.org