This year, with continuing low interest rates, the mortgage industry keeps booming. The New Pathway has talked to Tino Brelak, a mortgage broker, to provide basic information about mortgages for those who are only thinking about getting one, and some more detailed information for those who are already in the theme. Tino Brelak has been working in the mortgage industry for 15 years. He is currently a broker with the Concierge Mortgage Group, a division of a brokerage house Mortgage Intelligence, one of the largest mortgage broker houses in Canada. Tino is in the top 10 percentile as a producer nationally. Tino (short for Laurentin) is Ukrainian, he came to Canada from Yugoslavia 20 years ago. He is also known in the community as a front man of a popular Ukrainian band “Худі а Моцні”.
For starters, here is a 101 on mortgage rates from Tino Brelak. Variable closed rates are presently offered at around the “prime rate” or Prime – 0.3% (Prime being 2.7%), Variable Open at Prime + 0.5% to + 1% and there are Fixed mortgage rates, anywhere from one year fixed all the way up to 10 years fixed. The most popular fixed rate is a 5-year term currently offered at around 2.89%.
With fixed rates, one has to pay the penalty to get out which is calculated as the higher of the 3 months interest or the interest rate differential. With variable rates, the penalty is almost always 3 months worth of interest. Most variable terms are locked in for 5 years, although there are some lenders that offer a 3-year variable term. With variable terms, your spread is guaranteed for the term of the mortgage, but the rate will change if Prime changes. Variable Open rates can be paid off without penalty, which is why this rate is higher. The spread on these rates is anywhere between + 0.5% to 1.0% which is fixed for 5 years. This rate would be fixed for the five year term.
Tino Brelak says that mortgage rates have been quite low for some time. Variable rates have been quite stable for the past while, occasionally going up or down by about 0.25%. The government has been announcing that the rates would go up for the past 6-7 years. In reality, it has been otherwise. Prime has dropped by 25 basis points (0.25%) twice this year. At the same time, the banks have not transferred the savings to the clients fully and would only reduce mortgage rates by 15 basis points each time.
Tino Brelak does not expect the rates to go up anytime soon based in particular on some indications from the banks current behavior. For instance, about two months ago, one could get rates of Prime minus 0.8%-0.9%. Today, that has dropped down to Prime minus as little as 0.3% as the banks seem to expect the rates to stay stable at low levels or even go down and thus do not want to give big discounts. So, the new clients cannot expect variable closed rates at 1.9% anymore, and those rates are in the 2.15%-2.4% range now. There are lower mortgage rates, however those are products with restrictions, where, for instance, extra payments are not allowed.
The factors that could keep the rates low is the fact that inflation is currently under control which takes away the pressure from the Bank of Canada to increase rates. If inflation was an issue, the Bank of Canada would increase rates. Tino Brelak thinks that this situation will persist for some time, although when the US raises rates, Canada will be under pressure to follow as well.
He also says that the government has been trying to slow down the real estate market so that it does not create a bubble, and introducing various kinds of mortgage restrictions. Five years ago it was much easier to get approved for a mortgage than it is today. But even despite that, the Toronto market remains hot as the demand has concentrated on Toronto to the extent that many formerly “bad” neighbourhoods in the city are now becoming good neighbourhoods.
We asked Tino Brelak whether the high real estate prices in Toronto have deterred first-time buyers. He replied that the number of first time buyers is probably not declining but they are buying condos, which in many areas are not growing in price, or homes in suburbia. Young people, known as millenials, have a completely different approach to real estate and are more inclined to rent than to buy. “But you cannot rent forever. If your family is growing, you have to make a decision, do you stay in Toronto and buy a condo, or a townhouse that you can afford. Or if you go outside of Toronto and buy in suburbs, Mississauga for example. I don’t know how long you can live in a 600 sq. f. apartment.”
At the same time, Tino Brelak points out that Toronto is still one of the bigger cities that still has very inexpensive real estate on a global scale, as compared to the places like New York, Los Angeles and London. He expects that the Toronto and Vancouver markets will remain strong, however, even there the prices will not go up as much as they have gone in the last couple of years. There may be parts of the country where the real estate prices may stagnate. And Tino Brelak does not think that Canada's real estate market is in a bubble because “the Canadian banks have never given mortgages to people who cannot afford them.”
The requirements to get mortgages are now quite strict and the rules, which have been introduced in the last 2-3 years, have, in particular, slowed down the buying and selling, or “flipping” of the properties. The rules are tougher now for income recognition for self-employed people, even for those of them who have sizable downpayments, like 35%. If a self-employed person makes $100,000, they are no longer able to claim that their income is $100,000 while the official income is just $40,000 after the business expenses.
Previously, the banks would accept the $100,000 income verbally, with little verification. “Now, even though you make $100,000, if you officially book $40,000, they might be able to accept $60,000. Currently, if you have a 50% downpayment, you are not going to get mortgage that easily for principal residences while in the past with that kind of downpayment you could get a mortgage more easily even for secondary residences or investment properties. Now, the banks actually look into the details and have many more questions. I am a former credit auditor with the TD Bank and I know more about this than an average broker.
Another change is the reduction of amortization terms. Before, there used to be 35-40 years amortization, now 30 years is the longest one. It's still 35 years with a couple of banks, but many lenders have shortened the terms from 40 to 25 years. Just last week, they increased the minimum downpayment for new insured mortages from 5% to 10% for the portion of the house price exceeding $500 thousand, effective February next year. There are also other smaller rules that has made my work harder.”
However, it can be concluded, that with the general forecast of economic and population expansion in major cities such as Toronto and Vancouver, the mortgage market there is poised for a long-term upward growth.
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