A Seldom-used Strategy: Usually, it doesn’t make sense to buy default insurance on your mortgage if you have a big down payment. But there are exceptions, like when you have 35% equity and the difference between insured and insurable mortgage rates is 15 basis points or more. In those infrequent cases, you end up saving more by paying a default insurance premium—even though you technically don’t need to. (The premium is 0.60% of the mortgage amount — plus provincial sales tax in some provinces, like Ontario.) Doing so can qualify you for cheaper insured mortgage rates if your home purchase is under $1 million. And there’s an added bonus. When you come up for renewal, you can carry that insurance over to your next mortgage—even to a new lender, assuming you haven’t refinanced after getting the mortgage. Maintaining active insurance is valuable because it lets you keep qualifying for the lowest mortgage rates in the market, which are usually “high-ratio” insured rates. If bond yields drop further this year, there’s a chance the insured-insurable spread will widen to 15+ bps and this rare strategy will come into play. The reason being, some lenders have a disproportionately bigger appetite for insured mortgages and may price them a tad more aggressively, relative to mortgages at 65% loan-to-value. If this all sounds confusing and you have 35% down, simply ask your mortgage advisor to run the math and see if buying default insurance makes sense.
Burning Through Mortgages Quicker: 18 months ago, people were paying 3.50% for a 5-year fixed. Today, the lowest rates are at least 1.50 percentage points less. How fantastic is that? Well, if you voluntarily made the same payment as you would have 18 months ago, that higher payment would pay off a standard 25-year mortgage in just 20 years, 4 months. That’s the power of falling rates. It works in reverse too, of course.
Government Debt Alerts: Prepare for warning after warning (like this) about how our government’s debt issuance will boost bond yields and consumer borrowing costs. (Rising yields lift fixed mortgage rates.) Whether that happens to any significant degree is debatable, given all the other macro-economic pressures weighing down inflation and interest rates, including lingering unemployment and structural disinflation. You only have to look to Japan’s massive debt increase (see chart below), which unintuitively led to negative interest rates, to conclude that Ottawa’s debt spike isn’t a near-term threat. On top of the bond issuance concern, however, is the fact that the Bank of Canada will presumably sell some of its bond holdings…someday. Extra selling pressure also drives up yields and fixed rates, other things equal. This is probably a far-in-the-future problem, though. To date, “We have not sold any of the Government of Canada bonds that we have purchased [since the pandemic],” a Bank of Canada spokesperson said on Monday. And it probably won’t for several quarters.
Quotable: “Even in cases where a homeowner simply can’t make their mortgage payments anymore — as long as they have equity in their homes and the housing market is relatively stable — there’s always the option to simply sell…”—Bank of Canada director of financial stability Mikael Khan, commenting about the coming end of mortgage deferrals. (via Advisor’s Edge)
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