A Message to You from Geoff Lee, President of GLM Mortgage Group

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2 HOW RATES WORK 2

3 3 A Message to You from Geoff Lee, President of GLM Mortgage Group Should I have a fixed rate mortgage or a variable rate mortgage? At some point in the process of getting a mortgage this is a question that will need to be addressed. There are many factors to consider and it isn t a simple question to answer. I have put together this ebook to delve further into fixed and variable rates. There is a need for our clients to understand how rates work and what the difference between a fixed and variable rate is. Geoff Lee geoff@glmmortgage.com

4 4 Table of Contents A Message to You From Geoff Lee... 3 Table of Contents... 4 What is a Fixed and Variable Rate... 5 Pros and Cons of a Fixed and Variable Rate... 6 Insured/Uninsured and High Ratio/Conventional... 7 What Impacts the Rate... 8 Which Rate is Best for Me?... 9 Conclusion... 10

5 5 WHAT IS A FIXED RATE? 1. The interest rate will remain the same throughout the term of the loan. 2. Fixed rates are dictated by the bond market which is based on the world economy. As bond yields increase or decrease the fixed mortgage rates will reflect the changes within the bond market. If the world economy is unstable rates will remain low. If the world economy strengthens rates will rise. WHAT IS A VARIABLE RATE? 1. Variable rates may fluctuate with the changes in the prime rate and the interest and principle portion of the payment will vary. 2. Variable rates are based on the Bank of Canada s Prime lending rate which is dictated by the Canadian economy. When the Canadian economy is weak or unstable rates will remain low to stimulate buying. When the Canadian economy strengthens the rates will increase to slow down buying. 3. The Bank of Canada has eight fixed dates each year where it can announce if there will be any change in the Prime lending rate.

6 6 PROS & CONS OF A FIXED RATE PROS 1. You have stability for the term of your mortgage. Your mortgage payment will remain the same and there will be no charge to your payment each month. CONS 1. A fixed rate is typically higher than a variable rate. 2. If you break the term of your mortgage you may be charged at IRD (interest rate differential). An IRD can be a significant cost and it is typically ~4.7% of the balance. This works out to $4, for every $100, that you have borrowed. PROS & CONS OF A VARIABLE RATE PROS 1. A variable rate is typically lower than a fixed rate. 2. Statistically a variable rate has outperformed the fixed rate for the last 40 years. 3. You have the option to lock into a fixed rate at any point in the term of your mortgage at no cost. 4. If you break the term of your mortgage early your penalty is 3 months interest. CONS 1. Your rate will change as the Bank of Canada adjusts the prime rate. 2. Pending on the lender your payments can fluctuate. 3. As prime rate changes the amount going to interest and principle will vary.

7 7 INSURED & UNINSURED (specific to Monoline (Broker) Lenders) In November 2016, the federal government made changes to mortgage rules that created a tiered system for rates. If you have a LTV (loan to value) that is less than 80% (less than 20% down payment) you will have an insured mortgage. If you have a LTV that is greater than 80% (equal to or more than 20% down payment) you will have an uninsured mortgage. Although you will not be charged an insurance premium on this mortgage several lenders will still insure it themselves and you may be paying a higher rate. If you have an uninsured mortgage the lower your LTV is the higher rate you are likely to receive. With the changes that the federal government has made it means that an insured mortgage with a LTV that is greater than 80% is going to get better interest rates than those with a LTV that is lower than 80%. Yes, that means that a recently graduated student who has just barely saved enough for a 5% down payment is going to get a better rate than someone who is renewing their mortgage and has a LTV of 75% HIGH RATIO & CONVENTIONAL (specific to balance sheet lenders Big 6 banks/credit unions) Rates will remain the same regardless of your LTV. Rates are impacted by the amortization of your mortgage. Rate are impacted by the property details. For example, if you have an investment property you will be paying a higher rate than if the property is owner occupied.

8 8 FACTORS THAT IMPACT THE RATE 1. Is the mortgage is insured or uninsured? a. If you have an insured mortgage you are looking at more competitive rates than if your mortgage is uninsured. 2. What is the loan to value (LTV)? a. If you have an insured mortgage your LTV will not impact the rate. b. If you have an uninsured mortgage the lower your LTV (the more down payment you have) then your rate will be higher than if the mortgage was insured (putting down less than 20%). 3. How long is the amortization? a. If your amortization exceeds 25 years you will pay a rate premium for the longer amortization. 4. Who is the lender? a. Each lender has their own unique and competitive pricing. 5. What is your credit score? a. There are tiers when it comes to your credit score. The higher your credit score the more competitive rate that you can expect to get. 6. What does your credit history look like? a. Your credit history will also impact your rate. If you have a previous bankruptcy or consumer proposal you are likely looking at higher rates.

9 9 WHICH RATE IS BEST FOR ME? 1. That is a personal question that is individual for each client. 2. A variable rate historically has been lower than a fixed rate and the Bank of Canada does not make significant changes to the prime rate. When the BOC adjusts prime it has been a 0.25% drop or increase. A 0.25% change in prime rate would impact your mortgage payment by $13.00/$100, each month. 3. The last drop in rate for BOC was in July 2015 and the last time the BOC increased prime rate was in September The 50 BPS RULE 1. There is a rule known as the 50-bps rule. If you take the current best fixed rate and minus the best variable rate if the difference is greater than 50 you go with a variable. If it is less than 50 a fixed rate is a very good option. This can be a good rule of thumb when trying to decide if you should go with a fixed or variable rate.

10 10 Conclusion At GLM Mortgage Group we want you to get the best rate for you. That means that each client is different and we will take the time to have a conversation with you. We will find out what suits your needs best and make our recommendations based on your best interest. We are here to position you in the most favorable mortgage. We know what to look for in a rate and we will make sure you are well informed. Copyright 2017 GLM Mortgage Group All Rights Reserved. No part of this special report may be reproduced in any form or by any electronic or mechanical means including information storage and retrieval systems, without permission in writing from the author. The only exception is by a reviewer, who may quote short excerpts in a review.