What Is Mortgage Increase And Blend?

Homeowners are taking advantage of historic low interest rates whether they are fixed, around 3%, or deeply discounted variables around prime less 0.5%.  Majority of homeowners and real estate investors choose a 5 year term, but what happens in the future if it is required to increase the mortgage amount for the purpose of debt consolidation, equity take out for investment purposes, or moving to a new home?

Home Equity Take Out Options

Example: Property value $480,000. Current mortgage balance is $250,000 at 3.09% with 3 years remaining till maturity and the homeowner wants to borrow $150,000 to buy an investment property.  There are 3 options for the homeowner to entertain:

1. Break the mortgage and restructure up to 80% based on current market value. Con: paying a penalty and refinancing at a higher interest rate (assuming interest rates will not be at 2.99% in 3 years time)
2. Add a HELOC up to 80% of current market value: HELOCs are offered at prime+0.5%. Good option since it is setup separately and interest costs can be easily tracked for income tax deductions
3. Increase & blend: Leaving the current mortgage at 3.09% unchanged, the homeowner can add another $150,000 to the mortgage based on current mortgage interest rates with the new mortgage maturing at the original date. In this case, a 3 year fixed term would the product choice.

The above illustrates the options for a fixed mortgage holder. The options are different for variable mortgage holders:

1. Refinancing the mortgage with the penalty being 3 month interest
2. Adding a HELOC up to 80% of current home value
3. Increase and blend is not an option lenders offer. To my knowledge only one lender allows increase and blend for variables. ING Direct used to allow it, however that might have changed after the acquisition by Scotiabank and renaming to Tangerine

One thing to look out for is the fine print detail for no frills mortgages (ultra low rates) as some might restrict the homeowners ability. For example, BMO's 2.99% offer allowed the homeowner to refinance only with BMO and did not allow adding a HELOC. Since the homeowner has no negotiating power they are at the mercy of the bank when it comes to interest rates.

There is more to mortgages than interest rates. Rates are the cost of getting into the mortgage, however the fine print can cost thousands more.

To navigate through the mortgage minefields and for a hassle free transparent experience please contact Nawar.

Mortgage Rates Are Up....Already!

There has been lots of talk about interest rates not moving up for the next year or two.  But mortgage rates are up already! There are two types of mortgage products: fixed rate and variable rate.  Variable mortgages are based off prime rate which is set by Bank of Canada's benchmark rate, whereas fixed mortgages are based off bond yields.  As per the Bank of Canada's most recent announcement, the benchmark mark rate remained unchanged which effectively left all variable mortgages, HELOCs and unsecured lines of credit unchanged. However, the bond market has experienced a sharp increase in yields which pushed fixed mortgage rates higher.

Variable Mortgage Rates

Bank of Canada's benchmark rate is a tool to control inflation around the 2% level.  As inflation creeps up, the Bank of Canada increases its benchmark rate to slow down spending due to the higher costs of borrowing. On the other hand, when the economy contracts (recession), the Bank of Canada reduces its benchmark rate to stimulate spending and economic growth.  Currently, Canada is in a stable inflationary period, therefore the prime rate has not changed for a few years and should remain close to the 3% level in the near future.

Fixed Mortgage Rates

You might be wondering, why did fixed mortgage rates move while prime rate did not?

The bond market movements are influenced by good or bad economic news. Good economic news result in money moving from the bond market, which offers low returns since it is considered a secure investment, into the stock market for higher returns.  For the bond market to be attractive for investors, yields increase. As yields increase, fixed mortgage rates increase.  Good economic news such as job creation, GDP growth, improved housing numbers result in upward pressure on bond yields and fixed interest rates.  The US economy has been showing signs of improvement which caused the recent increase in fixed mortgage rates.

There you have it, now you know why fixed mortgage rates have increased and variable mortgages have not.

With the recent 5 year mortgage rates increase, the difference between 5 year and 10 year fixed mortgages is at an all time low, is it time to rethink the 10 year fixed mortgage strategy?