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5 Questions Every Borrower Should Ask

As a mortgage borrower – particularly if this is your first time embarking upon homeownership – there’s no doubt you have a load of questions related to the mortgage process. Aside from the most common questions, such as those relating to mortgage rate, the maximum mortgage amount you’ll be able to receive, as well as how much money you’ll need to provide for a down payment, the following five questions and answers will help you dig a little deeper into the mortgage financing process.

1. Can I make lump-sum or other prepayments on my mortgage without being penalized? Most lenders enable lump-sum payments and increased mortgage payments to a maximum amount per year. But, since each lender and product is different, it’s important to check stipulations on prepayments prior to signing your mortgage papers. Most “no frills” mortgage products offering the lowest rates often do not allow for prepayments.

2. What mortgage term is best for me? Terms typically range from six months up to 10 years. The first consideration when comparing various mortgage terms is to understand that a longer term generally means a higher corresponding interest rate and a shorter term generally means a lower corresponding interest rate. While this generalization may lead you to believe that a shorter term is always the preferred option, this isn’t always the case. Sometimes there are other factors – either in the financial markets or in your own life – you’ll also have to take into consideration. If paying your mortgage each month places you close to the financial edge of your comfort zone, you may want to opt for a longer mortgage term, such as five or 10 years, so that you can ensure that you’ll be able to afford your mortgage payments should interest rates increase.

3. Is my mortgage portable? Fixed-rate products usually have a portability option. Lenders often use a “blended” system where your current mortgage rate stays the same on the mortgage amount ported over to the new property and the new balance is calculated using the current rate. With variable-rate mortgages, however, porting is usually not available. This means that when breaking your existing mortgage, you will face a penalty. This charge may or may not be reimbursed with your new mortgage. Some lenders allow you to port your mortgage, but your sale and purchase have to happen on the same day, while others offer extended periods.

4. What amortization will work best for me? The lending industry's benchmark amortization period is 25 years, and this is also the standard used by lenders when discussing mortgage offers, as well as the basis for mortgage calculators and payment tables. Shorter time-frames are also available. The main reason to opt for a shorter amortization period is that you'll become mortgage-free sooner. And since you're agreeing to pay off your mortgage in a shorter period of time, the interest you pay over the life of the mortgage is, therefore, greatly reduced. A shorter amortization also affords the luxury of building up equity in your home sooner. While it pays to opt for a shorter amortization period, other considerations must be made before selecting your amortization. Because you're reducing the actual number of mortgage payments you make to pay off your mortgage, your regular payments will be higher. So if your income is irregular because you're paid commission or if you're buying a home for the first time and will be carrying a large mortgage, a shorter amortization period that increases your regular payment amount and ties up your cash flow may not be your best option.

5. How do I ensure my credit score enables me to qualify for the best possible rate? There are several things you can do to ensure your credit remains in good standing. Following are five steps you can follow: 1) Pay down credit cards. This is the #1 way to increase your credit score. 2) Limit the use of credit cards. If there’s a balance at the end of the month, this affects your score – credit formulas don’t take into account the fact that you may have paid the balance off the next month. 3) Check credit limits. Ensure everything’s up to date as old bills that have been paid can come back to haunt you. 4) Keep old cards. Older credit is better credit. Use older cards periodically and then pay them off. 5) Don’t let mistakes build up. Always dispute any mistakes or situations that may harm your score by making the credit bureau aware of each situation.

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Canadian Building Permits

Canadian building permits declined 4.1 per cent in December to $6.5 billion, the second consecutive monthly decrease following November's 6.6 per cent drop. The decline in building permits was led by weaker permitting activity for Ontario and BC multi-family projects.

Construction intentions in BC tumbled 30 per cent from November as both residential and non-residential permits experience substantial monthly declines. On a year-over-year basis, the value of total BC building permits was down 4.8 per cent compare to December 2012.  For all of 2013, the total value of BC building permits fell 8 per cent from 2012. 

Building permit activity was down across all of BC's four major census metropolitan areas (CMA) in December. In the Abbotsford-Mission CMA, permits fell 7.1 per cent on a monthly basis and were down 31 per year-over-year.  Construction intentions in the Victoria CMA declined 2.3 from November and 22.6 per cent year-over-year. In the Kelowna CMA, permits were down 29 per cent from November and 26 per cent year-over-year.  Finally, in the Vancouver CMA  building permits were off 31.4 per cent cent month-over-month but rose 12.4 per cent compared to December 2012.

Copyright BCREA –reprinted with permission

Canadian Monthly GDP Growth

The Canadian economy grew 0.2 per cent in November, the fifth consecutive month of expanding real GDP growth. At the industry level, growth was led by rising output in the mining and oil and gas industry, while output declined in the manufacturing and wholesale trade industries.  With today's release, we now have two months of GDP data for the fourth quarter of 2013. Our quarterly tracking estimate is currently indicating that real GDP will expand between 2.5 and 3 per cent in the fourth quarter.

Copyright BCREA – reprinted with permission 

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Housing Demand to Trend Higher

BCREA 2014 First Quarter Housing Forecast Update

The British Columbia Real Estate Association (BCREA) released its 2014 First Quarter Housing Forecast Update today.

BC Multiple Listing Service® (MLS®) residential sales are forecast to increase 4.8 per cent to 76,450 units this year, before increasing a further 7 per cent to 81,800 units in 2015. The five-year average is 75,400 unit sales, while the ten-year average is 84,400 unit sales. A record 106,300 MLS® residential sales were recorded in 2005.

"Housing demand in the province has nearly fully recovered from the 2012 downturn,” said Cameron Muir, BCREA Chief Economist. “Over the next year, BC will be the beneficiary of more robust global economic growth, led by a resurgent US economy and a favourable exchange rate. The resulting boost in employment will help underpin the housing market." 

"Home prices are not expected to climb much higher than the overall inflation rate as housing starts are expected to keep pace with consumer demand, added Muir. The average MLS® residential price is forecast to increase 1.8 per cent to $547,300 this year and a further 1.7 per cent to $556,800 in 2015.

Copyright BCREA – reprinted with permission 

US Real GDP Growth

The BEA's preliminary estimate of Q4 US GDP came in at 3.2 per cent, modestly higher than consensus expectations of 3.1 per cent and a deceleration from Q3's 4.1 per cent growth.  The details of the report were overwhelmingly positive with personal consumption, exports and business investment all making healthy contributions to growth. In fact, GDP would have grown by over 4 per cent in the fourth quarter were it not for a contraction in US government spending.  For all of 2013, the US economy grew at a somewhat disappointing 1.9 per cent rate, though showed significant momentum in the second half of the year with quarterly growth averaging 3.7 per cent. It is worth noting that today's release is a preliminary estimate and will be revised in subsequent months.

Bond markets have thus far shrugged off further Fed tapering announced at yesterday's US Federal Reserve meeting as well as today's positive news regarding economic growth.  Interest rates in the US are modestly higher this morning while the yield on 5-year Government of Canada bonds, the key benchmark rate for 5-year mortgages, have remained relatively unchanged at less than 1.6 per cent.

Copyright BCREA – reprinted with permission 

Canadian Consumer Price Inflation

Canadian consumer prices rose 1.2 per cent in the twelve months to December, a modest increase from 0.9 per cent inflation in November.  The Bank of Canada's index of core inflation, which strips out the most volatile components of the CPI, such as food and energy prices, increased 1.3 per cent in December. Consumer prices in BC were unchanged in December on a year-over-year basis.

The Bank of Canada's repeated messaging around downside risks to inflation continue to have their desired effect. The five-year Government of Canada bond yield, the key benchmark for fixed mortgage rate pricing, has now fallen over 30 basis points since the beginning of the year to under 1.6 per cent, prompting lenders to cut posted mortgage rates. While we still anticipate that mortgage rates will be higher at the end of the year, a continued low-rate environment early in the year should provide a boost to the market heading into the spring home-buying season.

Copyright BCREA – reprinted with permission 

Canadian Retail Sales

Canadian retail sales rose 0.6 per cent in November, the fourth increase in the past five months. The advance in sales was largely attributable to higher sales of motor vehicles and parts as well as electronics and appliances. In inflation-adjusted terms, retail sales rose 0.8 per cent, a higher rate than nominal sales growth due to holiday discounting and heightened retail competition.  

Retail sales are finally showing signs of strength following close to a year of meager gains. Sales in BC were up 1.4 per cent in November, the third increase in the past four months.  Compared to November 2012, sales were up 4.3 per cent.  Year-to-date, BC retail sales have grown 1.7 per cent over 2012.

Copyright BCREA – reprinted with permission