Mortgage 101 – Avoid Heartbreak Before You House Hunt

Dan Ahlstrand and Clinton Wilkins discuss the potential impact of U.S. Canada trade tensions on Canadian mortgage rates, with Bank of Montreal suggesting rate cuts might be necessary.

Dan Ahlstrand
Welcome back to Mortgage 101. I’m Dan Ahlstrand. He’s Clinton Wilkins. We were talking about mortgage rates before the break, and we were talking about why it’s important to have that conversation with somebody like Clinton, who’s a mortgage broker, who’s not beholden to a certain bank. Why is it important to have that talk, Clinton?

Clinton Wilkins
I think it’s important to talk because I think competition is important, and when you deal with one institution, you only get what they have. Like the other day, I’m just going to throw a lender out there. It was one of the big five. A realtor was dealing with that lender and the client, and they just couldn’t get this transaction done. And they agreed with the seller to say, “We are only willing to give this client an exception if they go see someone on Clinton’s team, because they’re like, we know he can get this to the finish line. We get the file approved. The realtors on both sides are now new super fans, and it was really because one realtor kind of dug in their heels to say We want the real straight skinny here, and we’re willing to take a risk if the client agrees to see someone on Clinton’s team because we, the bank, just couldn’t get it to the finish line, and we got it done. So the client’s happy, the client’s getting the house, buying their new home, sellers happy, realtors on both sides happy, and that’s just like an example of what we do every day. Can we make miracles happen every day? No, but like I always say, every Canadian can get a mortgage if their situation is more challenging from an income, asset, or credit perspective. They just need to put more skin in the game, so maybe if your situation’s not so good, instead of 5% down, maybe you can get it with 20% down, or if you can’t do wit down, maybe you have to do 35% or 50% down. So if you can get enough skin in the game, we can get you a mortgage. But obviously, the more risky, the higher the cost. That’s just the reality. Now, I saw a news article that just popped up here before we came back from our little break. I don’t know, Dan. Do you want me to maybe just give you the headline, and we can be sure we were talking.

Dan Ahlstrand
about rates before the break and how the learning is that the Bank of Canada was planning to perhaps hold its rate steady throughout the remainder of the year. But we, as we mentioned in the in the previous segment, the the world is in a constant state of flux these days, and and with all of the things the the pressures on the economy that from from our relate trade relationships to to violence in the Middle East and in Ukraine it can change on on almost on the flip of a coin and and that appears that that we’re not alone in that hypothesis.

Clinton Wilkins
We are not alone, and I think that’s what you need to remember, especially in this business. So that this is the headline: Trump tariffs could reopen the door to the Bank of Canada rate cuts. Bank of Montreal, okay? Kind of the subheading was: BMO expects the Bank of Canada to remain firmly on hold this year, but says worsening trade relations with the U.S. could put rate cuts back in play. So that’s probably good news for some people who have a variable rate mortgage. For me, the U.S. Canada stuff-we’ve been desensitized. We were on it every day. I can’t even tell you what the tariffs are anymore. Like we just so clearly knew in the early days, and now I’m like, there’s stuff going on, but we don’t know what’s going on.

Dan Ahlstrand
A lot of noise.

Clinton Wilkins
A lot of noise, and it’s literally changing all the time. But it’s interesting to say, okay, we’re in a hold, but if the trade relations do get worse, we may need to cut to spur some spending here in Canada. That’s basically what this headline is saying. So that’s interesting because usually these headlines, these banks don’t put these headlines out lightly. Like these are their chief economists that are putting these types of messages out. So again, we’re watching it. This is just a news article that came out today that I’m sharing with everyone, but this is something that BMO put out and said.

Dan Ahlstrand
Do the banks have to follow suit with the Bank of Canada? If the Bank of Canada decides to lower its rate, are the banks gonna get in line?

Clinton Wilkins
So the way that it works is the Bank of Canada sets the key overnight rate, and that’s where the banks are exchanging basically funds, and that’s their cost of borrowing. We’ll just use it, as I know I’m really dumbing it down, but we’ll just use this as kind of an overarching explanation. And then the bank sets the key overnight rate that the Bank of Canada sets, and then there is an offset from what that key rate is to what the prime rate is that all the banks have. So all the banks use the same prime rate, and currently it’s 220 basis points above what the key overnight rate is. So right now, the key overnight rate is 2.25. So sometimes, and I see this, and I see realtors posting this. I’m like, realtor, stay in your lane. That’s what I’m kind of thinking myself. But they’re like, oh, the bankian a release at the key rate is 2.25. Well, that’s not the rate a client gets. That’s the rate that your bank. Getting that’s what Bacon Montreal is getting, baby, not not you. And then the actual prime rate is 220 basis points above that. So today the prime rate is 4.45. If you’re doing a variable rate mortgage, you’re typically getting a mortgage that is below prime. So you’re getting a discount below that prime rate of 4.45. I think good customers are getting rates, you know, in the 3.6, 3.7, 3.8, something like that, in that type of range, in terms of a variable rate mortgage. It depends. Are you doing a high ratio purchase, i.e. are you buying a new home, putting down less than 20%, or are you doing a refinance at 80%, for example, with a 30-year term? So, I think a variable rate mortgage today is anywhere from 3.6 to probably low fours, like in that range.

Dan Ahlstrand
You said, good customer. How does one become a good customer and get those rates? Is it based entirely on credit score?

Clinton Wilkins
Not at all, really. So it’s usually with us. You’re either approved or you’re declined. It’s not. You have a better credit score. You’re getting a better rate, and I think that’s kind of the mentality that customers sometimes think. It really depends on the product. If you do a high-ratio mortgage with the Canadian Mortgage and Housing Corporation, you’re getting the best rate. That’s just the way it is. If you’re doing a refinance, you’re getting the worst rate, and it depends on what type of transaction is going to be in between those two ranges. It’s very transaction-based, and oftentimes it’s more based on what your what the amortization is. So if you’re doing an amortization of 25 years or less, that’s the magic to getting kind of the better rate option. If you decide that you want to go to a 30-year amortization, typically you’re going to pay a little bit of a higher rate. I mean, the banks can charge you more. You’re riskier, and if you want a longer amortization, maybe having a higher rate isn’t a bad thing because maybe you’re just so focused on what the cash flow is, and maybe the cash flow is more important to you than the interest rate itself.

Dan Ahlstrand
We’ve talked about variable rate mortgages. There’s another option out there, and that’s the fixed rate mortgage. Of course, that is not dependent as much on the Bank of Canada decision.

Clinton Wilkins
What the fixed rates are really tied to is what’s going on in the bond market. Is the bond market influenced by the Bank of Canada? Of course, it’s priced into the market. What I mean. They’re already pricing in stability right now, or they’re pricing in rate decreases, and the bet that bothe nd market is already forecasting what’s going on in the future because these bonds are basic. And the way that it works is these lenders are gathering up a whole big chunk of mortgages. For example, let’s say $100 million worth of mortgages, just for argument’s sake, and they’re packing them all up in a bond, and they sell it off. Does that bank still own your mortgage? Yes, they’re still servicing it. You’re still paying that lender. They’re still doing all of it, but the actual debt they’ve basically reinvested that money that you’re borrowing, and they are basically making a margin between what they’re selling that bond for and what you’re actually paying on your contract, and that’s how it works. So in these contracts, it may say, “Hey, we can assign or sell or whatever. They’re basically saying that they can repackage that mortgage, or they could sell it off. But typically, the lender that’s lending you the money, they’re still having a relationship with you. They’re still debiting you. Technically, your mortgage is still with that company, but they’re packaging these mortgages off all the time. So then they have more money to lend new customers. Because just imagine, like these banks, it doesn’t matter if it’s Bank of Montreal, TD, Scotia Bank; they are still selling these mortgages off into the bond. So then they can get more resources to then lend more mortgages.

Dan Ahlstrand
Is the rate higher on a fixed-rate mortgage than a variable rate mortgage? I know it’s difficult because the rate obviously changes.

Clinton Wilkins
Typically, the fixed rate is higher. Typically, always, and today that is the case, and I think the spread between where the fixed rates are and where the variable is even wider than it was. So that’s why more and more customers are choosing to do a variable with the lower rate, te and us being in a plateau situation, a lot of consumers are willing to take the risk on a variable rate. There’s a lot of upsides. You break the mortgage early; it’s only three months’ interest to get out, and you can still convert that variable rate mortgage into a fix at any time, no penalty.

Dan Ahlstrand
So the question is: Is it purely on risk tolerance that somebody would decide to get a fixed rate over a variable rate?

Clinton Wilkins
I think so, and I’ve seen so many customers break their mortgage early. I, for me, I would always do a variable personally. I probably have a higher risk tolerance than some people. Historically, about 60% of consumers will take a five-year fixed. That is the historic average. For me, it’s the opposite. About 40% of our clients are taking the fixed rate. 60% are taking variable. I think it’s just primarily tied to the advice that they get from us, but also the communication that we’re pumping out. Like I’m doing a live stream every time the bank. We’re sending SMS. We’re sending emails. Like we’re pumping out a lot of that communication that they wouldn’t normally get from another lender. We’re still in a relationship with our customer. Even if we’re doing a mortgage with Scotia Bank, for example, we’re still in a relationship with our customer, and we want to still be involved with them, and we want the clients to come back to us when that mortgage comes up for renewal as well.

Dan Ahlstrand
That’s the benefit of having a mortgage broker. Not only do you get to shop around and look for the best situation for your client, but you also get to build a relationship with somebody that you’re not just dealing with an institution that is a bank.

Clinton Wilkins
Yeah, exactly. And like, here’s the thing: we deal with broker-only lenders, like trust companies, credit unions, etc., but some of these big five lenders that I talked about, like BMO, TD, Scotia Bank, we are doing business with these lenders every single day. And I will also say, the majority of our business is with that style of lender. So I think sometimes customers in their mind are like, okay, a mortgage broker-they’re only dealing with broker lenders. No, we’re dealing with Scotia Bank, TD, and BMO literally every single day, and the bulk of our business that we’re doing, at least here in Atlantic Canada, is with these big five.

Dan Ahlstrand
So, when should somebody, if they’re planning to make that decision, Clinton, if they’re planning to get into the real estate market, when should they come to see you? Should they come to see you when they’ve got a place in mind where they’ve got a property that they want to buy, or should they come to see you as soon as they think that they’re in a position that they can get into the real estate market?

Clinton Wilkins
The timing for a pre-approval is so, so important. When we do a pre-approval, it’s good for 120 days, and it also includes a rate hold. So just imagine we are holding a rate, and imagine if the rates go up, you’re really going to want to access that rate hold, but if we’re doing a rate hold and the rates go down, we’ll always give the customer the lower rate. So we can do that for 120 days. So four months before you’re actually wanting to close on that home, you get the keys. That’s the time for us to do a pre-approval. And I always, always, always encourage everyone who’s making an offer, anyone who’s even going to go and look at any real estate, to get pre-approved before you are stepping into a home. And I always encourage realtors: don’t be showing a home to a customer unless they have a pre-approval. I’ve heard the horror stories. I’ve had the war wounds, and I’ve had people crying. And always get a pre-approval before you are even walking into a home. Why would you want to be disappointed? Why would you want to waste your time? We waste a realtor’s time, waste a seller’s time. For me, if I’m buying something, I want to know I can buy it. I think there’s nothing more frustrating or challenging. Like buying a home is such a huge transaction. When you’re working with us, it’s maybe like five hours’ worth of time. But when you’re buying a home, sometimes it’s like a 40-hour process. You’re paying for inspections. You’re going to look at 20 homes, and realtors don’t get paid unless the home closes. They sell the house. They are self-employed. Obviously, we need to protect their time. We need to have their resources, and I think it’s just so important. You don’t want to be disappointed, and I think people get their hopes up, and they can see themselves as living in the home. And that’s why I think if you’re going to be making an offer on a home, you want to know that you can be approved.

Dan Ahlstrand
Valuable information on this summer edition of Mortgage 101. We’re going to take another break. We’re back in minutes.