My thanks to Sam Rowley for the use of his wonderful image of two mice fighting on the platform of a London Tube Station.
For most of the late winter and spring, I have been saying that the first Bank of Canada Rate Drop would come in September and more recently, I moved that to July. I am delighted to have been proven wrong.
It is certainly good news that rates have started a downward trend but who benefits from an immediate rate drop?
A .25 BPS Rate Decrease and a declining rate environment - who benefits?
The most obvious answer is; those of us still in variable rate financing. Those people with an adjustable rate mortgage will have some small relief in cash flow, while the people who have a variable rate mortgage with a fixed payment may finally start seeing some principal being paid off.
There will be some downward pressure on fixed rates as well, which will be good for those looking for predictable financing.
Surprisingly, it also benefits borrowers using Schedule B lenders who will consider applications with extended ratios. One B lender announced yesterday that they will no longer add a rate premium to loans with debt servicing between 50 and 55%. This acknowledges a slightly lower cost of funds but also that with a rate drop, more may qualify for A lending where earlier they may not have. Competition in the flourishing B lending space has been fierce, because fewer people have qualified on the 'A' side during times of increased mortgage rates.
Who does this not affect?
60% of mortgage holders come up for renewal in the next 24 months. Many of those mortgages have an existing fixed rate of between 1.5 and 2%.
Rate drops are certainly something to be celebrated but it's likely that those people renewing will be faced with a rate with a '4' in front of it. How to manage the payment differential is going to be the biggest challenge.
For Example : A $600,000 Mortgage holder coming off a 5 year fixed rate mortgage @ 1.78% could potentially face a $700 or more increase in monthly payments, in spite of having paid down $100,000 on the principal.
Our recommendation:
Clients should PLAN for that renewal and get advice from a Mortgage Broker now. Why a mortgage broker? You get unbiased advise from a source that has the willingness and capacity to assist.
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