The Bank of Canada kept its overnight rate steady at 1.75% this morning after speculation that it might raise the rate by 0.25% again. The rate has previously been increased by 0.25% five times since 2017 in an attempt to keep inflation in an acceptable range. The last rate increase was in October 2018.
The overnight rate is set by the Bank of Canada and it is the rate other banks use to lend one-day funds among themselves. This influences other rates such as consumer loans and mortgages. Keeping the rate unchanged means the current mortgages rates should hold steady for the time being.
Although the lending and mortgage rates should remain the same, other areas of the economy will be affected by the hold on rates. The bank downgraded its expectations for Canada’s economy in 2019 from 2.1% to 1.7% GDP growth. As far as real estate and mortgage rates go, fixed rates should stay the same and those who opted for a variable rate will enjoy a continued lower rate.
Buying a house can be a bit confusing at times, especially if it’s your first time buying one. It’s even more confusing when big words are thrown at you like “amortization”, and don’t even get me started on compounding interest rates. Hopefully this list of mortgage terms will help you feel more confident when sitting down to discuss lending options with your bank or mortgage broker
Amortization: One of the more confusing words you’ll come across but it’s actually an easy one – it’s the amount of time you will take to pay off the loan. Typically this will be 20 or 25 years.
Term: The amortization (expalined above) is usually divided into several “terms”. At the end of a term you can either pay off the remaining balance of the mortgage without any prepayment penalties (expalined below) or you can renew the loan for another term. For example: John gets a mortgage with an amortization of 20 years and a term of 5 years. At the end of the 5 year term John has the option to pay off his mortgage or renew it for another 15 years with a new 5 year term.
Principal: This is the total outstanding balance of your loan.
Interest: Interest rates on mortgages in Canada are compounded semi-annually. This means the interest rate is applied twice per year.
Open vs Closed Mortgage: An open mortgage allows you to pay off your mortgage or change lenders at any time without incurring a prepayment penalty. A closed mortgage gives you a set payment schedule that you must follow. If you make any lump sum payments before the end of your term you will have to pay a penalty. Interest rates for closed mortgages are lower than for open mortgages and most closed mortgages give you options for making extra payments to avoid penalties.
Fixed Rate vs Variable Rate: A fixed rate means your interest rate stays the same throughout the term of the mortgage. A variable rate (also called a floating rate) means your interest rate as well as your monthly payment will change if the prime lending rate changes. By assuming the risk of fluctuating interest rates and payments you will typically be offered a lower rate than for a fixed rate mortgage.
Prime Rate: The Prime rate is linked to the Bank of Canada’s overnight lending rate, which reflects the rate they charge when they loan funds to other banks; it is tied to global financial markets and monetary policy.
Portability: Because not everyone is happy paying a prepayment penalty, lenders came out with an option that keeps everyone happy – mortgage portability. This allows you to transfer your current mortgage to a new property that you are buying. All the terms of the mortgage typically stay the same. You can take advantage of this feature if your interest rate is lower than current rates. Instead of breaking the mortgage and getting a higher rate you can just “port” your mortgage to the new property.
Conventional vs High-Ratio Mortgages: High-ratio mortgages are when you loan more than 80% of the home’s value (ie. less than 20% down payment). Most mortgages are high-ratio mortgages. If you are putting the minimum 5% down on your home then it is considered a high-ratio mortgage because you are taking out a loan for more than 80% of the homes value. Anything less than 80% of the home’s value (or a down payment of 20% or more) is considered a conventional mortgage.
Pre-Approval: The first step in getting financing is getting a pre-approval. This is a way for you to find out how much you qualify for before you go house shopping. You can also usually lock in the rate for a specified period of time.
There are a number of government funding programs for home buyers and current homeowners to help with the costs of buying or updating a home in Canada. Although each of the provinces have their own provincial programs, there are a few federal programs as well. Below is a list of the Federal programs as well as provincial programs for Newfoundland and Labrador.
Federal Funding Programs
Federal Programs
First-Time Home Buyers’ Tax Credit
A $5,000 non-refundable income tax credit on a qualifying home. The credit provides up to $750 in tax relief to assist first-time home buyers with their purchase costs.
Home Buyers’ Plan
A one-time withdrawal up to $25,000 from a Registered Retirement Savings Plan (RRSP) by first-time home buyers to help purchase or build a home. Generally you have to repay all withdrawals from your RRSP within 15 years.
CMHC Green Home Program
When you use CMHC-insured financing to buy or build an energy-efficient home or make energy-saving renovations, you may qualify for a premium refund of 10% on your mortgage default insurance and a premium refund for a longer amortization period (if applicable)
Provincial Funding Programs
Provincial Programs
Downpayment Assistance Program (DAP)
Applicants must be first-time home buyers who live in the province and meet the requirements. This program will assist approximately 100-125 applicants annually. The program will provide eligible households a repayable loan of up to 5% for down payment on a new or existing home (purchase price must be less than $200,000 in Clarenville, Gander, Grand Falls-Windsor, Corner Brook and Stephenville and all communities within a 30 km radius). The amount of the loan will be based on a sliding scale that takes into consideration the applicant’s household income level and the cost of the home being purchased. Typically household income levels must be under $75,000 to qualify and the interest rates on the loans vary but will not exceed the prime lending rate minus 1%.
Home Energy Savings Program (HESP)
Available as of July 4, 2017. It is a provincial initiative designed to assist low-income households with electrically heated homes which consume 15,000+ kWh of electricity annually. The program will provide non-repayable grants of up to $5,000 to help these households make energy efficiency upgrades to their homes.
Home Modification Program (HMP)
This program is designed to provide funding to assist homeowners with low-to-moderate income who require accessibility changes to their residences, which can help promote independence, self-reliance, assist with a better quality of life, and enable individuals to remain in their own homes for a longer period. The program is available to homeowners with low-to-moderate income requiring accessibility modifications to their homes (an Occupational Therapist’s report is required clearly indicating whether modifications are urgent or non-urgent). Applicants must have an income of $46,500 or less. Newfoundland and Labrador Housing Corporation provides funding to eligible homeowners in the form of forgivable grants and repayable loans. Funding is limited to the costs associated with repairs. Persons with accessibility needs may receive a forgivable loan of up to $7,500. Repairs exceeding these levels may be addressed under a repayable loan of up to $10,000
Provincial Home Repair Program (PHRP)
This program is designed to assist homeowners with low income who require repairs to their homes, or to bring dwellings up to minimum fire and life safety standards, with improvements in basic heating, electrical and plumbing services. To be eligible for this program homeowners must have an income of $32,500 or less, and must have owned the home for at least 5 years (except in the case of an emergency). There is a lifetime assistance cap of $12,500 and an application for a second project can be submitted after 7 years. Newfoundland and Labrador Housing Corporation provides funding to eligible homeowners in the form of forgivable and repayable loans. Funding is limited to the costs associated with repairs. Forgivable loan funding is available for homeowners up to a maximum of $5,000 ($6,500 in Labrador). Repairs exceeding these levels may be addressed under a repayable loan of up to $12,500 ($15,000 in Labrador).
