Ten obstacles to getting the best mortgage rate

Anyone with a mortgage wants the lowest possible rate. But there’s an array of requirements for snagging the best all-around deal, and some of them are counter-intuitive.

Once people have chosen the term and rate type for their mortgage, they often find that rates for that same term can vary by a percentage point or more. Countless factors can keep borrowers from getting a rock-star deal. Here are 10 of them:

1. Rates vary by province

Ontario usually has the most competitive rates in Canada, partly because it has the greatest number of competitors. People living in the Prairies or the East Coast, for example, often pay one-tenth to two-tenths of a percentage point more than folks in Ontario. Other examples: Home owners in Alberta sometimes have to put down more equity to get the lowest available rates (thanks to larger default risks in that province); borrowers in Manitoba have the cheapest six-month rates; borrowers in Quebec have some of the best 10-year rates.

2. A long rate hold

The further into the future your closing date, the longer the rate guarantee you’ll need. In turn, the higher a lender’s rate hedging costs and the higher your interest rate. The cheapest rates in the market are generally for “quick closes.” That typically means you must complete the mortgage in 30 to 45 days from applying. Applying one month from closing can shave off one-tenth to two-tenths of a percentage point from your rate, but the risk is that rates jump even more while you’re waiting.

3. You’re refinancing

Lenders love to finance purchases. So mortgages for new buyers sometimes have lower rates than mortgages for refinances. What’s more, refinances, which essentially require a whole new mortgage, often have lower rates than mortgage transfers, where you’re switching lenders but the key mortgage terms stay the same.

4. You’ve got an apartment condo or atypical property

Some lenders charge more for high-rise condos, especially in cities where condo markets are arguably overextended. The same goes for cottages, co-ops, hotel condos, former grow-ops, larger multiunit residences and other non-standard structures, which lenders view as higher risk.

5. The property isn’t your full-time dwelling

The cheapest rates in the country rarely apply to income-generating properties that the owner doesn’t live in. These deals are statistically a higher risk for lenders and investors, so expect a higher interest rate.

6. Your credit score isn’t high enough

The magic number is 680. That’s the most common minimum credit score to qualify for the best rates, especially if you have a higher debt ratio or a smaller down payment. But one number isn’t everything. To qualify for the best pricing you also need a two-year track record of managing your credit with no serious delinquencies.

7. You want flexibility

Some of the nation’s lowest rates come with strings attached, such as below-average prepayment privileges. This limits your ability to save interest by making lump-sum extra payments. Instead of prepaying 15 per cent to 30 per cent annually (which few people do anyway) a “no frills” rate might limit you to prepaying 5 per cent or 10 per cent. Restricted mortgages can also impose painful penalties, prohibit you from refinancing elsewhere before your term is up and prevent you from increasing your mortgage without penalty – useful if you buy a new house.

8. Your mortgage is not insured

In many cases, people with smaller down payments – less than 20 per cent – get better rates. That’s because their mortgage must generally be insured. Lenders like insured mortgages because someone else shares the risk of the borrower defaulting.

9. Your mortgage is too big

For lenders, bigger mortgages mean potentially bigger losses on default. This added risk results in rate premiums and stricter lending limits, especially on million-dollar mortgages without at least 25-per-cent to 35-per-cent down payments.

10. Your income is too low

If you’ve just become self-employed, are on probation or you can’t prove one to two years’ worth of stable salaried income, it can cost you. You may also need a bigger down payment. Lenders want less than 40 per cent to 44 per cent of your provable income to go toward debt.

In looking at this list, you may surmise you’ll get the best deal if you have pristine credit, don’t care about mortgage restrictions and are buying a detached urban home in Ontario that’s closing in 30 days.

That all helps, but there’s plenty more that governs mortgage pricing. Step one is knowing how well qualified you are. The stronger you are as a borrower, the more likely you’ll find exceptions to the rate “rules” above.

Bank of Canada lowers overnight rate target to 3/4 per cent

The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of one percentage point to 3/4 per cent. The Bank Rate is correspondingly 1 per cent and the deposit rate is 1/2 per cent. This decision is in response to the recent sharp drop in oil prices, which will be negative for growth and underlying inflation in Canada.

Inflation has remained close to the 2 per cent target in recent quarters. Core inflation has been temporarily boosted by sector-specific factors and the pass-through effects of the lower Canadian dollar, which are offsetting disinflationary pressures from slack in the economy and competition in the retail sector. Total CPI inflation is starting to reflect the fall in oil prices.

Oil’s sharp decline in the past six months is expected to boost global economic growth, especially in the United States, while widening the divergences among economies. Persistent headwinds from deleveraging and lingering uncertainty will influence the extent to which some oil-importing countries benefit from lower prices. The Bank’s base-case projection assumes oil prices around US$60 per barrel. Prices are currently lower but our belief is that prices over the medium term are likely to be higher.

The oil price shock is occurring against a backdrop of solid and more broadly-based growth in Canada in recent quarters. Outside the energy sector, we are beginning to see the anticipated sequence of increased foreign demand, stronger exports, improved business confidence and investment, and employment growth. However, there is considerable uncertainty about the speed with which this sequence will evolve and how it will be affected by the drop in oil prices. Business investment in the energy-producing sector will decline. Canada’s weaker terms of trade will have an adverse impact on incomes and wealth, reducing domestic demand growth.

Although there is considerable uncertainty around the outlook, the Bank is projecting real GDP growth will slow to about 1 1/2 per cent and the output gap to widen in the first half of 2015. The negative impact of lower oil prices will gradually be mitigated by a stronger U.S. economy, a weaker Canadian dollar, and the Bank’s monetary policy response. The Bank expects Canada’s economy to gradually strengthen in the second half of this year, with real GDP growth averaging 2.1 per cent in 2015 and 2.4 per cent in 2016. The economy is expected to return to full capacity around the end of 2016, a little later than was expected in October.

Weaker oil prices will pull down the inflation profile. Total CPI inflation is projected to be temporarily below the inflation-control range during 2015, moving back up to target the following year. Underlying inflation will ease in the near term but then return gradually to 2 per cent over the projection horizon.

The oil price shock increases both downside risks to the inflation profile and financial stability risks. The Bank’s policy action is intended to provide insurance against these risks, support the sectoral adjustment needed to strengthen investment and growth, and bring the Canadian economy back to full capacity and inflation to target within the projection horizon.

Bank of Canada maintains overnight rate target at 1 per cent

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rate is 3/4 per cent.

Inflation has risen by more than expected. The increase in inflation over the past year is largely due to the temporary effects of a lower Canadian dollar and some sector-specific factors, notably telecommunications and meat prices. Underlying inflation has edged up but remains below 2 per cent.

The U.S. economy has clearly strengthened, particularly business investment, which has benefitted Canada’s exports. Growth in the rest of the world, in contrast, continues to disappoint, leading authorities in some regions to deploy further policy stimulus. Oil prices have continued to fall, due to both supply and demand developments. In this context, global financial conditions have eased further.

Canada’s economy is showing signs of a broadening recovery. Stronger exports are beginning to be reflected in increased business investment and employment. This suggests that the hoped-for sequence of rebuilding that will lead to balanced and self-sustaining growth may finally have begun. However, the lower profile for oil and certain other commodity prices will weigh on the Canadian economy.

The net effect of these recent developments, together with upward revisions to historical data, is that the output gap appears to be smaller than the Bank had projected in the October Monetary Policy Report (MPR). However, the labour market continues to indicate significant slack in the economy.

While inflation is at a higher starting point relative to the October MPR, weaker oil prices pose an important downside risk to the inflation profile. This is tempered by a stronger U.S. economy, Canadian dollar depreciation, and recent federal fiscal measures. Household imbalances, meanwhile, present a significant risk to financial stability. Overall, the balance of risks remains within the zone for which the current stance of monetary policy is appropriate and therefore the target for the overnight rate remains at 1 per cent.

Information note:

The next scheduled date for announcing the overnight rate target is 21 January 2015. The next full update of the Bank’s outlook for the economy and inflation, including risks to the projection, will be published in the MPR at the same time.

Condo owners advised to check their insurance policies

Leak in their unit could leave them paying strata’s deductible

Zoe McKnight, Vancouver Sun

Government must change the rules so the owner of an individual condo unit doesn’t have to pay the huge insurance deductible on the entire condo complex when something goes wrong in their individual unit, the Insurance Bureau of Canada says.

Those deductibles have risen sharply in recent years. Some Metro Vancouver residents have been shocked to find, after a leak in their unit causes water damage to other parts of the building, that they are required to pay the entire deductible on the strata council’s insurance policy, which can amount to $100,000 or more.

Many condo owners have their own unit policy that covers a portion of the deductible on the strata corporation policy. But some are finding out the hard way their insurance covers only a fraction of the larger deductible – usually about $10,000 – or in some cases, not at all.

“We’ve begun to speak to government officials at a variety of levels to say there’s a problem here,” said Lindsay Olson, vice-president of the Insurance Bureau of Canada for B.C., Alberta and Saskatchewan.

“This is becoming a real issue. There’s a shortfall, and I don’t know what a person can do … if it’s a common expense it should be dealt with as such.”

She said it is important to read the strata council’s bylaws to see who can be held financially responsible for damage to common assets.

In the past, accidental damage to common assets was the liability of the entire strata unless a single owner had been negligent.

But recently, strata councils have been changing their bylaws so they can designate an individual responsible if the damage occurred in their unit, even if that person had not been negligent.

Such a change is allowed under provincial law. “It’s been tested in court and it’s been permitted. It’s been occurring over the last few years,” Olson said.

Previously, deductibles for claims made by the strata were in the $10,000 range.

“Over the last number of years what we have seen happening is strata corporations having higher and higher deductibles on the building insurance policy,” Olson said. Often insurers insist on higher deductibles because of multiple claims, especially water damage, in a complex. Some strata corporations have opted for higher deductibles to lower their premiums.

Under the provincial Strata Property Act, the strata corporation is required to review their insurance policy annually and provide a summary to unit owners at the annual general meeting. According to the Insurance Brokers Association of B.C., it’s the unit owner’s responsibility to make sure their own insurance policy dovetails with their building’s policy and strata bylaws.

If a building is well-maintained, the deductible can be small.

“In the old days, deductibles could be $1,000, $2,500 generally, which was well within the strata council’s ability to pay,” said Alan Rees, a longtime insurance broker at KRG. He said water damage is becoming a huge problem in the Lower Mainland due to aging infrastructure.

There are big variations in strata council bylaws and condo owners can’t be forced to take out individual insurance policies.

“It boils down to: read the rules,” Rees said.

The solution is to make sure your own unit insurance covers the strata deductible. Rees said he pays $20 a month for such coverage, which is worth $100,000.

But not all companies will provide that kind of coverage, said Lindsay de Craene of the InsureBC Group.

For example, she said, only two insurers provide such coverage in downtown Vancouver, where there are seven condo complexes carrying a deductible of $100,000, 19 with a $50,000 deductible and one with a $150,000 deductible.

The B.C. Ministry of Housing said it has no plans to revisit the Strata Property Act.

– from October 1, 2012 Vancouver Sun

Undeclared suite insurance can void owner’s insurance

Most landlords unaware they lack proper coverage

Tara Carman, Vancouver Sun

When Raj Bhangu put a secondary suite into his Kitsilano house, he spent the extra $20,000 to do it legally and get the right permits. But he was surprised to find that even though he had home insurance, it would have been null and void had the unthinkable happened – a flood, fire, earthquake or any other unforeseen catastrophe.

That’s because insurance companies will not pay out if homeowners don’t inform them when they put in a secondary suite, something Bhangu found out when his insurance came up for renewal several months after his first tenants moved in.

Almost one quarter of B.C. residents rent out a secondary suite in their home to help with the mortgage – and that’s likely a conservative estimate – but most are unaware they are not covered if their insurance company doesn’t know about it, according to Square One Insurance.

Many people are reluctant to tell their insurer they have a secondary suite because they may not have followed all the rules, said Square One CEO Daniel Mirkovic. It is a widespread misconception that insurance companies pass on information about illegal suites to municipal governments, he said.

“For insurance purposes, it really doesn’t matter whether it’s a permitted or a legal suite,” he said. “In most cases, coverage is available. It might cost you a little bit more, but in the long term it’s well worth it.”

Insurers are only concerned about properly assessing the risk and making sure the customer is being charged at the correct rate, Mirkovic said.

An insurance company would only communicate such information to a government authority under a court order or with the homeowner’s explicit permission, given in writing, Mirkovic said.

Failing to tell the insurance company about a secondary suite is “the absolute worst thing that could happen because they’ll say that you didn’t disclose all of the necessary and pertinent information on the home which would have affected their decision as to whether they would insure the risk or not,” Mirkovic said.

In Kitsilano, Bhangu said many of his neighbours who rent out basement suites don’t know what the rules are.

“If you have an illegal suite, you’re not necessarily going to go and tell your insurance company that … so they just avoid it altogether,” said Bhangu, noting that his insurance went up by about $100 a year when he informed the company of the suite.

Many people tend to think of insurance as something they pay every month and don’t necessarily think to ask the pertinent questions, he added.

“It’s a recurring thing that you hope you’re covered [for the] worst-case scenario.”

Other changes to homes that may affect insurance rates are going from a one-to two-family residence and conversions of garages to coach houses, according to Square One.

Another thing most landlords don’t know is that they can purchase insurance to cover a loss of rental income stemming from damage that requires repairs, Mirkovic said.

– from June 5, 2012 Vancouver Sun