Category Archives: adjustable rate mortgages

Latest in Mortgage News: Stress-Test Rate Drops After a Year of No Change

 

The benchmark posted 5-year fixed rate, which is used for stress-testing Canadian mortgages, fell yesterday in its first move since May 2018.

The Bank of Canada announced the mortgage qualifying rate drop to 5.19% from 5.34%. This marks the first reduction in the rate since September 2016.

The rate change came as a surprise to most observers, since it’s based on the mode average of the Big 6 banks’ posted 5-year fixed rates. And there have been no changes among the big banks’ 5-year posted rates since June 21.

As reported by RateSpy.com, the Bank of Canada explained today’s move as follows:

“There are currently two modes at equal distance from the simple 6-bank average. Therefore, the Bank would use their assets booked in CAD to determine the mode. We use the latest M4 return data released on OSFI’s website to do so. To obtain the value of assets booked in CAD, simply do the subtraction of total assets in foreign currency from total assets in total currency.”

If that sounds convoluted, RateSpy’s Rob McLister tells us this, in laymen’s terms: “What happened here was that the total Canadian assets of the three banks posting 5.34% fell much more than the total Canadian assets of the three banks posting 5.19%. The 5.19%-ers won out this week,” McLister said.

Of the Big 6 banks, Royal Rank, Scotiabank and National Bank have posted 5-year fixed rates of 3.19%, while BMO, TD and CIBC have posted 5-year fixed rates of 5.34%.

“It’s one of the most convoluted ways to qualify a mortgage borrower one could dream up, McLister added. “It’s almost incomprehensible to think random fluctuations in bank assets could have anything to do with whether a borrower can afford his or her future payments.”

In his post, McLister noted the qualifying rate change means someone making a 5% down payment could afford:

  • $2,800 (1.3%) more home if they earn $50,000 a year
  • $5,900 (1.3%) more home if they earn $100,00 per year

Teranet Home Price Index Continues to Record Weakness

Without seasonal adjustments, the monthly Teranet-National Bank National Composite House Price Index would have been negative in the month of June. Thanks to a seasonal boost, however, the index rose just 0.5% from the year before.

Vancouver marked the 11th straight month of decline (down an annualized 4.9%), while Calgary recorded its 11th monthly decline (down 3.8%) in the past 12 months.

“These readings are consistent with signals from other indicators of soft resale markets in those metropolitan areas,” the report said.

But while Western Canada continues to grapple with sagging home sales and declining prices, markets in Ontario and Quebec are already posting increases following weakness in the first half of the year.

Prices in Toronto were up 2.8% vs. June 2018, while Hamilton saw an increase of 4.9% and London was up 3.3%. The biggest gains continue to be seen in Thunder Bay (up 9.2%), Ottawa-Gatineau (up 6.3%) and Montreal (up 5.4%).

Don’t Expect Housing Market to Catch Fire Again

Don’t hold your breath for another spectacular run-up in real estate as seen in recent years, say economists from RBC.

“A stable market isn’t a bad thing,” noted senior economist Robert Hogue. “This is sure to disappoint those hoping for a snapback in activity, especially out west. But it should be viewed as part of the solution to address issues of affordability and household debt in this country…It means that signs indicating we’ve passed the cyclical bottom have been sustained last month.”

Home resales in June were up marginally (0.3%) compared to the previous year, which Hague says provides “further evidence that the market has passed its cyclical bottom.”

Meanwhile, the national benchmark home price was down 0.3% year-over-year in June, “tracking very close to year-ago levels.”

Hague says these readings are good news for policy-makers, who he says want to see “generally soft but stable conditions in previously overheated markets.”

Source : Mortgage Broker News – STEVE HUEBL  

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How rising interest rates are squeezing homeowners

Mortgage holders on tenterhooks as they prepare for Bank of Canada’s next rate announcement Oct. 25

Gerry Corcoran is bracing for Oct. 25. That’s when the Bank of Canada will make its next interest rate announcement, on the heels of two consecutive rate hikes. Corcoran said he can’t afford a third.

“A lot of us with variable rate mortgages are on pins and needles because we’re like, ‘Are we going to get hit again?'”

‘It’s kind of smacked my finances around a little bit.’– Gerry Corcoran, new homeowner

Corcoran, 38, signed the mortgage for his two-bedroom condo in Stittsville back in June.

Two weeks later, on July 12, the Bank of Canada announced a rate increase of .25 per cent, the first increase in seven years. It was followed by a second .25 per cent increase in September.

As someone with a variable rate mortgage, Corcoran says those small rate hikes have had a sizeable impact. He estimates they’ll cost him about $65 per month.

While it’s a cost he says he can absorb, as a new homeowner Corcoran only has a few hundred dollars a month in disposable income. It’s also meant he’s had to put on hold his plan to enrol in his employer’s matching RRSP program until next year.

“It’s kind of smacked my finances around a little bit,” he said. “It hurts.”


 


Gerry

‘A lot of us with variable rate mortgages are on pins and needles because we’re like, ‘Are we going to get hit again?” (Ashley Burke/CBC News)

Homeowners in ‘panic mode’

After years of record-low interest rates, people in the mortgage business say they’ve been waiting for this other shoe to drop.

Erin MacDonell, a mortgage agent with Mortgage Brokers Ottawa, says she saw a spike in calls after the rate hikes. Many callers were eager to buy — or refinance their mortgages — before rates went up again.

“People are in a little bit of a panic mode,” MacDonell said.

But even if interest rates continue to climb, she says a new federal “stress test” will help mortgage holders weather the changes.

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Mortgage agent Erin MacDonell says calls from both potential buyers and homeowners looking to refinance spiked when the Bank of Canada announced a rate increase in July. (Ashley Burke/CBC Ottawa)

Under the safeguard introduced last October, a borrower had to be approved against a rate of 4.64 per cent for a five-year loan — even though many lenders are offering much lower rates. That rate is now 4.84 per cent.

The test applies to all insured mortgages where buyers have down payments that are less than 20 per cent of the purchase price.

“No one should be struggling too, too much,” MacDonell said.

Instead, she predicts future rate hikes will simply mean “people won’t be qualifying for as big of a house as they maybe wanted in the past.”

Gerry Corcoran says despite being forced to tighten his belt, buying was still the right choice for him.

“At the end of the day, even with mortgage and condos fees, I am still paying less to own this place than [I’d pay] to someone else to rent it.”

Source: Karla Hilton · CBC

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New financing rules could drive more consumers into more volatile mortgages

Proposed changes to mortgage rules may force some consumers to consider more volatile variable rate mortgages in order to qualify under a strict stress test proposed by Canada’s banking regulator.

Guidelines published by the Office of the Superintendent of Financial Institutions in July, which the agency is now receiving feedback on, would change the qualifying rules for uninsured mortgages in Canada — a less regulated segment of the market made up of consumers who have down payments of 20 per cent or more.

The rules under consideration would force consumers to qualify for loans based on the rate on their contract plus 200 basis points, a move that might lead some people into shorter term loans that have lower rates and are therefore easier to qualify for.

“It could be one of the unintended consequences,” said Benjamin Tal, deputy chief economist with CIBC World Markets Inc., about the changes. Tal believes OSFI will modify its proposal before it is finalized and one of the factors under consideration could be how the rules might discourage Canadians from locking in their rates.

Rob McLister, the founder of ratespy.com, said the potential impact of the changes can be seen when examining the current yield curve, which shows longer term rates are still much higher. As an example, with the prime rate now 3.2 per cent and the average discount on a five-year variable rate mortgage around 65 basis points, that means those consumers would have to qualify based on a rate of 2.55 per cent plus 200 basis points or 4.55 per cent.

 

“Generally, the variable will be cheaper. Maybe the one-year or two years (even more so). We have people who can’t qualify because of 10 basis points. I think it will force at least 10 per cent of uninsured borrowers to look at shorter-term rates that have more risk,” said McLister, who notes the average five-year fixed rate mortgage is more like 3.19 per cent.

Those consumers looking for the safety of a five-year rate would end up having to qualify based on 5.19 per cent with the 64 extra basis points meaning they could get a larger loan by borrowing at short-term rates.

The Bank of Canada has raised its overnight lending rate twice in the last two months and may do so again in October. Such hikes, which affect variable-rate products that are tied to prime, are part of the risk that comes with a floating rate product.

CONVENTIONAL BORROWER

McLister said a typical conventional borrower would qualify for a home that’s about six per cent more expensive by choosing a lower more volatile variable, one- or two-year rate instead of a “safer” five-year fixed.

That assessment was based on latest median household income from Statistics Canada, average non-mortgage debt, a 30-year amortization and a 20 per cent down payment

The OSFI changes fly in the face of previous government policy, which had tried to entice people into longer-term products by making the qualifying easier.

Consumers with less than 20 per cent down on a mortgage and their loans backed by Ottawa already must qualify based on the five-year Bank of Canada qualifying rate of 4.84 per cent. That rule change was made in October, 2016 but previously those high-ratio borrowers could use the rate on their contract if they were locking in for five years or longer.

Robert Kavcic a senior economist with Bank of Montreal, said households in Toronto — currently facing rapidly declining sales and an average price correction of almost 25 per cent from the April peak, can withstand more rate increases but he agrees people on the fringe may turn to shorter-term money to get into the housing market.

“I think the goal is to make sure people can pay higher rates two or three years down the road,” said Kavcic.”It does sound like there is more caution (about proposed changes) given what is happening in the Toronto market.”

Source: Financial Post – Gary Marr gmarr@postmedia.com

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Proposed mortgage rules aim to reduce financial risk in Canada’s hot housing markets

Vancouver has one of the hottest housing markets in Canada. New mortgage rules proposed by OSFI aim to mitigate the financial risks.

New rules proposed by the federal government to curb financial risks associated with the country’s hot housing markets could make it more difficult to secure a mortgage.

The Office of the Superintendent of Financial Institutions’ new guidelines proposed Thursday include stress tests for uninsured mortgages — loans secured with a deposit of at least 20 per cent on the value of the home.

Those homebuyers will now have to show that they can withstand a two per cent increase on their contractual mortgage rate. This would apply to variable and fixed-rate mortgages, regardless of term.

Using a million-dollar home as an example, buyers looking to secure a mortgage with a 20 per cent down payment at a three per cent interest rate would have to prove they could pay up to $4,652 per month instead of the $3,786 on their contract — a difference of $866 per month.

The changes come as the Bank of Canada looks set to increase interest rates as soon as next week for the first time in seven years.

CANADA-HOUSING/

The B.C. and Ontario governments have been using different tactics to try to cool housing prices in major cities. (Mike Cassese/Reuters)

“Persistently low interest rates, record levels of household indebtedness, and rapid increases in house prices in certain areas of Canada (such as Greater Vancouver and Toronto), could generate significant loan losses if economic conditions deteriorate,” OSFI wrote in a public letter.

But those working in and studying the real estate market say those changes aren’t likely to make a difference, especially given that those uninsured mortgages tend to be less risky because owners have already proved they have access to capital for a down payment.

What experts say will have a greater effect on housing markets is the office’s proposal to ban co-lending arrangements, or bundled mortgages, that sidestep rules designed to clamp down on risky lending.

The regulator said it is considering “expressly prohibiting co-lending arrangements that are designed, or appear to be designed, to circumvent regulatory requirements.”

Fear of a housing bust

Reuters reported in January that regulated mortgage providers were teaming up with unregulated rivals to circumvent rules limiting how much mortgage providers can lend against a property.

The arrangements have proliferated as Canadian regulators tightened lending standards to shield borrowers in case a decade-long housing boom goes bust.

“Bundled” or co-lending agreements with an unregulated entity can enable lenders to offer combined mortgages worth up to 90 per cent of a property’s value. Under federal rules, regulated lenders in Canada are not allowed to lend more than 65 per cent of the value of a home to borrowers with bad or nonexistent credit records.

They also cannot lend more than 80 per cent of a property’s value — even to borrowers with solid credit — without obtaining government-backed insurance.

city of vancouver empty homes

B.C. recently implemented a tax on foreign homebuyers as part of an attempt to reduce real estate demand and prices. (Rafferty Baker/CBC)

Under rules rolled out last October, that insurance requires the banks to run income stress tests on borrowers.

“When you’re looking at excited housing markets, you’re really concerned about where the capital is coming from,” said Tsur Somerville, a senior fellow with UBC’s Centre for Urban Economics and Real Estate.

“In terms of trying to cut down on the flow of capital in the housing, in particular in Toronto and Vancouver, cutting down on the bundling is probably the most important piece.”

Somerville guessed the intention behind the new regulations is likely a mix of wanting to cool those hot housing markets and mitigate risk in the financial sector.

Mortgage brokers concerned

Grant Thomas, founder and partner with The Mortgage Group, said he was concerned about the proposed changes — especially in big-city markets where homes often sell for millions of dollars.

Thomas said bundled mortgages are probably less than a third of all mortgages, but are often used when homeowners are financing the construction of a new home or are in between selling and buying a home.

Mortgage delinquency rates in Canada remain low even in cities like Toronto and Vancouver, he points out.

“The government has been intrusive in our industry in the last three years, and they continue to be so at a rate that is probably unnecessary,” he said.

“I’m not overjoyed whenever the government involves itself in business.”

Affordable housing in Nova Scotia.

Canadian regulators have tightened lending standards to shield borrowers in case a decade-long housing boom goes bust. (Robson Fletcher/CBC)

Thomas said his company and Mortgage Professionals Canada are planning to spend the next few days examining the proposed changes.

The Office of the Superintendent of Financial Institutions is accepting comments until Aug. 17. It said it will finalize the guidelines and set an effective date for implementation later in 2017.

The office said the proposed changes would be guidelines that federally regulated financial institutions would be expected to follow.

 

Source: Maryse Zeidler, CBC News

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What the latest rate hike means for you

Those with mortgages will feel the hike the most

The Bank of Canada is hiking its benchmark interest rate by a quarter point to one per cent. So, what does that mean for people with credit card debt or a mortgage?

Economist Bryan Yu with Central 1 Credit Union says if you’re carrying a lot of debt on your credit card, you’ll probably start to notice higher interest charges.

“They’re going to be facing the quarter-point increase on terms of that debt for their servicing… That’s a quarter point on an annual basis. So, it is going to be a bit of a pinch going forward.”

“Likely, we are going to see a couple more hikes going forward,” he speculates. “But I think at this point, it will be relatively stable for most individuals until about next year.”

So, it might be a good time to start chipping away at that balance.

“They should keep in mind that this is sort of the early stages of a longer-term rate cycle. So, they may want to be looking at paring back some of that debt over time,” says Yu.

“When it comes to credit card debt, it’s a normally high cost debt, unlike mortgages, which is relatively cheap money. So you don’t really want to be holding on to that type of a debt going forward because of the high cost associated with it. So, if you are looking at paying off any debts whatsoever, it should be those high-cost loans.”

Effect on mortgages

For those with a mortgage, Economist Tsur Somerville with UBC explains who’ll feel this rate hike the most:

“If you have an adjustable rate mortgage, then your mortgage payments will be going up very, very soon. And if you’re on a fixed rate mortgage, it means that when you renew, you’re going to be looking at higher payments then.”

Somerville says while the Bank of Canada hiking its trendsetting rate won’t alone make a huge impact, it’s part of a process that is increasing the cost to borrowers, which could dampen the real estate market.

 

“You start seeing increases in what people will have to pay on their mortgages. That affects pricing and affects demand.”

He adds first-time buyers will be most affected. “Those are the people who are entering mortgages; they’re not carrying an existing mortgage. So, we would expect those to be the people who all of a sudden are looking at qualifying for a smaller mortgage and having higher payments on a mortgage than the existing amount.”

This is the second time this year that the Bank of Canada has moved the benchmark higher.

“I think if we get a third and fourth hike, I think that a kind of accumulated pattern that starts to have an effect on people,” says Somerville. “Any one-off effect, the amount and payment is relatively small and you can sort of brush it all off. But when they start piling up, [it starts] making a difference.”

Source: MoneySense.ca –  Martin MacMahon and Denise Wong, News 1130

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A potential way to end Toronto bidding wars

open

New home buyer Marko Sijakovic and his fiancée had to contend with months of looking and 10 bidding wars before they were finally able to purchase their first home.

Adding to the stress of a record-breaking market was the fact that Sijakovic didn’t how many other buyers he was up against, or how much they were bidding.

“You don’t know who you’re going against you don’t know how many there are. It’s a really grey area of what’s really happening,” he said. “Sometimes I felt like I was negotiating with myself instead of a counter party.”

Click Link To Watch Video

That is the case in much of Canada, where information on other bidders or a home’s history is not revealed by realtors. Today, Ontario’s Finance Minister Charles Sousa admitted to CityNews that there is a transparency problem.

“Buyers are frustrated every time they get into these bidding wars. We recognize more and more are happening not just in Toronto but it’s expanding beyond Toronto and the GTA,” he said.

He revealed it’s an issue he’s going to bring to the table when he meets with Mayor John Tory and federal Finance Minister Bill Morneau.

However, there is a way for buyers to get a little more transparency about who else is interested in their potential dream home. In July 2015, the Real Estate Council of Ontario introduced Form 801 – giving buyers the power to request documents with the names of other potential buyers and their agents. However, exactly how much people are bidding is still top secret for potential buyers.

In other jurisdictions, more transparency is the norm. In Australia, home bidding auctions take place on the property’s front door. All interested parties come face to face and go head to head.

Buyers there can also obtain home inspection results, sale-price histories and information on recent sales of comparable and neighbouring homes — without going to an agent to get the information.

In Nova Scotia, people in the market for a new home have access to a house’s history and information about properties in the neighbourhood. And over the border in Buffalo, every time a house changes hands, the old and new owners and the selling price are listed in the local paper.

Sijakovic says that he would have welcomed information like that when he was looking for a home

“In any real market the transparency needs to be there. It doesn’t matter what you’re going to buy,” he says.

Getting the Ontario market to make the change to public bids may make sense for buyers, but real estate experts say not everyone would embrace the change.

“It’s a different way of thinking, and getting the market to adopt that is going to be an uphill battle,” says MoneySense senior editor Mark Brown. He adds that more transparency wouldn’t be much help in cases where there’s only one offer on a house, or when a home is in a highly coveted neighborhood.

Realtor David Batori says when you’re on the other side of the bid, it’s better not to reveal information. Greater transparency for bidders may mean sellers don’t get the generous offers they’re hoping for.

When it comes to concerns about phantom offers, Batori believes it’s a thing of the past. But even realtors can never be sure.

“Sometimes you have a feeling,” says. “But I can never say for sure because you just don’t know.”

Source: 680 News – by NEWS STAFF Posted Apr 6, 2017

 

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De-mystifying mortgage penalties

Research has shown that over 83 per cent of people break their mortgages early, resulting in their incurring hefty mortgage penalties that sometimes far exceed the annual interest on a mortgage. People break their mortgages early for several reasons, including relocation, the end of a marriage relationship, loss of a job, to take equity out to invest elsewhere and for many other reasons. A mortgage penalty is a fee built into the contract to prevent or make it difficult for you to break the mortgage, in addition to compensating the provider for the loss of interest income. Different mortgage providers calculate the penalty in different ways, which is why it is always a good idea to shop around before settling on one particular provider. Also crucial is ensuring that you read the fine print before signing the mortgage document, so that you have an idea of the penalties (if any), that you are likely to incur in the event that you break the mortgage.
How mortgage penalties are calculated
Traditionally, banks and other lenders have used two main methods to calculate mortgage penalties. This means that in the past, you were assured of paying a standardised penalty depending on which method the bank used. As a rule, you could then expect to pay the greater sum calculated under the following methods:
The three month interest method: Here, you basically calculate the interest due on your next three mortgage repayments and pay the three month total.
Interest Rate Differential (IRD): The IRD is calculated by multiplying your mortgage balance by the difference between your original mortgage interest rate and the current interest rate that the lender can expect to charge upon reselling the mortgage.
The first method has typically been applied on variable rate mortgages, while fixed rate mortgages would use the ‘higher amount’ rule where they pick the larger sum depending on which method is used to calculate the penalty figure. However, with the advent of new mortgage lenders with cheaper interest rates and friendlier lending terms, banks have taken steps to reinforce their customers; including changing the way the IRD is calculated. Today, for instance, you may find that your prepayment penalty is calculated in the following ways:
  • Using posted rates as opposed to discounted ones, which significantly increases the penalty.
  • Basing their penalty calculations around a variety of factors including bond rates.
  • Rounding off to the next longest remaining mortgage term, and many others.
What this means for you as a customer is that your mortgage penalty is likely to be extremely high, or you may find yourself stuck with your current mortgage provider in order to avoid incurring an exorbitantly high penalty. Unfortunately, unless you are an insider in the mortgage industry, you may also find yourself unable to calculate the rate personally, forcing you to rely on the formulas that your lending partner has come up with. Fortunately, there are ways to avoid finding yourself in this situation or at least significantly reduce the penalty you pay to your mortgage lender.
How to protect yourself from high penalties
Whether you are just starting to shop around for a mortgage or are looking to offload a current one in favour of a friendlier option, the following strategies can help you avoid paying a hefty penalty:
  1. Read your mortgage contract thoroughly: Take time to completely go through your contract before signing the document. Ensure you find out exactly what penalty you will be expected to pay in case you decide to break your contract early. Ask your mortgage agent to clarify how the penalty will be calculated and if possible, have a lawyer or other mortgage professional go through the document with you. Make sure to seek clarification on terms you do not understand and ensure that you are clear about any other costs associated with breaking your mortgage early. Ensure to read the fine print and only sign when you are completely satisfied with the terms of the mortgage.
  1. Understand, and take advantage of pre-payment clauses: Pre-payment clauses allow you to pre-pay up to 20 per cent of the balance of your mortgage annually without incurring a penalty. Pre-paying your mortgage allows you to significantly reduce the amount of your mortgage so that you can decrease the penalty you have to pay for breaking the contract. In addition, you can often take advantage of the end and beginning of a calendar year to double your prepayment in order to bring the mortgage balance down even further. For example, you could pay the first instalment at the end of December, and the other as soon as the financial year begins in January. Pre-payment allowances can vary from lender to lender so ensure you understand what options you have.
  1. Ensure that the contract allows you to break your mortgage: One of the most crucial things to look out for before signing the mortgage contract is whether the lender will allow you to break the contract early. Some lenders have clauses built into the contract prohibiting you from breaking it early and ensuring that you pay a very hefty penalty in the event that life circumstances force you to break it unintentionally. Sometimes, these types of “restrictive” mortgage products can come with lower rates. These lower rates are to make up for the fact you can’t break the mortgage early! These lower rates can be tempting, but without having a complete understanding of the mortgage product and it’s restrictions, they can lead to an unfortunate surprise down the road should you decide to break your mortgage early.
  1. Enlist the help of the Ombudsman for Banking Services and Investments Office: While IRDs remain unregulated for now, consumers with valid complaints may still enlist the help of the OBSI office if they feel that their penalties are too punitive. If you have been unable to successfully negotiate a reduction of the mortgage penalty with your mortgage lender, you can get some help from the OBSI, and even get part of the penalty reimbursed if the office rules in your favour.
  1. Learn how to calculate the penalties yourself: Educate yourself about how the various penalties are calculated in order to avoid situations where your mortgage lender rips you off because you are uninformed. As a rule of thumb, variable rate mortgages will use the three-month interest method, while fixed term mortgages will use the IRD. If you are still unsure on how to go about it, contact a trusted mortgage professional who will be happy to help.
Taking out a mortgage is a great way to get a place to call a home or premises to conduct your business. However, changes in life circumstances, the desire to move somewhere else, or simply wanting to access additional equity can force you to break your mortgage contract early, resulting in hefty penalties from your mortgage lender. Canadian mortgage laws are yet to regulate how the mortgage penalties are calculated, which means that many people find themselves at the mercy of mortgage providers as far as penalties are concerned.
Fortunately, there are a few steps you can take to protect yourself from hefty penalties or at least significantly reduce the amounts you pay upon breaking your mortgage. With a little research, you should be able to discover the methods that work best for you. A mortgage loan will likely be the biggest debt you incur in your life and it’s very important to ensure you have a good understanding of the mortgage product’s terms and conditions. Most importantly, ensure to work with a trusted mortgage professional who can help explain the terms of your mortgage commitment to you, and address your concerns about the associated penalties should you decide to break the mortgage down the road.

Are you looking to invest in property? If you like, we can get one of our mortgage experts to tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much they could save you right now if you have an existing mortgage.

Source: WhichMortgage.ca – By Dan Caird  24 March, 2017

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