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DECODING THE MORTGAGE MARKET Mortgage rates today are way below normal. Or are they?
Finance Minister Jim Flaherty called Canada’s low interest rates an “anomaly” last week, echoing warnings that other government officials have been making since 2009. But one of the country’s best-known economists believes today’s rates are closer to normal than many think.Benjamin Tal, deputy chief economist at CIBC, caught viewers off guard in a recent webcast with a mortgage company TMG The Mortgage Group. Whereas most economists have been calling for the Bank of Canada to lift its 1 per cent key lending rate back to a more normal 3 per cent, Mr. Tal thinks that these days, “normal” is significantly less.“The speed limit of the economy has been permanently reduced,” Tal said. Inflation, the key rate threat, is extraordinarily low at 1.1 per cent. And the pace of economic growth is in a long-run downtrend, with few signs of bucking that trend.Consequently, “The new normal is much lower interest rates than there used to be…The new normal would be maybe another 100-125 basis points (above today), not more than that.”If true, this would suggest that prime rate - the basis for variable mortgage rates – will average just 4 to 4.25 per cent over the long term, a big departure from the roughly 5 per cent prime rate that most economists forecast as “normal.”Saving ¾ of a percentage point, over the long-term, would have enormous impact on the finances of regular Canadians. Over five years alone, it would put $11,000 of interest back in people’s pockets on the average home purchase, with 20 per cent down. If you’re financially secure, that makes shorter-term and variable-rate mortgages worth a close look.In an email with Mr. Tal about his call, he was careful to point out that “the new normal is a theoretical rate.”“There is a big difference between the actual and theoretical rate,” he said. “In practice, rates tend to overshoot or undershoot. So it is possible that rates will rise by more than that, possibly to 3 per cent.”Presumably, if his model is correct, rates would then revert back down to the mean and cycle around that 4.25 per cent prime rate number.Regardless of how accurate Mr. Tal’s forecast proves to be, the odds are decent that the prime rate will remain almost two percentage points below its 6.89 per cent 30-year average. That’s in keeping with the Bay Street consensus. But more importantly, it’s reflective of Canada’s new realities: contained inflation and modest economic growth.“Variable will probably do better in this environment...if you have a five-year time horizon.” But long-term interest rates will be “permanently higher” five years from now, Tal predicts.If Mr. Tal’s estimate of a 4 to 4.25 per cent prime rate does pan out, variable rates could save people more than fixed rates over the long-run, as they have for decades. And even if “normal” turns out to be a 5 per cent prime rate (which is closer to most economic forecasts), variables should still come out on top over the long term.The question is, what happens between now and the time that rates “normalize.”Today you can find variable rates at prime – 0.5 per cent (i.e., 2.5 per cent) and five-year fixed rates at 3.49 per cent. Let’s assume that rates shoot up in 2015 as economists expect (an expectation that changes with the wind) and that they increase two percentage points over the two years that follow.In the hypothetical scenario laid out above, those of you shopping for a mortgage may find extra value in two particular terms:A three-year fixed mortgage: If you can find one in the 2.75 per cent range or better, it’s a compelling option. It gives you meaningful savings for three years (when compared to terms of four years or more). It also provides insulation from rate increases for three years. Compared to a five-year fixed mortgage, rates would have to be 2.25 percentage points higher at renewal for you to lose on this strategy. That assumes you make equal payments in all cases and renew into a two-year fixed (which adds up to five years total). Betting against a 225 basis point hike in three years is a wager that most strong borrowers should make.A hybrid (50/50) mortgage: Despite our personal beliefs, rates are impossible to foretell with accuracy. A hybrid mortgage removes the guesswork, cuts your risk of rising rates in half and lets you participate in today’s low variable rates. This strategy involves putting 50 per cent of your mortgage in a five-year variable and 50 per cent in a five-year fixed, netting you a starting rate under 3 per cent. It also gives you more flexibility than a five-year fixed by letting you refinance early with a lower potential penalty, and letting you lock in the variable rate at any time.Keep in mind, these strategies are primarily based on hypothetical interest cost. They’re also suited mainly to well-qualified borrowers with sound finances, stable employment and a five-year time horizon. Your situation may be different so as always, make sure to do your own research on what works best for you.Robert McLister is the editor of CanadianMortgageTrends.com and a mortgage planner at VERICO intelliMortgage, a mortgage brokerage. You can also follow him on twitter at @CdnMortgageNews.Source:ROBERT MCLISTERSpecial to The Globe and MailPublished Sunday, Nov. 10 2013, 10:47 PM ESTLast updated Monday, Nov. 11 2013, 10:32 AM EST
Increase in residential mortgages extended by non-bank lenders
The value of residential mortgage loans extended by non-bank lenders grew by 25.4% to $41.1 billion in the second quarter of 2019. The total number of extended residential mortgages also increased during the quarter to 166,482an increase of 34.1%.
Mortgages extended during the second quarter of 2019 represented 12.6% of the total value and 9.8% of the total number of outstanding residential mortgages.
The average value of mortgages extended during the quarter was $246,802, down 6.5% from the previous quarter, as the number of mortgages extended grew at a faster rate than the value. Increased sales in key housing markets of condominiums and townhouses, which are often more affordable than other property types, could be responsible for the lower average mortgage value.
Although the majority of mortgages extended by non-bank lenders was uninsured, insured mortgages grew faster (+33.0%) than uninsured mortgages (+19.6%) in the second quarter of 2019. In terms of number of mortgages, both insured and uninsured mortgages extended posted growth above 30% (+34.9% and +33.5%, respectively).
Minister Morneau announces new benchmark rate for qualifying insured mortgages
For many Canadians, their home is the most important investment they will make in their lifetime. That is why the Government of Canada has introduced measures to help more Canadians achieve their housing needs while also taking measured actions to contain risks in the housing market. A stable and healthy housing market is part of a strong economy, which is vital to building and supporting a strong middle class.
Today, Minister of Finance, Bill Morneau, announced changes to the benchmark rate used to determine the minimum qualifying rate for insured mortgages, also known as the stress test. These changes will come into effect on April 6, 2020. The new benchmark rate will be the weekly median 5-year fixed insured mortgage rate from mortgage insurance applications, plus 2%.
This follows a recent review by federal financial agencies which concluded that the minimum qualifying rate should be more dynamic to better reflect the evolution of market conditions. Overall, the review concluded that mortgage standards are working to ensure that home buyers are able to afford their homes even if interest rates rise, incomes change, or families are faced with unforeseen expenses. This adjustment to the stress test will allow it to be more representative of the mortgage rates offered by lenders and more responsive to market conditions.
The Office of the Superintendent of Financial Institutions (OSFI) also announced today that it is considering the same new benchmark rate to determine the minimum qualifying rate for uninsured mortgages. OSFI is seeking input from interested stakeholders on this proposal before March 17, 2020.