Sean Cooper was one of the most talked about Canadian homeowners in the news when he paid off his 30-year mortgage on a $425,000 house in just three years. He saved $100,000 in interest payments by age 30 and released Burn Your Mortgage to booksellers last March.
The Bank of Canada prime lending rate was at a record low back then. But in January, Canada’s five biggest banks all hiked their interest and mortgages rates. Today, Cooper’s mortgage payments would be $443 higher a month, and the rate of interest charged on his mortgage could be 3.59 per cent instead of the 3.04 per cent he paid through First National Financial.
“I’d rather save $100,000 of my own money in interest payments, thank you very much,” says Cooper. In 2012, he chose a five-year fixed-rate mortgage and made a whopping down payment of $170,000 on a renovated three-bedroom bungalow. He then owed $255,000, which he paid by working two jobs and renting half of his house to tenants.
“Buying in today’s market I couldn’t qualify for the same type of home I bought in August 2012,” says Cooper. “Today I’d have to move down the property ladder.
“Before the new rules on mortgage stress test surfaced in January 2018, some homebuyers could afford a detached or semi-detached home. But now they can probably only afford a town house or condo.”
The stress test Cooper talks about helps mortgage brokers plan for a buyer’s worst-case scenario – such as a rise in interest rates or the loss of a job and suddenly unaffordable mortgage payments.
Most lenders won’t ask customers to requalify for their mortgage when they renew it. In January, Canada’s top banking regulator developed a rule for stress testing homebuyers who want to qualify for a mortgage with a down payment of more than 20 per cent of their home’s value. Previously only homebuyers who paid between five and 19 per cent were stress tested.
The new rules surfaced after the Office of the Superintendent of Financial Institutions expressed concerns that homebuyers would default on their mortgage payments. “We are keenly aware of the potential risks caused by high household debt across Canada, and by high real estate prices in some markets,” says Jeremy Rudin, OFSI’s superintendent. “We are not waiting to see those risks crystalize in rising arrears and defaults before we act.”
“Canadian household debt levels are indeed near historic highs,” reports Livio Di Matteo, an economics professor and senior fellow at the Fraser Institute in Canada. “Debt reached over $2 trillion in 2016.” The lion’s share of this debt lies in Alberta and is credit card and mortgage related.
Unless you have debt from credit cards and personal loans, Cooper believes now is the time to buy a home before interest rates surge yet again. “I don’t have a crystal ball on interest rates but it looks like they could rise three times this year.
“If you are a homebuyer facing your first mortgage payments, then you might want to start with a fixed-rate mortgage and lock your interest rate in,” he says. With this mortgage, the interest rate stays the same during the life of the loan, but with an adjustable or variable-rate mortgage the interest rate changes as interest rates rise.
“Many people think that five-year fixed-rate mortgages are the only option open to them, adds Cooper. “But there are one-, two- or three-year fixed rates and different types of mortgages.”
Loans Canada urges Canadians to shop for a mortgage since mortgage rates vary from one lender to the next. You should negotiate your rate but only with a copy of your credit report, which is a summary of your credit history. Armed with your credit score from Equifax Canada or TransUnion, try to increase your score or dispute any reported errors with your lender to qualify for a better mortgage.
“I’m amazed at people who apply for a mortgage and are shocked at the things on their credit report,” says Ellen Derrick, a financial planner at Kelly Realtors. “They say, ‘I had no idea I forgot to pay my Best Buy card.’”
“Don’t automatically accept the five-year fixed-rate mortgage with one of the big banks because the penalties are very onerous if you break them,” advises Cooper. “In my book I state that 78 per cent of buyers break or renegotiate their five-year fixed-rate mortgage before the end of their mortgage term. And some of the penalties can be $20,000 to $25,000 – the cost of a car.”
It’s fine to start with a five-year fixed-rate mortgage if interest rates are rising. But you may want to find a better deal – and a different lender – near the end of your mortgage. Depending on the type of mortgage you have, there can be penalties if you pay off your mortgage early.
If you’re planning to renew your mortgage, rates will be higher now with the mounting interest rates. A higher rate means more of your money will go toward interest payments and less toward your principal. As a financial planner, Cooper tells homeowners to budget, track their spending and see what they can afford.
“Come renewal time, lenders are betting that you won’t want to switch lenders,” notes Which Mortgage, Canada’s independent mortgage website. “It’s much easier and more convenient to simply accept your first lender’s terms. But you could be leaving thousands of dollars on the table because you can probably find better rates and more flexible terms elsewhere.”
“It’s important to be cautious as some lenders post artificially inflated rates and then offer a lower rate once a customer starts the conversation,” reveals John Tarnowski, ATB Financial’s vice president, Retail Financial Services. “At this bank, the rates you see are the rates you pay.”
Cooper says the jump in interest rates will motivate some homeowners to pay off their mortgage faster, like he did. “I worked between 70 and 80 hours a week while paying down my mortgage. You don’t have to work as many hours as me, but you should be willing to do what it takes to achieve both your short- and long-term goals.”
Cooper suggests homeowners manage their time to further their goal of burning their mortgage. For couples with children, working part time or overtime to earn extra money for their mortgage may not be an option.
One final tip: consider paying your property taxes yourself rather than through your lender with your mortgage payments. Lenders often collect more than the estimated annual property taxes to cover any possible fluctuations and tax increases. Your money goes into an escrow account and in the time it’s there, you’ll earn little or no interest as the surplus rolls over year after year.