Newsletter September 2017

Welcome to the Guardian Financing September 2017 monthly newsletter. This month’s issue is about how the Bank of Canada’s interest rate increase, and higher line of credit payments, will make it more challenging for homeowners to keep up their payments, and the various considerations that should be made when making any decisions or changes. In addition, we will provide some suggestions as to how you can properly inform and advise your clients.

How to Protect Your Clients from Rising Interest Rates

Following a lot of anticipation, controversy, and little to no notice, interest rates will ultimately increase to their highest levels since 2008. Some say that it’s overdue and are bullish regarding the anticipated growth of the real estate market, while others are adopting a slightly more bearish outlook.

An interest rate hike is guaranteed to impact individuals who have a home mortgage, a car loan, a savings account or money in the stock market, while keeping in mind that mortgages are Canadian families’ largest source of debt by far. Montreal’s real estate market could react to increased interest rates in many ways.

Firstly, let us examine how the Montreal real-estate market has been responding so far, to the initial interest rate hike. Montreal’s booming real estate market continued to grow last month, with record August sales, along with rising prices. The Greater Montreal Real Estate Board states booming condo sales drove an eight percent increase in residential sales throughout Montreal. There were 2,899 sales, with condo transactions increasing by 19 per cent. Single-family homes, which account for more than half of the sales, rose four percent. The Island of Montreal surged the most, with a 12 percent rise in sales. Since February 2015, when the market took a rare drop, sales have increased consecutively over the last 30 months, except July 2016 when they remained flat.

That said, apparently the full impact of an interest rate hike, only really settles in after approximately one year.

Here are several ways you can help protect your clients against interest rate hikes.

Fixed Versus Variable Mortgage Rates

If you have a variable-rate mortgage, you should know that just under a third of Canadians have a variable-rate mortgage, which fluctuates in correlation with the general level of interest rates throughout the economy. As a result of the Bank of Canada rate increase, homeowners with variable-rate mortgages will see their monthly mortgage payments rise.

Should home buyers move towards fixed rate mortgages?

Variable-rate mortgages allow its recipients to convert their plan to a fixed rate throughout the term of the loan. If you value your peace of mind in regards to rising interest rates, you may opt for this. However, current conversion rates come at a cost.  Some lenders require a five-year term, regardless of the remainder of their current term. After comparing both options, you may determine that you are better off with your variable rate.

Is it worth breaking your variable-rate mortgage to get a better fixed-rate loan with a different lender?

Variable-rate mortgages generally come with a comparatively modest penalty when breaking the loans, compared to fixed rate mortgages; amounting to approximately three months worth of interest. If signed up for a variable mortgage, home buyers could find a fixed rate mortgage that amounts to less than their variable mortgage payments, in addition to applicable conversion fees. However, a few significant notary fees would then apply. In addition, the rates being offered would be for refinancing their mortgages, which are higher.

Notes regarding fixed rate mortgages

Two thirds of Canadians have fixed-rate mortgages; here’s what they need to know. The increase in interest rates impacts fixed rate mortgages. Fixed-rate mortgages correlate with bond yields, which means that most Canadians with fixed-rate mortgages will need to pay a higher interest rates when refinancing their mortgage loans.

Information for aspiring first time homebuyers

Looking to make your first new real-estate purchase? Consider getting pre-approved for a 5-year mortgage. By getting a pre-approval, you are securing today’s rates for 120 days.

What to Tell Your Clients

1. The first and perhaps the most obvious thing to advise your clients to do, is to clear as much of their outstanding debt as possible; especially those that come with higher interest rates, such as credit card debt.
2. Secondly, is to critical to re-evaluate their purchase decisions, while keeping in mind that they may have less discretionary income; for instance, you may advise them to put off any vacation plans, to ensure that they have enough cashflow to cover essential expenses. In addition, you should advise your clients to minimize day-to-day expenses. This could mean going to half the amount of restaurants, concerts; perhaps even eating more vegetables instead of meat, since it is more expensive. What may appear to be small lifestyle adjustments can go a long way, and can amount to a significant decrease in expenditure.
3. Put together an emergency fund. Create a cash stash for emergencies, and avoid dipping into it for other purposes. We never know what life may throw at us, and it is important to be prepared for any unfortunate scenarios that may arise.
4. Invest your cash. Once debts have been cleared, it may be worthwhile for your clients to fill up your TSFA accounts, keeping them in low-risk balance-preserving accounts or funds, to gain some interest on any cash that is in your bank accounts. Take advantage of higher interest rates; every penny counts!
5. First time home buyers should take advantage of the “home buyers’ plan” (HBP), which will allow you to borrow some money from your RRSPs, and contribute it towards a deposit for your first home. This will help your clients save a significant sum of money on mortgage interest payments. By the same token, you should advise clients who wish to purchase their first home a few years from now, to begin to regularly contribute to their RRSPs, if they haven’t already.
6. Pay your bills on time. Remind your clients about the importance of maintaining a good credit rating, which includes paying your monthly minimum payments on time.

Although the Canadian stock market has been relatively flat in recent months, an increase in interest rates is telling of a strong economy. Economic growth, employment and GDP are strong, but can the market sustain a series of interest rate increases? Whether the market experiences a slight pullback or it continues to thrive, make sure to inform, and to protect your clients, just in case the worst-case scenario manifests itself.

Guardian Financing is a direct mortgage private mortgage lender. We serve the greater Montreal area, providing short term residential mortgage loans, typically ranging from $50,000 to $750,000. Contact us today to discuss your file at 514-700-3121 or by email at files@guardianfinancing.ca.