“Risky” Variable rate mortgages? Not so Fast…

Mortgage Tips Shaun Serafini 25 Sep

“A Variable rate mortgage? Too risky for me!!”

This is probably one of the most frequent, and most costly misconceptions I see in mortgages. 

The true risk of a mortgage is in erosion of a family’s net worth. I’m not talking erosion caused by a $25-50 change in a person’s payment when Bank Prime rate changes. I’m talking erosion caused by a payout penalty that can be 4 to 10 times higher (or more) than another available option. Check the two pics showing the identical mortgage, the only difference, one is a FIXED rate, one is ADJUSTABLE / VARIABLE rate:

Fixed rate example

Adjustable / Variable rate example


The fixed mortgage penalty (top) is 7 times that of the adjustable mortgage and over 4% of the total mortgage amount. That’s on a $172,000 mortgage. Imagine what that penalty looks like on a $650,000 mortgage!

In 14 years of doing mortgages, I am here to tell you that LIFE HAPPENS! The best laid plans, strategies and goals can be undone by a single change of course along the journey. 

The smartest, most prepared, most informed people get transferred, get promoted, get sick, get divorced, start businesses, have children etc. Often this requires or results in a recalibration of their current mortgage financing. 

In most cases, the chartered banks have the MOST punitive / harmful penalty calculations. If you knew how much money banks put on their “other fees & charges” revenue line due to early payout fees annually you would be shocked. It’s honestly crazy that such high penalties are even allowable. Statistics show that over 70% of 5 year mortgages are broken prior to their maturity. The average lifespan of a mortgage is 3.7 years before being broken or changed. And banks know this as well. The five year fixed mortgage is indeed the safest mortgage available – to the bank shareholders!  The true risk in mortgages lies in rolling the dice with less than 30% odds that you will see a 5 year term through to its maturity.

I use the saying (borrowed from an esteemed colleague) – “Life is variable, your mortgage should be too!” It has served many of my clients (myself included) very well over the years. 

Bottom line

Of course, the entire picture has to be known before a professional can properly determine which mortgage option fits one person / family’s circumstances. In some cases, the peace of mind that goes along with a Fixed rate is, in fact, a preferred option. In our role, we do our best to ensure that if the mortgage is to be set up with a fixed rate, that we align with a fair-penalty lender. That is the value and advantage of working with dozens of lending institutions. We can sidestep lenders that are known to have much more consequential penalties than others.

As a Mortgage Professional, my goal is to help manage the overall risk of your mortgage. We don’t want you to take on more risk than you are comfortable with by any means. Just want to make sure you don’t drive into the ditch trying to avoid a pothole!

Separation / Divorce doesn’t have to mean splitting from your home too

General Shaun Serafini 20 Mar

When we tie the knot with a soulmate, we assume it’s going to be forever. It’s pretty much written in the vows. Unfortunately not all marriages have fairytale endings. In fact, a significant amount of marriages in Canada end in divorce. The most recent data suggests 38 per cent of all marriages in Canada don’t last until death. Over 70,000 per year. The average marriage lasts 14 years, with 42 per cent of divorces occurring in marriages lasting between 10 and 24 years.

The reasons for the divorce rate are many and complicated and not really necessary to discuss here.

What we do know is, divorces can get ugly and costly for both individuals involved. And if the marriage is years old, there’s likely a home or property that gets caught in the middle.

A typical divorce scenario sees that when the couple breaks up, the matrimonial home is sold and what’s left over is split. In almost all cases, even when one party wants to keep the home, the lawyers, banks and other professionals recommend selling the home. It makes sense, since most couples get a mortgage they can afford together, not on their own. That or due to refinance regulations that came in to play a few years ago, the home is not seen to have enough equity to fully pay out one of the parties unless sold. If the home is full of memories, or children are involved, it can be an extremely painful situation. You not only have to start a new family dynamic, but also do so in totally new homes as well.

There is a unique alternative very few professionals even know exists. All three of Canada’s mortgage insurance providers, Canada Mortgage and Housing Corporation, Genworth Financial and Canada Guaranty, offer what’s called a spousal/partner buyout program.

This program allows one party to refinance the matrimonial home up to 95 per cent of its appraised value, and pay out any debts related to the marriage.

Traditionally, you can only refinance on an existing mortgage up to 80 per cent of the appraised value.

The program is considered a purchase, so all the requirements and qualifications needed in a traditional purchase mortgage apply. In this case, you’ll also need a purchase agreement and a separation agreement with all the debts and payments spelled out up front.

The buyout program is a one-time opportunity. It can be used to pay off other debts outside the separation agreement, but this depends on which one of the three insurers used.

Even with a helpful loan-to-value ratio, some people still can’t afford to take on the home on their own. The program can also allow people to bring on a cosigner in this scenario, often a new partner or family member.

At the end of the day, divorce is unfortunate and very difficult. The program strives to allow you to keep your home and kids can remain where they’ve grown up and feel comfortable. And that makes the situation at least somewhat more bearable.

If you find yourself in a relationship / matrimonial breakdown and you’re not sure what to do about your home, a mortgage professional who has experience with this program should be consulted before making any important decisions. We can work with the lawyers to ensure proper steps are taken initially to ensure this program is considered and to determine if it can be used to keep the matrimonial home if desired. Even if you’ve already been told “No” by your bank / existing lending institution.

Click HERE to get in touch for information / advice on this program. All conversations are in strict confidence!

For Rental Properties, Cash (Flow) is King

Mortgage Tips Shaun Serafini 25 Jan

Ask pretty much anybody about mortgages and the first, sometimes only thing they want to talk about is the interest rate. In my business as a Mortgage Professional, my job is to educate clients that while interest rate is definitely a cornerstone of your mortgage decision, it is not the only factor to consider when agreeing to sign a mortgage commitment. In many cases, the lowest interest rate does not represent an ideal fit, especially when the actual mortgage isn’t aligned with customer’s stage of life, priorities, or long-term outlook. Rental properties are a prime example of mortgage situations where basing a decision solely on the rate is often short-sighted and in some cases detrimental to the long term viability of one’s investment.

Rental properties can be a lucrative way to diversify investments, build passive income and long term net worth. They can also be costly, rigid and very problematic if you don’t choose the right property, area, tenants and MORTGAGE PRODUCT. Like any investment you are going to do your research before buying – RIGHT? And you are going to take your time and screen potential tenants vs taking the first Kijiji reply from @fraudster.com offering a cash deposit higher than you have specified – RIGHT? I’ll leave that part up to you. Where I come in is ensuring that the mortgage product you are using allows you the most  flexibility on your payments and  overall investment. The best way to ensure that your rental investment does not become a sucking vampire on your personal bank account is to minimize the cash outlays you are obligated to make.

Enter the Home Equity Line of Credit (HELOC).

In my 10+ years of doing mortgages and owning investment property, the HELOC is far and away my favourite product for investment properties.

First & foremost – CASH-FLOW. HELOC’s allow you the option of making interest-only payments monthly.  The monthly payments on a standard $200K mortgage using current 5 yr fixed rate of 3.39% for example are $987. Interest only payments would be about $650. That’s a cash flow difference of $340. Think of a vacancy – they happen. That’s $340 of your own money that you don’t have to pull out of personal savings to cover while your investment income is stalled.

Having the ability to scale back or minimize your cash outlays can be the difference between good and bad when it comes to an extended vacancy, renovation or unforeseen expense such as a repair or insurance claim. This very feature has allowed me to take the time needed to properly screen potential tenants when I have a vacancy and not rush into leasing to the very first interested reply. I can tell you that one of the worst mistakes that can be made with a rental is to scramble to get tenants in so they can start paying rent only to find out you picked the wrong people.

HELOC’s also offer a number of additional features:

  • Fully open – imagine somebody comes along offering you top dollar for your investment property. A HELOC is fully open meaning it can be paid off immediately without restriction or early payout charges. You can accept the offer and cash out immediately without seeing profits eroded by penalty charges and fees. With a standard mortgage you may have a payout penalty ranging from 3 months interest into the tens of thousands depending on mortgage type & institution (cringe if you have a fixed mortgage with one of the Big 5 Canadian banks).
  • Revolving – so you’re an investment property wizard and the cash you are making has allowed you to pay down the HELOC we set-up dramatically. You can use the available space on your current HELOC towards the purchase of another property. Keep your personal savings and investments in tact and don’t have to ask permission to access the equity. That’s the beauty of revolving credit.

The main (only) drawback to a HELOC over a standard, amortizing mortgage is that the interest rate tends to be slightly higher (about .50%). To me this argument rings hollow. Since your rental property is essentially a business, the interest that you pay on a mortgage is eligible to be written off for tax purposes. Given the strict criteria involved in qualifying for mortgages these days, I’m willing to bet most people with rental properties are already showing income that has them in an elevated tax bracket. That means that every extra dollar of profit reported on tax returns gets annihilated by CRA. Sometimes increasing an individual’s interest expense actually helps them bring their reported profits on rentals close to breaking even and honestly that’s why we have accountants (SIDE NOTE: please use an accountant if you are going to play in the investment game).

Finding lenders who offer HELOCs on rentals isn’t easy, especially if you are wanting only 20% downpayment (80% LTV). Most lenders these days want more meat on the bone (equity) for rental properties. There are definitely good lenders out there doing rental HELOCs at 80%LTV. That’s where a call to your trusted Mortgage Advisor and the proper strategy can payoff in spades.

HELOCs are not just a great product for rental properties. Click HERE to visit an earlier blog I wrote discussing the full range of benefits a HELOC can offer as a mortgage strategy.

Mortgage Decision Making: Embrace, Don’t Fear the Variable

Mortgage Tips Shaun Serafini 31 Mar

Ah yes, the age-old ‘Fixed vs Variable’ debate when it comes to mortgages…

Analysis from one of our top lenders:

“There is the notion that the big, trend-setting lenders will be looking to move (fixed) rates up to bolster profits. As well, Bank of Canada Governor Stephen Poloz has hinted he might be willing to let inflation run in order to avoid hiking the policy rate. That would put upward pressure on government bond yields (Also affecting fixed rates). As for variable-rate mortgages, the betting is there will not be a Bank of Canada increase, holding variable rates in place for the foreseeable future.”

You read what the above quote is essentially saying right? Fixed rates are where banks etc. can turn to and manipulate to boost profits. Profits are good if you are a shareholder of a bank. Profits aren’t as cool if you happen to hold a borrowing instrument from one of those same banks. There’s a big reason that most banks aren’t rushing to market and push variable rate mortgages even though almost every one of them definitely has this in their arsenal. The reason is because variable mortgages typically favor the customer, or at least aren’t AS profitable as the fixed rate option.

Here’s an informative blog that a colleague of mine wrote: https://dominionlending.ca/news/top-4-reasons-why-a-variable-rate-mortgage-can-put-you-further-ahead/

In particular, the point that I find most relevant is the penalty calculation, usually a point that isn’t even brought up in the original mortgage application process. On a variable rate, the maximum penalty that can be charged is 3 months interest, in your guys case likely less than $2000 and a pretty basic calculation. A fixed penalty is a different beast altogether. The penalty on a fixed is the GREATER OF 3 months interest or a dreaded Interest Rate Differential (IRD) calculation. The IRD can be very punitive (I’ve seen over $20,000) and very difficult to calculate as it is based on bank posted or bond rates which change daily.

Here’s another colleague blog post that I like as it’s short, sweet and to the point: http://bit.ly/ARMvsFixed

My summary – Don’t believe media fear mongering suggesting to “lock in now or else!” whenever these headlines pop up. A variable rate strategy can be a very strong move to hammer down principal on your mortgage over the next 12-18 months.

Consider the strategy where we set your payment to what you’d pay on the higher fixed rate — all that extra money goes direct to principal. Net result, when / if rates rise, your balance is significantly lower and your budget already fits the rate increase. Despite what some publications would have you believe, rate increases are gradual and should not drastically affect most people’s cash flow situation. Sure your rate could be higher than present day fixed rates years down the road. This is no different than saying putting your money in GICs could produce a better result than investing in Apple stock. I’m willing to bet (and I have with my own personal mortgages) however, that the savings / net worth improvement that can result in the next 12-18 months plus added flexibility in reduced costs/penalties related to variable mortgages wins out over fixed in almost all circumstances. Decades of financial data on mortgage rates in Canada support variable mortgages consistently beating fixed, often by a large margin: (NOTE: Blue=fixed / Red=Variable)

Mortgage product selection is one small aspect of the value that an independent mortgage professional can offer clients. A licensed mortgage professional should bring more to the table than simply an approval and a low rate. By reviewing our client’s entire financial picture and outlook, we help build a plan that best aligns with the individual borrower’s goals & saves the most money overall on your mortgage, now and in the future.

Using a HELOC to Enhance your Financial Position

Mortgage Products Shaun Serafini 13 Mar

Do you have a large amount of equity built up in your home? Are you looking to further enhance your financial position? A HELOC may be just the type of financing that you are looking for.

HELOC is an abbreviation for Home Equity Line of Credit. Basically, a HELOC is a credit account that is secured by property that a person owns. This account can be drawn against for any number of reasons, such as paying bills, consolidating debt, making a large purchase such as vehicle, additional property, financing a new business venture, investing for retirement etc.

The HELOC option when used properly, can be a very powerful tool when looking to enhance one’s financial position. In most cases the interest rate offered on a HELOC is much lower than an unsecured credit line and funds available can be much higher because the line of credit is secured by valuable property. The interest rate on HELOCs typically sits at/around Prime rate, whereas unsecured lines usually are offered at Prime plus anywhere from 2 to 5%. Considering that retail credit cards often pack interest rates of up to 29.9%, you can see why it makes a lot of sense to have the option of a HELOC, especially for large purchases.

Aside from interest rate, there are several other attractive options that a HELOC can provide:

Interest Only payments –most Home Equity Lines allow for interest only payments, meaning your monthly obligation would be less than on a mortgage of the same amount. There is no amortization schedule or commitment to pay back principal required. This feature can prove very useful for cash flow management and is a major component of my investment property strategy for clients.
Fully-open – unlike a mortgage, there are no early payout fees if you decide to pay-off the line of credit. This option is very attractive to investors who are in the “Fix & Flip” or short term investment business.
Revolving Credit – The amount that you have registered for your line of credit is at your disposal for as long as you own the property. If you have a $200,000 line, you can use up to that amount at any time. That means no more having to wait for approval from a bank or lender in the future on large purchases.

A Home Equity Line also can work to enhance investments other than real estate such as RRSP purchases. If a person has $45,000 in RRSP room on their income tax available, wouldn’t they like to know that they have the option of making this max contribution if they feel it’s in their best interest? By setting up a home equity line and consulting a financial planner, one may be able to set up a plan that satisfies both short term and long term tax and investment strategies.

Think of these scenarios and imagine the benefits of a HELOC in each case:
• We’re renovating our house (improving our living and our asset)
• I’m consolidating my debt so I can get it paid off sooner
• I’m financing my own business
• We’re buying a revenue property and are concerned about cash-flow from rent / vacancy
• I’m clearing my credit cards to lower my borrowing costs
• We’re finishing our basement as a rental suite (to earn more income)
• I’m sending my daughter to university
• I’m reinvesting my mortgage to reduce my taxes
• We’re planning and paying for a wedding
• We would like to put a HELOC on our rental property so we can pay off the mortgage on our personal home.


As mentioned, a HELOC can provide many strong options to investors who have equity built up in a home. Homeowners can typically borrow or set-up a HELOC up to 80% of the value of a home.

Despite the advantages of flexibility and convenience, HELOC’s are not for everybody and require a higher level of financial management than a typical mortgage loan. For this reason, the requirements for obtaining a Home Equity Line of Credit are much tighter than on a traditional loan. In most cases, HELOCs are reserved for customers who display very high credit ratings and strong credit history. The interest rate on this type of account is tied to prime meaning that as interest rates go up, so too will monthly obligations.

As with any financial decision, it is always recommended that you consult with a professional. A mortgage professional specializes in consultation with clients in regards to mortgage and loan options and knowledge of all products available. It is our job to align you with the mortgage product that best fits your financial scenario / situation.

Please feel free to contact me for questions on HELOC’s or any home financing related questions.

If you’d like to apply for a new mortgage, click HERE to start with our secure online application. 10 mins is all it should take to get us working on your behalf.