BoC Cut Oct 2024 & Insured 30-Year Mortgages

Introduction

Neil: Hello and a warm Welcome to "Getting Your Sh*t Together".. a podcast dedicated to helping you take control of your financial life, be it Investments, Mortgages, Insurance, Loans and more. I’m Neil, full-time mortgage professional with nearly five years of industry experience.

Jerome: And I’m Jerome, also a mortgage professional with over a decade of helping clients navigate the complex world of mortgages and real estate. Together, we’re here to guide you.

Neil: We know that managing your finances, securing the right mortgage, and making smart investment decisions can be confusing and overwhelming. That’s why we created this podcast – to break down these complex topics into simple, actionable steps.

Jerome: Each week, we’ll be diving into essential topics, from financial planning to real estate investments, and bringing in expert guests from various fields. Our guests may include real world practitioners, investors, realtors, financial planners, investment specialist, builders, developers, lawyers, trustees, etc. – all here to provide valuable insights and practical advice.

Neil: Our goal is to help you evaluate how you’re managing important aspects of your life, highlight common mistakes, and offer corrective actions to get you back on track.

Jerome: We’ll also be busting common myths, answering your questions, and providing real takeaways that you can implement immediately. This isn’t just another boring podcast – we’re here to make sure you’re engaged, informed, and entertained.

Neil: So, join us on this journey to get your sh*t together and make smarter financial decisions. Tune in for actionable advice, expert insights, and engaging discussions that will empower you to take control of your financial future.

Jerome: Thank you for tuning in to "Getting Your Sh*t Together." Let’s get started!

Current Topics for the Week

Topic 1: Recent Reduction in the Policy Rates by the Bank of Canada

Neil: So, Jerome, let’s talk about something that might be top of mind for most homeowners and prospective home buyers. Interest Rates! Recently, Bank of Canada announced a 2nd reduction in the policy rate, which has now dropped to 4.50%. This has led most lenders to lower their Prime Rate to 6.70%. The move appears largely a response to the weakening economic environment in Canada. This drop in the policy rate means that for those with variable-rate mortgages or loans, there is a reduction in monthly interest costs of roughly $20.83 for every $100,000 of debt.

Jerome: That’s right, Neil.

Neil: But for those looking to buy a new home or refinance, the impact on mortgage eligibility might not be as significant or limited. This is a question that I often get from my clients. Can you, for the benefit of our viewers, elaborate as to why this reduction by Bank of Canada might not improve mortgage affordability for new buyers?

Jerome: Sure, Neil. So, most prospective home buyers and even homeowners are not aware of the basis of pricing (and by that I mean interest rates) for Fixed and Variable Rate mortgages. Variable Rate mortgages are linked to the Bank of Canada’s Policy Rate and so there is a direct co-relation between interest rate announcements made and their cost. However, Fixed Rate mortgages are based on Bond Yields and those their prices keep changing every day. And so to answer your question more directly.. Most mortgage shoppers these days might be opting for Fixed Rate mortgages if they are choosing to maximize their immediate mortgage eligibility or the amount of mortgage they can qualify for. And that is on account of Fixed Rate mortgages being 1% or more lower than comparable Variable Rate mortgages. And since, the interest rates for Fixed Rate products are not directly influenced by Bank of Canada, such mortgage shoppers are not expected to see much improvement in their situation (unless the Bond Yields drop significantly from current levels).

Neil: That’s really interesting.. isn’t it? There are so many factors influencing the mortgage rates and it is very difficult for a regular homeowner to make sense of all of this.

Jerome: Absolutely.. and that is why we have this podcast. Hopefully, we will make a difference!

Neil: I did have a follow-up question to this.. What is your outlook on rates for say the next 12 to 18 months?

Jerome: <Share your view>….. So, this is what I am thinking. How about you, Neil? I am sure you also have an opinion about this.

Neil: Yes, I am betting on the trend of weak economic performance to continue for the next little while. And if so, we should see about 1% reduction by next June. Then we get closer to the next Federal Election and who knows what curve balls may come our way. Plus, we will have a new President in the United States and they could surely make things more “Challenging” or at least keep us on the edge.

So, what are you recommending that your clients do?

Jerome: ….. What about you, Neil? What are you telling your clients?

Neil: I can tell you what I am doing for my own mortgages first. When it comes to clients, my recommendations are based on their risk appetite and other factors impacting them. If appropriate, my recommendation is to continue with existing Variable Rate Mortgage (ArM or VRM) and also opt for Variable Rate mortgages if taking new positions.

Jerome: So This brings us to the Audience Question: Now that Bank of Canada has started reducing rates, has that changed your home buying plans (for prospective home buyers)? Share your questions and comments and next week we will award a $50 Amazon gift card to the comment with most ‘Likes’ on our YouTube page.

Topic 2: Introduction of Insured Mortgages with 30-Year Amortization

Neil: Now let’s move on to an exciting development for first-time homebuyers. Starting August 1st, 2024, there’s a new insured mortgage option that allows for a 30-year amortization period. This change is specifically for first-time homebuyers purchasing new construction properties. Neil, what does this mean for potential buyers?

Jerome: This new 30-year amortization option is a fantastic opportunity for first-time homebuyers, as it helps make homeownership more affordable. With this insured mortgage, buyers can spread their payments over a longer period, which can reduce their monthly payments. However, this comes with a few caveats, firstly you should fit the definition of a First Time Home Buyer and an additional insurance premium of 0.20% compared to the regular mortgage rates.

Neil: That sounds like a great way to ease the financial burden for first-time buyers. Could you break down the criteria for someone to qualify as a first-time homebuyer under this new offering?

Jerome: Absolutely. To qualify as a first-time homebuyer under this new program, you need to meet one of these criteria:

1. You have never purchased a home before.

2. In the last four years, you haven’t occupied a home as your principal residence that either you or your current spouse or common-law partner owned.

3. You’ve recently gone through a marriage or common-law partnership breakdown.

Neil: With these criteria in mind, what should potential buyers consider before applying for this mortgage?

Jerome: Buyers should consider their long-term financial goals and current budget. While the 30-year amortization can make payments more manageable, it’s essential to ensure that you’re comfortable with the additional insurance premium and any potential impact on the total interest paid over the life of the loan. I would recommend that they work with a mortgage broker or agent who can run these financial scenarios for them and enable them to make an informed decision. They need to weight the costs of buying a new construction home (and the uncertainties that come with it) vs. that of buying a resale home. Dose it makes sense in their personal situation? There is usually never a “one size fits all” solution!

Neil: So, here is the Audience Question for this topic: As a first-time homebuyer, how do you think a 30-year amortization period would impact your home buying plans and financial strategy? What is your opinion and what questions do you have? Share your feedback to win an Amazon Gift card.

Please note that for both the Audience Questions, we will make a draw during our next episode and announce the winner!

Closing

Jerome: That wraps up our first episode of "Getting Your Sh*t Together." We hope you found these updates and our discussion useful. Don’t forget to subscribe to the podcast, share your comments and follow us for more insights in upcoming episodes.

Neil: And if you have any questions or topics you’d like us to cover, feel free to reach out. Thanks for listening and enjoy the summer!