Trigger Rates & Trigger Points

It is no secret that interest rates are continuing to rise. The Bank of Canada has done a super-sized rate increase the past few times with interest rates increasing by half a point or more. Many people who are in a variable-rate mortgage ask what a trigger rate is and how it could affect them. There are two types of variable-rate mortgages. The first is ARM and the second is VRM.

Adjustable-rate mortgage (ARM) is the most common variable rate. With this type of variable rate your mortgage payment will increase or decrease as the prime rate changes, meaning the amortization will not change. With a variable-rate mortgage (VRM), your mortgage payment does not change with the rate, which means the amortization will change.

When Do You Reach the Trigger Point?

The trigger rate is the rate at which the regular mortgage payments no longer cover the accrued interest. If interest rates for the variable rate have increased, your entire payment is dedicated towards the interest, and nothing is going against the principal. If in some cases rates were to increase more, the payments will no longer cover the interest.

To find out when you will reach the trigger point, you will need a formula to calculate lump sum. Once you have found your lump sum, this will then determine if you need to switch to a fixed rate with a higher payment. There are various sites that have a calculator for these specific equations, which makes it easier to figure out if you have reached your trigger point.

What is a Trigger Rate?

A trigger rate is the interest rate level where your lender can adjust your payment amount, even if it is normally fixed. The trigger rate applies to variable-rate mortgage holders that are on a fixed payment basis.

A variable rate mortgage has trigger rates to ensure the homeowners are always building equity with their payments, especially as interest rates rise. With a variable-rate mortgage, the amount you pay is usually fixed. What changes is the amount of your payment that is going towards interest. Sometimes lenders lump variable-rate mortgages together with an adjustable rate, which is completely different.

With an adjustable rate, the payments either increase or decrease due to shifting interest payments. With adjustable rates, they are like fixed rates, so there is no need to worry about a trigger rate in this case.

How Is Trigger Rate Calculated?

The quickest way to determine your trigger rate is to review your mortgage documents. Your trigger rate will be displayed clearly, so you will know when to expect a call from your bank. That said, the trigger rate outlined in your documents assume you have not made any prepayments. Every time you make a prepayment, it is applied directly to your principal, so your trigger rate would increase. To get a more accurate number, your mortgage lender will then calculate your current trigger rate to know how much breathing room you will have.

The following shows trigger rate formula:

• (Payment amount X # of Payments per year / Balance owing) X 100 = Trigger rate in percent.
• If you have an outstanding mortgage balance of $500,000 with bi-weekly payments (26 payments per year) of $1,100, your formula will look like this:
  ($1,100 X 26 / $500,000) X 100 = 5.72 percent

It is PARTICULARLY important to have a clear understanding of the implications when it comes to all the trigger rates and trigger points. It makes a significant difference in future planning and can impact you in incredibly substantial ways.

At GLM Mortgage Group, we know what questions to ask. We have relationships with the lenders that you know about and the lenders you don’t. We would be pleased to educate you on the financial options available to you. We want you to make the best decision possible on the mortgage that you are committing to. Call us anytime for a FREE consultation on the mortgage products available to you.

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How Mortgage Rates Work

The topic of how Mortgage Rates work is a long, complicated series of moving puzzle pieces that work together perfectly. Today we are going to break it down as best we can. During the process of taking out your first mortgage, you will learn that the interest rate is the “payable fee” your lender has calculated for you in exchange for borrowing their money.

As one of the Top 3 Rated Mortgage Brokers in Vancouver, we would be more than happy to assist you with understanding How Mortgage Rates Work.

When applying for a mortgage, the lender you decide to choose may offer various interest rate options. Mortgage rates are constantly changing due to the Canadian economy (Fixed rates) and Global economy (Variable rates). Each time you renew your mortgage term, you re-negotiate your mortgage interest rate… Simply, this means at the time of term renewal, your new mortgage interest rate may cause your monthly payments to increase or decrease.

The lender of your choice will set the interest rate for your mortgage.

Here are a few of the factors that they use to help determine your cost:

• The length of your mortgage term (higher length in the term usually have higher rates)
• Their current Prime and Posted Interest Rate
• If you qualify for a discounted rate
• Type of interest you choose (fixed, variable, or combination)
• Your credit history
• If you’re Self Employed/ Employee

For example, with credit, lenders will assess your bureau report to decide if they will lend you money. They will also use this document to determine how much interest they will charge on the money you will agree to borrow. The better your credit is, the easier it will be for you to get a mortgage. Even if you have poor or little to no credit history, there will always be options like B lenders and private lenders depending on your specific file details.

On the topic of Mortgage Rates, you will very commonly hear three words: Prime, Posted, and Discounted Rates. These are all different. To put it simply, a Prime Rate is the rate the lenders use to determine their posted interest rate. A Posted Rate is the interest rate that the lenders advertise for their products (these can change regularly).

A Discounted Rate is lower than the lender’s Posted Rates. Along with those keywords, there are two more words you will need to know about. These important terms are called Fixed and Variable Interest Rates. A Fixed interest rate will stay the same for the length of your term.

Fixed Mortgage Rates will work the best for you if you need the following:

• Your payments stay the same over the term of your mortgage
• You want to know in advance how much principal you’ll pay by the end of the term
• Keep your interest rate the same because you think market interest rates will go up

A Variable Mortgage Rate can increase and decrease during the length of your term. This means that when you choose a Variable Rate Mortgage, your interest rate may be lower than if you selected a Fixed rate.

This type of Mortgage Rates may be best for you if you can accommodate the following:

• Your interest rate changing
• Your monthly mortgage payments potentially increasing or decreasing

In a Variable Rate Mortgage (commonly referred to as AVRM) the interest rate can go up, meaning more of your monthly payment goes towards the interest and less to the principal. If rates go down, more of your payment goes to the principal, which means you can pay the mortgage off faster.

The best advice on Mortgage Rates is the advice that comes from your Mortgage Broker because they can analyze your needs and start underwriting your information. With their expert advice, together you can create a perfectly “tailored-to-you” plan.

If any of the topics mentioned on Mortgage Rates sound like something you may be interested in, please reach out and one of our Senior Broker Partners would be more than happy to assess your unique situation and give you the best advice. At GLM Mortgage Group, we are with our clients for the entire journey. From the beginning, we can identify client needs, any possible roadblocks, and give a variety of tailored solutions.

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• Forward-looking sales indicators have collapsed. Many businesses referred to elevated uncertainty. Still, roughly half of firms anticipate that their sales will recover to pre-pandemic levels within the next year.
• Businesses in most regions and sectors intend to cut their investment spending significantly. Hiring plans are muted, although a quarter of firms plan to refill some positions after recent layoffs.
• Reports of capacity pressures and labour shortages have fallen significantly. This suggests a substantial widening in economic slack.
• Expectations for input and output price growth, as well as for overall inflation, are all down considerably.
• Credit conditions have tightened significantly, but government measures are a helpful offset.

BOC CONSUMER EXPECTATIONS SURVEY–Q2 2020

This survey was conducted from May 11 to June 1, in the throws of the ongoing pandemic. Of most concern to consumers was the prospect of losing their jobs. Many believed finding another job would be difficult. As well, consumer expectations for wage growth declined significantly.

According to the survey, consumer expectations for interest rates have fallen sharply, although they expect rates to rise over the 1-year to 5-year horizon, albeit moderately. At the same time, expectations for average house price growth have dropped to zero for Canada as a whole. For Ontario, respondents expect the average home price to rise by 1% over the next year. In BC, people see home prices falling a moderate -0.30%, with Albertan respondents suggesting a price decline of -4.3% (see the chart below). It is important to note that oil prices have risen considerably since the completion of this survey. All of these forecasts are well below the figures in the Q1 study.

It is noteworthy that all of these expectations are well below the CMHC forecast for the national average home price to fall 9%-to-18% over the coming year.

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With that, we’d like to share with you the recent changes that occurred this past week within the Mortgage and Real Estate Industry.

1. BANK OF CANADA CUTS IT’S INTEREST RATE FOR THE 3^RD TIME

The Bank Of Canada has made an additional rate cut of 50 BPS (half a percent). What does that mean for you? Well, it means that lenders will (typically) lower their PRIME rate. If your lender has not done so, do not panic. Banks are often the first to lower their rates. Most banks currently have their prime rate set to 2.45%. Many monoline lenders (RMG/CAP/First National/Street Capital) are slower to respond, but we are seeing some of them lowering their rates to 2.95% effective on April 1, in response to the secondary rate cut that the bank of Canada made. They have not yet given any details regarding the third cut.

So, if you have a VARIABLE rate mortgage, your rate and your monthly payment will most likely be decreasing. On average it will equal about $27 for every $1000,000 of mortgage money that you have for every 50 BPS that the rate lowers. If you have a fixed rate it currently does not impact you.

2. MORTGAGE DEFERRAL PAYMENTS—AND TRYING TO GET YOUR LENDER ON THE PHONE

Have you been trying to phone your lender to request for mortgage deferral payments and haven’t been able to get through? Our lenders have simply been inundated with phone calls. They are doing the absolute best that they can however the phone lines are full. Many of you have spent hours trying to get through. Many lenders have now set up COVID-19 details on their websites. We strongly suggest you go to your online banking and look at the top for COVID-19 information. Click on that and read your lenders information. Many lenders have options to defer payments online or through email.

3. ECONOMIC RESPONSE PLAN

This does not tie directly to Mortgages, but we recognize that many families are facing financial hardships. With the government releasing new programs nearly each and every day, it can be hard to keep track of them all! Our friend and partner Brandon Kirk of Primerica but together the chard below to outline the options available as of March 31, 2020. This is not an exhaustive list (as policies are being put in place and altered on a day to day basis) but we hope that it can provide you with some guidance.

4. HELP FOR TENANTS & LANDLORDS

With it being the start of the month, many tenants have rent due—and many have limited resources available for them to pay it in full this month. The provincial government has stepped in and put in place the following emergency measures for both tenants and landlords here in BC:

1. Halted all new and active evictions except for exceptional circumstances
2. New Temporary rental supplement of up to $500 per month for 3 months
3. Stopped all annual rent increases until further notice

The application for the rent subsidy opened on April 1^st, and can be found here. There are also further details and information that can be found on the government’s website here.

These have been the 3 biggest updates that have taken place this past week. We are sure there are more to come as this pandemic continues and Canadians and their families have new questions and require new information. We are going to continue to do everything in our power to keep you up to date and knowledgeable about what is happening.

GLM Mortgage Group is still operating and we are well equipped to continue servicing our clients at this time. Our team works remotely which means that we can follow public health prevention recommendations while staying 100% dedicated to our customers.

If you have any questions, please reach out and we would be happy to assist.

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US Jobs Report Shows More Americans Re-Enter the Labour Market
Although the headline payrolls gain of 156,000 missed estimates and the jobless rate edged up a tick to a six-month high of 5.0%, the overall message is is positive. Wage rates continue to edge upward as labour markets tighten and the average work week for all workers is rising. Indeed, there are reports in the Fed’s regional survey, the Beige Book, of labour shortages in trucking, construction, and technology. While there is still slack in the economy, some sectors are seeing jobs go unfilled.
The underemployment rate, which includes part-time workers who would prefer to work full-time and people who want work but have given up looking, remained unchanged at 9.7% in September.
Record job openings drew more Americans into the workforce. The labour force participation rate, which shows the share of working-age people in the labour force, increased to 62.9% from 62.8%. It has been hovering near its lowest level in more than 30 years. Improving prospects for jobs will underpin further wage gains, boosting consumer spending, which has been the driving component of the U.S.growth this year. Today’s report, along with improving durable goods orders, consumer sentiment, and exports, will encourage the Federal Reserve to follow through on its forecast to raise interest rates by the end of the year–likely at its December meeting.

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Exports of goods and services fell 4.5% last quarter (quarter/quarter, -16.7% annualized) reflecting weakness in most export categories. This followed a 1.9% decline in the first three months of this year. Motor vehicles and parts exports were down 5.8% q/q, mostly because of lower exports of cars and light tricks (-6.6%). Exports of consumer goods decreased 6.8%, the largest decline since the second quarter of 2003. Stats Canada further reported that ” lower exports of crude oil and crude bitumen (-9.6%) and refined petroleum energy products (-19.6%) pushed down exports of energy products (-7.5%). Exports of metal ores and non-metallic minerals were down 17.5%, the largest drop since the first quarter of 2009. The only major offset to the decline in exports was aircraft and other transportation equipment and parts, which rebounded 5.6% following two quarters of decrease.” Exports of services posted a modest gain, as a rise in commercial services exports more than offset the decrease in transportation services.

Another weak spot was business capital formation–investment in structures, machinery and equipment and intellectual property. Investment in all but residential structures nosedived as construction of homes increased at a meager 1.2% annual pace, down sharply from the 11.3% annualized gain in Q1.

Adding to economic activity last quarter were consumer and government spending. Consumers have led the way for the economy for more than a year, growing at a 2.2% annual pace, in line with the past four quarters. However, auto sales decreased following four consecutive quarterly increases. Expenditures by Canadians abroad rose 2.1%, as a result of higher outbound travel and an appreciation of the Canadian/ U.S. dollar exchange rate.

The household debt service ratio (defined as household mortgage and non-mortgage payments divided by disposable income) increased slightly from 14.06% in the first quarter to 14.15% in the second quarter, as interest and obligated payments grew.

Government final consumption expenditure increased at a 4.2% annual rate, largely the result of the wildfires. Government fixed capital formation, which includes infrastructure spending, rose 2.7% following four consecutive quarterly contractions.

On a more positive note, Statscan also released GDP data for June showing that the economy ended Q2 on a stronger footing. June GDP rebounded with a better than expected 0.6% gain, and less than half came from rebounding oil, gas and mining, as manufacturing also showed a positive spring back. This bodes well for a sizable bounce in economic activity in the third quarter.

The June data also confirmed the recent slowdown in housing. Construction declined for the third month in a row in June. Real estate agents and brokers posted a second consecutive monthly decline, as home resales activity was down. This is in line with the Canadian Real Estate Association reports, providing more recent data showing resales slowed further in July.

The dismal Q2 decline in economic activity was worse than the 1.0% downturn predicted by the Bank of Canada in its July monetary policy report. But the Bank also expected a 3.5% rebound this quarter. The July introduction of the federal government’s new Canada child benefit and an increase in infrastructure spending should boost the economy meaningfully in the second half of this year. The Bank of Canada is likely to remain on the sidelines assessing the effect of these policy changes.

Thank you to DLC Chief Economist Dr. Sherry Cooper for this article.

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My advice to you is to run the other direction as fast as you can.

Let’s begin with the foreclosed property sales process to see why:

In B.C., the process of taking possession of a property in default and then reselling it takes about a year, then another six months for the sale. During this time, the Mortgagor (the owners) can live in the property subject to only to allowing reasonable access to the realtor. They can live in the property without paying a penny against the mortgage, potentially to the final closing date.

Some, like the Smith family, who have fallen on hard times, treat this as an opportunity to get back on their feet and continue to take pride in their home and ensure that it stays in good shape.

Others, like the Jones family, have rented the property out since they bought it, haven’t maintained it, and now that they are in default, abandon any pretence of caring for the property.

After a year’s worth of legal action, the mortgagee (the bank or whatever financial institution the mortgage is with) meets with a judge and agrees on a price to list the property at. The Judge, who acts for the benefit of the mortgagee (the Smiths or the Joneses), insists that it be at the fair market value.

The property is then listed. It sits on the market for three to six months, the listing price drops regularly.

At some point, someone approaches the listing realtor with an offer. Because the place is listed “As-is, where-is”, all of the normal subjects and conditions have to be removed before the offer is represented. There is no allowance for financing, inspection and remedying existing problems. Even the normal disclosure statement will not be provided.

It’s entirely up to you to have all your ducks in a row (and theirs as well) prior to submitting an offer.

Once the offer is agreed upon by the bank, the listing realtor takes the offer to court for approval. If your realtor is smart and experienced, you tag along. Once in court, the offer is presented to the master for review. If anyone else has been interested in the property, they now take the opportunity to come in with a competing, sealed bid on the property. You will be given an opportunity to counter, but its basically guesswork as to how much to bid.

The successful bidder is now instructed to close within a very short period of time.

Because the bank are selling the property under a legal order rather than as an owner and because you are buying “as-is, where-is”, they cannot be held accountable for any damage incurred between your last inspection and the possession date. They will make every effort to prevent it, but what if the Jones family, angry at what’s happened, entered the property and trash the place, or remove all the appliances and fixtures for their next rental property?

Remember there are no subjects on your offer – you can’t cancel it no matter what. Then there are the clean up and fix up costs which you and you alone are on the hook for.

In the end, buying a foreclosed property may end up costing you more than buying the property for sale next door to it that’s move in ready.

Still not convinced? Still want to give it a try?

Here’s some advice on going ahead:

-Find the most experienced realtor you can and stick to him or her like glue. This is not a task for your Uncle Manny, no matter what a great guy he is. There are about a dozen or so realtors (B.C. again) who specialize in selling foreclosed properties. Someone like that who has handled dozens or even hundreds of foreclosure sales can provide valuable service in ensuring the transactions flow smoothly.

-Find your financing before you start looking. In terms of financing, the best (and possibly only) terms you will get will be subject to less than 65% loan to value. Make sure you have easy access to the 35% cash commitment ready.

-Have lots of experience in the building trades or have experienced family or a friend who can come with you on the walk through. Nothing says buyer’s remorse quite like the crack in the foundation you failed to notice on first look or underestimating the clean up costs by $100,000.

-Find a qualified inspector with a good reputation and when you’ve found a property, pay him well to tell you what’s good and bad.

-If you’re looking at a condo with a special assessment due and the bank says they’ll pay the special assessment, remember they’ll only pay that one. I guarantee you there will be a second one, which you will need to factor into your costs.

-If you are wanting to buy a foreclosed grow op, make sure the damage has been remediated and a clearance certificate has been issued. No one will finance an unremediated one! Note, there are only about three lenders who will finance one with a clearance certificate.

-Don’t think you can shortcut the process by contacting lenders directly. Remember, the decision maker is the Court’s Master, not the bank or credit union.

If you are still interested call or email a mortgage professional at Dominion Lending Centres!

Thank you to my DLC colleague Jonathan Barlow for this article.

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Sell your home for lots of cash and buy new; what could be easier! There is definitely something to be said about buying new and ‘shiny’ with a warranty. It’s glamorous, it’s easy and it makes for great Facebook posts.

On the flipside, posting before-and-after pictures of a renovation could be more impactful. You could even use the platform as a confirmation tool with picking wall colors, countertop material or even layout.

You don’t have to sell to win the lottery. The equity in your home could also be viewed as the lottery proceeds. In my opinion if there isn’t enough thought put into staying in the current home and improving the living space these days. Bear in mind, there are valid reasons why you have lived there so long: an established network of friends, close to school, convenience for day-to-day amenities, access to work, beautiful big back yard (new homes have small yards nowadays), family activities, kids sporting programs; the reasons are endless to stay. But one could also say there are many reasons for moving.

My only intention for this blog post is to create questions and have you think about what the best option might be; improve or move. Don’t always jump at the dangling carrot; there could be other options.

One could argue that deciding to sell and move is the easier of the two. All that you need to do is to call your trusted Realtor and suddenly (these days very quickly) your home is sold. But is that the more financially sound choice?

Here are the costs to consider when selling your home.

• Approx Realtor fees: 3.50% on the 1st $100K, 1.15% on the balance
• Potential mortgage penalty: Based on the balance, or it can be ported
• Lawyer fees: $2,000 (sell and buy)
• Property repairs: TBD; major repairs or just minor touch ups?
• Movers: Professional movers $2,500 or friends/family
• Inspection: $400-500 buying new property
• Appraisal: $300 buying new property with 20% down or more
• Property Transfer Tax: 1% on the first $200K & 2% on the remaining bal. (purchase)
• Mortgage payment: Difference between mortgage payments (old and new) is a cost
• GST: Are you buying a brand new home?

The other side to the equation is staying in your current home and making it better; more livable, shiny, new, fresh…Facebook worthy!

Here are the costs to consider when improving or renovating your home. This scenario makes the assumption that you will be accessing your equity to improve your home.

• Appraisal: $300; to determine market value for equity leveraging
• Mortgage payment: What is the overall increase per month with the additional funds?
• Permits/Plans: Are renos structure or surface? New floors, new paint etc…
• Product to be used: Cost to purchase new flooring, paint etc…
• Demolition: Cost of disposing of the materials correctly.
• Installation: Can you do it or do you need to hire a contractor?

Both scenarios create disruptions in life. Which one makes more sense for you and your family? Moving can have long-term effects, whereas improving is a short-term impact with living in a construction zone.

Either of the options is a great journey; don’t focus on the destination. Before you decide, make sure you consult with your Dominion Lending Centres Mortgage Broker first to consider all the costs and qualifying ramifications. The lending landscape is constantly changing; don’t assume you will qualify for a mortgage today because you qualified for one 5, 10, 15, 20…years ago.

Thank you to my DLC colleague Michael Hallett for the article.

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