Trigger Point for Canadian Variable Rate Mortgages Explained, with Example

You have likely heard – or will soon be hearing – a lot of talk about “trigger rates” and “trigger points”. More importantly, you are probably hearing “trigger point” together along with more changes in the Bank of Canada rate and you need expert guidance.

Let’s start with a few definitions:

  • Variable Rate Mortgage (VRM) – prime changes, rate changes. When interest rates change, typically, your mortgage payment will stay the same.
  • Adjustable Rate Mortgage (ARM) – prime changes, rate changes. Unlike variable rate, your mortgage payment will change when interest rates change.
  • Trigger Rate – When interest rates increase to the point that regular principal and interest payments no longer cover the interest charged, interest is deferred, and the principal balance (total cost) can increase until it hits the trigger point.
  • Trigger Point – When the outstanding principal amount (including any deferred interest) exceeds the original principal amount. The lender will notify the customer and inform them of how much the principal amount exceeds the excess amount (Trigger Point). The client then typically has 30 days to make a lumpsum payment; increase the amount of the principal and interest payment; or convert to a fixed rate term.

NOW, WHICH MORTGAGES WILL BE AFFECTED FIRST?
Quick answer, VRMs from March 2020 to March 2022.

During the month of March 2020, the prime rate dropped three times in quick succession from 3.95% to 2.45%, and variable-rate mortgages arranged while prime was 2.45% have the lowest payments. The lower the interest rate was, the lower the trigger rate, and the faster your client may hit this negative amortization.

WHAT TO DO
When this happens, customers are contacted by the lender and generally have three ways they can proceed:

  • Make a lump-sum payment against the loan amount
  • Convert with a new loan at a fixed-rate term
  • Increase their monthly payment amount to pay off their outstanding principal balance within their remaining original amortization period

Below is a customer scenario so you can see how this could play out.

Nov 2021; Mortgage Rates & Inflation Report

This just in data is when mortgage interest rates are expected to rise.

DATA JUST IN

Canada’s latest employment and inflation numbers have triggered new expectations about the next steps by the Bank of Canada and the arrival of interest rate increases.

BoC Governor Tiff Macklem continues to offer soothing words about inflation, which is current running at 4.1%.  That is an 18 year high and more than double the central bank’s 2.0% target.

Macklem has repeatedly said high inflation is temporary; the result of low prices during the pandemic lock-downs, and supply chain problems that have cropped-up as the economy reopens.

Macklem points out that a key factor in long term inflation – wage growth – has not materialized.  That is despite Canada returning to pre-pandemic employment levels with the addition of 157,000 jobs in September.  It should be noted that the growth of Canada’s labour force during the pandemic means the country is still 276,000 jobs short of full employment.  Last week however, Macklem did concede that this temporary inflation may linger for longer than initially expected.

Several prominent economists have weighed-in.  Benjamin Tal cautions that inflation is a lagging economic indicator.  He says the risks for long-term inflation are present and the Bank of Canada would be better to start raising rates earlier to help mitigate those risks.  Doug Porter says there is a growing chance rate increases will come earlier.  He expects they will happen quarterly rather than every six months.  And, Derek Holt would like to see a rate hike by the end of the year, given that emergency levels of stimulus are in place while inflation is well above target.

Look for mortgage interest rates to start going up close to the end of 2021 and continue until they are back close to PRE-Covid Rates of about 3.35% for the 5-year fixed.

Mortgage Mark Herman, best Calgary mortgage broker for the masses!

How the Big-5 Banks Trap You in Their Mortgages

Yes, the Big-5 banks do not love you, they love your money.
 
 
Now they can “trap” you in their mortgages with the Stress Test to get more of your money that they love!
 
 
Highlights of the article below show how the new mortgage rules – called the B20 – allow the banks to renew you at almost any rate they want – or at least not a competitive one – if your credit, income, or debts should mean you can’t change banks.
 
 
If your mortgage is at your main bank they can see:
 
  • what your credit score is
  • your pay and income going into your accounts
  • your debt payments
  • other debt balances on your credit report
  • your home/ rental addresses so they can accurately guess at your home value.
 
AND this means they can calculate if you can pass the new “Stress Test.”
 
 
If you can’t pass it then they know you can’t change banks, are you are now totally locked into them for your renewal. They can renew you at POSTED RATES … 5.39%, not actual discounted rates they offer everyone, today about 3.69%.
 
 
The GOOD NEWS is broker banks do not do any of this … so having your mortgage at your main bank only helps them “grind you” later on. …. so how convenient is having your mortgage at your bank now?
 

Highlights of the article link below are:

Canada’s biggest banks are tightening their grip … as new rules designed to cut out risky lending make it harder for borrowers to switch lenders …  the country’s biggest five banks … are reporting higher rates of renewals by existing customers concerned they will not qualify for a mortgage with another bank.

B-20 has created higher renewal rates for the big banks, driving volumes and goosing their growth rates,” said Eight Capital analyst Steve Theriault. “It’s had the unintended consequence of reducing competition.”

Royal Bank of Canada (RBC), the country’s biggest lender, said last month that mortgage renewal rates [are up …] due in part to the B-20 regulations and also to improvements it has made to make it easier for customers to renew.

Ron Butler, owner of Toronto-based brokerage Butler Mortgage, said the changes leave borrowers with less choice.

“Even if they are up-to-date with their repayments, borrowers may find they don’t qualify with other lenders so they’re stuck with their bank at whatever rate it offers,” he said.

Senior Canadian bankers such as RBC … and TD … voiced their support for the new rules prior to their introduction, saying rising prices were a threat to Canada’s economy.

While analysts say RBC and TD are expected to benefit from higher-than-normal retention rates in 2019, not everyone is sure borrowers will benefit.

“The banks are becoming more sophisticated in targeting borrowers who would fail the stress test and they can charge them higher rates at renewal knowing they can’t move elsewhere,” Butler said.

Link to the full article is here: https://business.financialpost.com/news/fp-street/canadas-big-banks-tighten-grip-on-mortgage-market-after-rule-changes

We saw the “Mortgage Renewal Trap” coming long ago when the Stress Test was announced. It is more important than ever to consider Mortgage Broker Lenders for your mortgage now.

Mark Herman, Top Calgary Alberta Mortgage Broker.

A lesson from RBC’s mortgage rate increase

I love this article from the Globe as it explains why rates are going up a bit and what expectaions are for the near term.

Call for a rate hold if you are thinking of buying in the next 4 months!

“Borrowers who use a mortgage broker pay less …,” Bank of Canada.

See our reviews here: https://www.markherman.ca/CustomerREVIEWS.ubr

Mark Herman, Top best Calgary mortgage broker

The lesson home buyers should take from RBC’s mortgage rate hike

NO Condo Bubble in Calgary nor Toronto!

These comments below are in addition to the report last week that said that because Toronto has:

  • lots of in-migration,

  • New to Canada migration and

  • no other kinds of homes being built in the inner city

they do need all of these new condos and it is not a bubble. Interesting.

Economists to condo investors: Smile!

Written by  Vernon Clement Jones

Condo investors in Toronto have every reason to be keep smiling, with two separate bank reports suggesting their assets are almost certain to retain their value at the same time their cash flow gets buoyed by rental demand.

“As CMHC… mentioned, capital return for investors who bought new condominiums and decided to rent them once the construction was complete, could earn superior returns than on other investment products,” reads Laurentian Banks’ July economic outlook. “Furthermore, condominiums rents are generally 40% more expensive than apartments of same dimensions in the Toronto CMA, the most important spread in the whole country.”

Smiling yet?

There’s more.

RBC is also weighing in on the future of Canada’s most controversial housing market, suggesting there’s no indication condos, despite what most see as a glut of inventory, are in a bubble.

Far from it.
“Based on market activity to date,” say economists for the heftiest of Canada’s big banks, “the total number of new housing units (condos) completed by builders has not exceeded the GTA’s demographic requirements and is unlikely to do so by any significant magnitude in the next few years.”

Phew!

That dual analysis effectively counters concerns that T.O.’s high-rise properties are primed to fall in value as renters find themselves spoiled for choice and investors are forced to slash prices. The naysayers are also worried that even new construction will be subjected to a major price correction and in the short-term, a phenomenon directly tied to mortgage rule changes making it harder to win financing.

That could, in fact, still happen, although not likely on the scale many analysts had predicted earlier this year, says Laurentian in its analysis.

The upside of higher rates

We all know interest rates are going to go up. Even after reading this the big hit we all know is coming is that variable rate mortgage payments go up right away. The rest mentioned below may come later.

Jason Heath  Mar 31, 2012 – 7:00 AM ET | Last Updated: Mar 30, 2012 9:09 AM ET

 For three years, the word on the street has been that interest rates have nowhere to go but up. But few Canadian commentators – other than David Rosenberg – got the call on rates right. Although the prime rate has risen since dropping to an all-time low of 2.25% in April 2009, the increase to the current 3% rate that has remained stable since September 2010 has been modest to say the least. Long-term rates, like fixed mortgage rates, have gone up and come back down during that time, such that one can currently lock in fixed rates under 3%.

York University’s Moshe Milevsky did a study in 2001, which he revised in 2007, and determined that borrowers are better off going with a variable rate mortgage instead of a fixed rate mortgage approximately 9 times out of 10. That said, we have to be close to if not already in that 10% sweet spot where fixed beats variable.

Despite the opportunity to lock in low rates today, it could actually be beneficial for the average Canadian for rates to rise. Conditions need to warrant rate increases and the Bank of Canada (which directly governs the prime rate) and the bond market (which indirectly governs fixed mortgage rates) won’t raise rates until the time is right. How soon that time comes depends partially on domestic influences, but also on our neighbours to the south and the current eurozone debt debacle.

Greece is a perfect example of why rates should rise. Greek participation in the European Union gave them access to cheap credit and helped facilitate some of the excess spending that has them where they are today. Despite bond markets demanding higher interest rates on Greek and some other European government bonds, market intervention by the EU has helped keep rates artificially low.

The U.S. Federal Reserve has been doing the same thing, buying up U.S. government treasury bills to keep U.S. rates artificially low as well.

It’s hard to justify how artificially low interest rates for an extended period are good for anything other than delaying the inevitable for some market participants.

Higher rates would have a negative impact on those of us with outstanding debt, as higher interest charges would follow. But Canadian debt levels have moved ever higher in recent years, likely a response to the low rates that have been in place in part to stimulate spending. Higher mortgage rates could protect us from ourselves by making higher debt levels more punitive and less tempting.

Furthermore, fixed income investors could benefit. The emphasis on “could” is key. Rising rates typically hurt those holding bonds because today’s bonds are that much more appealing than yesterday’s as rates go up. How much the hurt hurts is a matter of fact. But those renewing GICs or sitting on cash these days are desperately awaiting higher interest rates to help their savings grow. So higher rates could at least lead to higher returns for fixed income investors in some cases.

Higher rates could benefit stock investors. Once again, the emphasis on “could” is key. Higher rates usually mean the economy is improving and inflation is rising. This could be a good sign that corporate profits and corresponding stock prices are moving higher. That said, one has to wonder if low bond and GIC interest rates and cheap credit have pushed more money into the stock market than should otherwise be there. Rising rates could bring income investors back to the more traditional income investments like bonds and GICs from the blue chip stocks they’ve potentially flocked to in order to obtain yield.

Despite the purported uncertainty above on stocks and bonds, higher rates should at least contribute somewhat to restoring equilibrium to credit, debt and equity markets. Something seems wrong with near zero or negative real interest rates. That is, something seems wrong with a GIC investor earning 2%, paying 1% of that away in tax and 2% inflation resulting in an effective return of -1%. On that basis, something seems right about higher interest rates, whether we like it or not. What happens to mortgage debt, stocks and bonds remains to be seen.

Jason Heath is a fee-only Certified Financial Planner (CFP) and income tax professional for Objective Financial Partners Inc. in Toronto.

Immigrants the proudest Canadians, poll suggests

We love people that are New to Canada. New immigrants are 20% of our business. There are lots of tricks on what is needed to get a mortgage for them and not all banks do these files BUT WE ARE SPECIALISTS at it. I will upload our brochure for it here.

They can normally buy with:

  • 5% down if they have a foreign credit report – England, most all of South America – including Mexico, Portugal or Spain.
  • or 10% down. 5% from own savings and 5% from other possible sources – like relocaton allowances, gifts from home, etc.
  • and a full time, permanent job.

Call to discuss these files. The one tough part is their files do not get rate holds so it is live deals – when you have an accepted offer to purchase – only.

Most Canadians feel immigrants are just as likely to be good citizens as people who were born here, a recent Environics survey suggests.

Canadians also don’t appear to have problems with dual citizenship or with Canadian citizens living abroad.

The telephone survey is, according to Environics, the first poll to directly ask Canadians their views on citizenship. Its results suggest Canadians have a broad, inclusive view of the concept and of immigrants in general.

“To be a good citizen, it means to contribute to the society, to obey the laws of the country, to help other citizens, to volunteer, and it’s a rewarding feeling when you do all those things,” said Sara Jhangiryan, an Armenian-born resident of Toronto who became a Canadian citizen last year.

“It’s not only to take what the country offers but to give back, as well.”

Although not part of the survey, Jhangiryan echoes the views of many of those who responded to the poll, a joint initiative of Environics, the Institute for Canadian Citizenship, the Maytree foundation, CBC News and the Royal Bank of Canada.

When asked what makes a good citizen, the top five responses were: obeying laws, actively participating in the community, helping other people, being tolerant of others and sharing or adopting Canadian values.

But when asked to list what they did to be good citizens, respondents cited volunteer work, being kind/generous to others, paying taxes, obeying laws and voting.

The survey suggests Canadians see immigrants as their equals: nearly 9 out of every 10 respondents agreed that a person born outside Canada is just as likely to be a good citizen as someone born here.

“There’s no real evidence of people feeling threatened or a sense that, ‘Well, people can come live here from other countries, but they’re not quite the same,'” said Keith Neuman, executive director of the Environics Institute.

When it comes to immigration and citizenship, the views of the majority of Canadians born in the country and the 20 per cent born outside it are largely aligned. Canadian-born and foreign-born respondents were equally likely to feel fully like citizens (78 per cent versus 75 per cent).

Usha George, dean of Ryerson University’s Faculty of Community Services, says the survey’s findings confirm a lot of what those working with new Canadians know already.

The willingness of Canadians to not view a person’s foreign background as an impediment to citizenship is a product of the country’s multicultural policies and the visible effect of immigrants on the economy, George said.

Integration of immigrants has worked in Canada because the government has funded programs that teach immigrants about Canadian values and society has adapted its institutions to accommodate diversity.

“The mutual recognition that we should be respectful to each other and celebrate diversity in a genuine way, those values permeate the whole society,” said George, whose faculty trains many of those who provide social and other services to new immigrants.

Whatever Canada is doing, it seems to be positively influencing immigrants’ views of the country, the survey suggests: 88 per cent of respondents who were born outside Canada said they were very proud to be Canadian, compared with 81 per cent of those born here.

“Canadians who were not born in Canada are more proud than naturally born Canadians simply because we had the choice of being Canadian,” said Vikram Kewalramani, who immigrated to Canada in 2006 from India. “It wasn’t something that, literally, was a birthright. We consider it a privilege.”

For Amal Ibrahim, a Palestinian who became a citizen last year along with her two children, Canadian citizenship is primarily about respecting differences.

“It’s a great diverse culture where people learn how to live in harmony with each other while they have different ideas, different religions and different backgrounds,” she said.

Tolerance of others who are different was among the top five behaviours survey respondents considered a “very important” part of being a good citizen. Others were:

Treating men and women equally (95 per cent ranked this “very important”).

Following Canada’s laws (89 per cent).

Voting in elections (82 per cent – the same as tolerance of others).

Protecting the environment (80 per cent).

Immigrants’ views of what makes a good citizen were strikingly similar to those of native-born Canadians, said Neuman. In the majority of cases, the responses of the two groups varied at most by only a few percentage points.

“People might think … that newcomers are coming [into] this country … with their own sense of what it means to be a citizen, and they don’t really buy into the same perspective that native-born Canadians have,” he said.

“And this research pretty clearly suggests that they’re largely the same perspective, and the more somebody is in this country, the more immigrants buy into the native-born view.”

Canadians are generally satisfied with the rules for obtaining citizenship, the survey suggests. Only 26 per cent of respondents said the rules were not strict enough. Six per cent felt the rules were too strict, though that number tripled for permanent residents.

Canada’s willingness to allow multiple citizenships also got broad approval in the survey: 71 per cent of those surveyed felt Canadians should be allowed to hold dual citizenship.

That sentiment was even higher among 18- to 44-year-olds, with 80 per cent supporting dual citizenship, but lower for those 60 and over, at 58 per cent.

“I am equally proud of both citizenships,” said Natasha Nikolovska-Angelova, 32, who became a Canadian citizen last April. “Macedonia is more like my mother … the country where I was raised, and Canada is the country I chose to live in. It’s like the spouse you choose.… It’s the country of my future.”

Nikolovska-Angelova is part of the roughly 2.8 per cent of Canadians who hold at least one other citizenship.

Most of those surveyed also didn’t have a problem with Canadians living abroad. Sixty-six per cent of respondents who were born in Canada said it was generally a good thing to allow Canadian citizens to live abroad, compared to 55 per cent of respondents born outside of Canada.

The survey of 2,376 adults was conducted between Nov.18 and Dec. 17 and has an overall margin of error of plus or minus two percentage points 19 times out of 20 (+/- 4.3 percentage points for the foreign-born subsample group). Only households with landlines were surveyed.

New Canadian Mortgage Rules are Possible

Below is a commentary on the possible new rules for Canadian mortgages. Anyone looking at buying with 5% down (which is about 80% of our clients) or using a 30 year amortization (75% of our clients) should look at buying sooner than later.

Comparing New Amortization & Down Payment Rules

Government mortgage restrictions instituted from 2008-2011 have not achieved their goal, suggests Desjardins’ Senior Economist Benoit Durocher.

He wrote this on Thursday: “…The third series of [government mortgage rules] was announced nearly a year ago now, and we must conclude that the tightening introduced to date has not
slowed the market enough.

Under these conditions, it is likely, and perhaps even desirable, that the federal government will shortly announce a fourth series of measures to further limit mortgage credit.”

It almost sounds like Durocher has some inside info.

He adds: “Among other things, the government could be tempted to once again raise the minimum down payment on new loans (it went from 0% to 5% in October 2008).”

Many believe a down payment increase would have a more chilling effect on home prices than the other option being talked about: a reduction in the maximum amortization from 30 to 25 years.

The difference in impact would depend, however, on the degree of rule changes.

For example, raising the minimum down payment from 5.0% to 7.5% (a possibility that’s been discussed) would require that entry-level homebuyers come up with $8,700 more on a typical Canadian home purchase. For most, that’s not totally out of reach.

A five percentage point increase to the minimum down payment is a somewhat different story. Requiring 10% down equates to $34,780 on an average home. That’s beyond the means of a sizable minority of first-time buyers.

First-time buyers are essential to home price stability. They account for 1/2 of unit demand according to Altus Group research. While the latest data suggests that average down payments are somewhere around 30% (an estimated $104,000), first-time buyers put down far less.

That means stricter down payment rules could potentially hurt home values at the margin, if other things are held equal.

In terms of amortization, a government-imposed reduction—from 30 to 25 years—would lower a typical family’s maximum purchase price by roughly 9%. (That’s based on today’s 5-year fixed rates, normal qualification guidelines, median incomes, and average consumer debt.)

To put this in perspective, a reduction in amortization from 30 to 25 years would cut a typical buyer’s maximum possible purchase price by ~$31,000 (again, based on an average income, average debt, a 5% down payment, etc.).

Fortunately, most people don’t need a 30-year amortization to buy a home. Despite 41% of homebuyers choosing extended amortizations, the majority could have qualified with a standard 25-year mortgage. (That said, this doesn’t mean that cutting amortizations across the board is justified. Well-qualified borrowers deserve a carve-out in the rules because they utilize extended amortizations for legitimate cash-flow management purposes. But that’s a topic for another day.)

CIBC Being Sued: Unfair payout penatly calculations continue

This is interesting.

We have always thought that the way they do their math was odd or different or something.

Another reason to use a good Calgary broker that has other options than the Big 6 banks that continue to take advantage of their own customers. Why do they do this?

CIBC class action attracts hundreds of inquiries

By Vernon Clement Jones

Lawyers spearheading twin class-action suits against CIBC over “vague prepayment terms” have fielded interest from hundreds of the bank’s mortgage clients — that as a case management judge in B.C. gets assigned to the legal action.

“There have been hundreds of inquiries about these cases to our office and that of our co-counsel in Ontario,” Kieran Bridge, a Vancouver lawyer with the Construction Law Group, told MortgageBrokerNews.ca, pointing to borrowers who paid out CIBC mortgage from April 2005 onward.

Firstline clients areamong those concerned that they may have been adversely affected by the lender’s prepayment policy.

A Case Management Judge has also been assigned, what Bridge calls a key, mandatory step in moving class actions forward in British Columbia.

“We applied in November for a judge to be appointed, in order to move the case ahead, and are pleased this has happened,” he said.

The twin lawsuits were filed in B.C. and Ontario last October, alleging some CIBC mortgage borrowers have been unfairly penalized by unclear prepayment terms giving rise to two substantive complaints.

Aside from what Bridge terms “uncertain and unenforceable language” in contracts dating as far back as 2005, he also points to the mathematical formula CIBC used to determine those prepayment charges, calling them “invalid,” or in legal speak a “miscalculation.”

The suits rely on individual representative plaintiffs in B.C. and Ontario. Each of those two notices of claim alleges CIBC applied terms and conditions to certain mortgage contracts that allowed it “unfettered discretion” in calculating mortgage prepayment penalties.

The suits also allege that the actual amounts of those penalties were themselves in breach of the mortgage contracts.

CIBC will haven’t yet filed a statement of defence against the allegations.

“Because these cases are intended class actions, the normal time limit for filing a Statement of Defence is rarely applied,” said Bridge.”There has been no Statement of Defence filed, and no substantive response from CIBC.”

The assignment of a management judge notwithstanding, the suit still must be certified in order to proceed to trial. That could take a year or more.

The collective legal action effectively echoes some of the more-perennial and broader concerns of brokers, who grapple with the widely varying interest rate differential and prepayment penalties many lenders demand of borrowers. The former, sometimes stretching into the tens of thousands of dollars, has presented a major impediment to helping clients take advantage of historically low rates by switching or refinancing clients before maturity, argue many mortgage professionals.

Those challenges have led to broker calls for industry-wide standardization of penalties.

Undoubtedly, broker-arranged mortgages through Firstline are among the thousands of transactions the dual suit is meant to address, said Bridge, at the same time expressing his support for mortgage professionals.

The B.C. lawyer led a similar case against RBC about ten years ago. It ultimately ended in a settlement, said Bridge.

Calgary MLS sales jump 22% in August

CALGARY — MLS sales in Calgary rose by 22.1 per cent in August compared with a year ago — a greater year-over-year rate of growth than the rest of the country.

The Canadian Real Estate Association said Thursday that Calgary recorded 1,907 MLS sales for all residential properties during the month for an average price of $394,251, up 2.2 per cent from last year.

New listings in Calgary rose by 11.7 per cent in August to 3,819 and the sales as a percentage of new listings jumped by 4.2 per cent to 49.9 per cent.

In Canada, sales of 39,542 were 15.8 per cent higher than August 2010 and the average sale price of $349,916 was up 7.7 per cent.

New listings in Canada rose by 13.4 per cent to 73,125 and the sales as a percentage of new listings jumped by 1.1 per cent to 54.1 per cent.

“The housing market in Canada remained on a firm footing in August when compared to volatile financial markets,” said Gary Morse, president of CREA. “Through their actions, homebuyers are showing that they remain confident about the stability of the Canadian housing market, and recognize that the continuation of low interest rates represents an excellent opportunity to buy their first home or trade up.”

Gregory Klump, CREA’s chief economist, said economic and financial market headwinds outside Canada are keeping interest rates lower for longer.

“Those headwinds will likely persist until, and indeed after, fiscal quagmires in the U.S. and Europe are resolved,” he said. “In the meantime, the Bank of Canada will have ample reason to delay raising interest rates further, which is supportive for the Canadian housing market.”

mtoneguzzi@calgaryherald.com

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