The recent interest rate increases from the Bank of Canada will affect many Canadians. But the question of the day is: Do you know how a 1% interest increase will affect your budget?
We tend to think that a 1% increase in our mortgage rate is no big deal but it is. A 1% increase in your mortgage from 3% to 4% actually increases the cost on your mortgage by 33%.
Today’s guest is Brent Hughes, who is here to discuss the impact of higher, or lower, mortgage rates, and how you can calculate the financial impact for your mortgage. There are two times throughout the life cycle of a mortgage that most people receive professional advice: the beginning of the renewal term, and the end. The problem is interest rates are constantly changing during your mortgage term. Brent’s company, Monitor my Mortgage, helps give people the information they need to make the right choices on renewing your mortgage mid-term by notifying you of the impact of a rate change compared to your potential penalty over different mortgage options.
How Interest Rates Affect Your Mortgage
It’s important to look at the big picture when when interest rates change. You need to look at not just the change in your monthly mortgage payment but how much more (or less) you will be paying over the lifetime of your mortgage. At renewal time that might be easy. You sit with your mortgage broker or lender and they can prepare a new amortization table to tell you the differences between your current mortgage rate and the rate you might get on renewal.
But what about mid-term changes?
If you want to take advantage of rate changes mid-term you must factor in your penalty. A variable penalty is usually about three months interest. But penalties vary by lender, some have extra fees written in on top of the rate differential. You have to know your contract and then compare this to any interest savings you might get by renewing at a different rate. Combine this with the fact that there are a lot of different rate options out there & this becomes difficult which is where Brent’s software comes into play.
Things to consider for in-term renewals:
- How much longer do you have on your term?
- Are rates rising or lowering? If rates are rising you might want to cancel a fixed rate mortgage and renew early. If rates are lowering maybe you want to lock in if you have a variable rate loan.
- What’s your current credit look like? If it’s not good right now, it may be wiser to repair your credit before trying to renew mid-term even if rates are dropping since you may not qualify for a lower rate.
- Did you change your job recently? A change in your employment situation can affect the way banks look at your situation when it comes time for renewal and might affect the rate you are offered.
Brent recommends constantly monitoring rate changes and the impact on your mortgage. Don’t just wait for your standard renewal date. That’s what his app helps you do. With this information you can make an informed decision about what to do as rates are moving.
Resources mentioned in this show:
- Bank of Canada increases overnight rate target to 1 per cent
FULL TRANSCRIPT show #162 with Brent Hughes
Doug Hoyes: After many years of low interest rates, interest rates are now increasing and many experts believe we’ll see continued interest rates increasing in Canada well into 2018. If The Bank of Canada increases interest rates, mortgage interest rates will continue to go up. That’s not an immediate problem if your mortgage is locked in for the next five years, but if you have a variable rate mortgage or your mortgage is due for renewal in the near future, rising interest rates could have a significant impact on your monthly cash flow.
We tend to think that a 1% increase in your mortgage interest rate is no big deal. But if you have a mortgage at 3% interest, a 1% interest rate increase actually means that your interest rate is now one third higher, that’s one over three higher, and that’s 33%, which is huge. Here’s another way to look at it, if you have a $500,000 mortgage at a 3.25% interest rate, amortized over 25 years, you’re paying $2,430.83 a month, an increase to 4.25%, which is only a 1% increase or 100 basis points as the economists would say. That puts your monthly payment up to $2,698.30.
Now again, that might not seem like much but that’s an extra $267.47 a month, do you have an extra $267.40 per month in your cash flow? And just so you know an extra $267 a month over a 25 year mortgage is more than $80,000 in extra payments over the life of the mortgage. That’s huge and that’s why mortgage interest rate increases are such a big deal.
So, you want to keep your interest rate as low as possible but if your mortgage is coming up for renewal, how do you know if you’re getting the best deal? What if your bank just renews you at the rate they think they can get away with charging you? That could cost you a bunch of money in the future.
Today on Debt Free in 30 my guest has a new tech start-up that helps homeowners explore their mortgage options. He also has some thoughts on fixed versus variable rates and how new financial technology is impacting our financial decision making. So, with that background let’s get started. And meet my guest. Who are you and what do you do?
Brent Hughes: Hi, it’s Brent Hughes and our business is Monitor my Mortgage and we created a software platform app, software platform both desktop and mobile to manage a little bit different than where you were talking, manage in-term mortgages.
So, the industry chases the renewal or the net new mortgage, we assist consumers on a day to day basis for exactly what you were talking about as far as when rates change, how does that impact me today? I don’t want to wait five years. It hasn’t factored in what I may have as far as life changes, new baby, job change. So, we are very focused on the in-term mortgage part of the business.
Doug Hoyes: Interesting. Well, great thanks for being here Brent and I want to dive into that in a little bit more detail. But before I do I want to give my audience my standard disclaimer and that’s this, I don’t pay guests to appear on this show and guests don’t pay me to appear on this show. Debt Free in 30 is not an infomercial for my guests or for any products so I invite my guests onto the show because I think they have useful, practical information to share with my listeners. So, you’re not going to hear any affiliate links or anything like that mentioned in the show.
So, with that disclaimer tell us a bit more about this product. So, it’s called Monitor my Mortgage and you said it’s more targeted at not the renewal market but someone who has an existing mortgage, so explain what you mean by that. I mean if I’ve got an existing mortgage, why do I need any additional information?
Brent Hughes: Probably the simplest way to sort of explain why we created this software was I’ve done it as a consumer. So, one of the most frustrating things to me was to listen on the radio and hear Bank of Canada is changing its rate, which is great to hear but I don’t actually know how that impacted me over my different mortgages over the years. So, I quickly pick up the phone, call my broker, they would tell me to check on what my amortized value is and what my penalty was. And if at that point they had that information they would then be able to provide me a solution or a stay put type scenario.
So, that to me is frustrating because I’ve sort of abdicated responsibility for what generally is my largest liability in the hands of somebody else. I don’t think I’ve ever had a call from any of my lenders to tell me that I should be looking at my mortgage midterm. So, we designed the software to do the calculation of the penalties based on your current situation. So, you have the scenario you gave where potentially somebody could be up to another $265 a month and where is that money going to come from?
This way, based on your notification level, so you decide what’s the minimum savings that interest you to at least open the door to start to discuss changing your mortgage in-term or over the life of the term, what’s the savings target you’re looking for, not on a monthly basis but over the remaining term? Because there are times where the software may say we can save you a thousand dollars net after your penalty but you’re about to get on a plane and head off with the family for a vacation, probably not the greatest time for you to make that decision. Now when you return from that vacation it may be an interesting thousand dollars to save. But it provides you the savings and the notifications based on your specific circumstance and your specific mortgage.
So, it takes two to three minutes to put your current mortgage in, then the system runs, you can run it on demand by simply pushing a button or it runs automatically for you nightly and provides you notifications. And so this is a consumer driven piece of software.
If I can add one more item, that question I met with a professional mortgage, a long-term mortgage professional, and the drew me a very simple drawing and it was a horizontal line with a vertical line at each end and he said that’s the life of a mortgage. He said, and he did a circle at the beginning, and he said this is when consumers make decisions on mortgages and this is when they make decisions at the end.
And his business was related to renewal and net new mortgages. And I said to him put an X where your competitors are and he put an X across the beginning circle and put an X at the end. And I said to him our software manages in between that. So every day you’re ignoring your customers, we’re helping them. We’re providing them information on where their mortgage is every day. So I said and when it comes time for them to either make an early renewal there’s a purchase, you know, they’ve sold their house, they’ve got a net new purchase, they’ll have the up to date information of where their position is.
Because most people don’t even know what their penalty is or how to figure it out, a variable penalty is very easy to understand about three months interest. But if you’re trying to figure out the interest rate differential, then find the information on your lender’s website and then do the calculation, most people won’t do that. They won’t find that out until they’re sitting with their lawyer on the payout statement. So, this provides them the day-to-day piece of mind really of where they stand.
Doug Hoyes: So the way it works I go into the program, this app on my phone and I punch in some basic information, you know, how much is owing on my mortgage, what the interest is when it comes up for renewal. And then –
Brent Hughes: Who’s your lender?
Doug Hoyes: Who my lender is. And what else do I have to put into it?
Brent Hughes: That – so, those are your – obviously when it started, you know, what’s the term, what’s your frequency of payment. Lender is critical because as much as everybody thinks the lenders are fairly similar on their penalties, they’re actually not, there are some extra charges here and there. So once you have that information there’s defaults on your notifications so minimum savings per month, minimum savings over the term to be notified, early renewal, when you want to be notified on your renewal dates, rate changes. So, when The Bank of Canada makes a rate change you want to know and be notified. All of those are defaults but you can adjust them based on your circumstance. After that if it takes you three minutes, that would be the most. And then the system runs.
Doug Hoyes: Got you. So, I set up my alerts and it says oh, guess what? Because I can’t remember when it was in the summer whenever The Bank of Canada raised rates and then they did it again in September I’d get some kind of alert that says ding, ding, ding rates have gone up so here is some potential advice for you. So, the app might suggest that I’m with Bank ABC now and I’ve got three years left to go on my mortgage but if I switch to a different lender I could save money, is that the kind of practical thing it’s going to tell me?
Brent Hughes: In the end we’re not a mortgage broker so we wouldn’t make a lender-specific recommendation. What the system will do, the system recognizes the different available rates on the market across – I wish I knew, I probably should have the number but 70 plus different combination of different lenders and different rates. If it identifies an opportunity for you it allows you to connect to one of our vetted brokers across Canada who we have a relationship with.
Once you connect to that broker, the broker’s going to connect to you by email or phone. The broker now knows your current state mortgage so it knows here’s everything that you have in place. Here’s the information that created an opportunity for you so you’re on a current five year, you have two years left, the rate difference is going to be about two basis point at 20 basis points and your penalty’s been calculated, here’s the information. So, you don’t have to spend the first 10 or 15 minutes updating the broker on your current state or the opportunity you’re interested in.
Then the broker, the mortgage professionals, will do their job. Because they’re going to look and say lender A may have a better rate but you’ve just told me you’re changing jobs in the next year or you’re adding to the family and there’s just certain – you still have life circumstances that have to be factored in. You may have a windfall coming, whether it’s an inheritance or something. You don’t want to – if you have the ability to pay down a mortgage a little bit earlier, you want to make sure you’re working with a lender that gives you the ability at the lowest possible cost. The broker is the one that makes the recommendations.
Doug Hoyes: Got you. And so as a consumer, I’m not paying anything for this app, is that correct?
Brent Hughes: Correct, the app, the software is free.
Doug Hoyes: So how do you make money then?
Brent Hughes: We have a relationship with the brokers we have in place. Lenders pay brokers a finder’s fee for lack of a better term. So, the lender will pay the broker and we share in that split with the broker. So, there is a – you know, one of the challenges I have is when people have vested interest in trying to sell me something. In this case you can use the software from, you know, day one and never connect to one of our brokers, take that information back to your lender and say that I know my penalty is roughly X, I think I should be doing something and away you go. You can take it to your current broker and take the same information.
The question I would say is, you know, and I think I’ve written some blogs on it, when was the last time your broker or lender called you in term on your mortgage? And the answer is they don’t, they have a vested interest to keep you in the position you’re in. So, what our software does is say here’s a vetted broker, if you’d like to have a conversation there is no commitment, no cost, no hooks, at least have the conversation and understand your options. And if you use one of our brokers then the lender fee will be split between us and the broker.
Doug Hoyes: Got you. And obviously I’m the one making that decision if the broker can’t get me a better deal than what I can get somewhere else then I’m not going to do it. So, I’m completely in control I guess is what you’re saying. Okay, so that kind of makes sense and I get the business model. Your goal is that lots of people will be using it, lots of people will see that there’s potential savings, they’ll reach out to one of the people in your network to do it. But if they don’t, fine they can use it completely for free and do what they want with the information.
So, okay so let’s talk about well, I want to get into interest rates but before we do that, what you’re describing, this app that you’ve got I guess the current buzz word is “fin tech”, this is a fin tech application, a financial technology thing that – that’s the buzz word. If you want to start a company and raise a few million dollars in an IPO just call it fin tech. And just like the internet in the year 2000, right, everyone will jump on it.
Brent Hughes: If it were only that easy.
Doug Hoyes: There you go eh, I live in a simplified world obviously where I think everything is really easy. So, how do you see applications like yours or fin tech in general, impacting the way we make financial decisions? Because you described how it used to be. Once every five years I would walk into the bank and they would tell me what my new mortgage interest rate was going to be and I’d sign the piece of paper. That’s no longer the way it has to be. So, what do you see as the future for applications, not just in the mortgage area but, you know, fin tech applications in general and how we’re going to make financial decisions in the future and what that’s going to do to the financial industry in general?
Brent Hughes: Yeah I think it doesn’t just start with the financial industry for me. I mean if I’m looking to hire a taxi or a car to go to from A to B, we used to stand on the corner, wave our arms and hopefully somebody would stop. You know, obviously the largest of the players right now put in software into people’s hands that provide them visibility, access to information and a level of governance. So, I won’t state their name but they changed the way that people hire a car.
I think that’s ultimately what our goal was, if you can put information into people’s hands to make it easier for them to make an educated decision, it’s just a natural way to look. It may not always be about saving money. I mean I think that’s a little bit of a misnomer with some of the fin tech businesses that are out there it’s all about saving money. Sometimes – your description at the beginning talked about in five years, you know, changing rates today may not impact you but in five years they are. And where are you going to find that?
I always did a simple calculation when I close my eyes at night. And I say what are my total assets worth, what are my total liabilities worth? Close your eyes, as long as my assets are greater than my liabilities I should be able to get a good night’s sleep. Just by getting the information in people’s hands faster, I think they’re going to make better educated decisions. I know I have retirement goals coming up, the lenders, many of the banks are creating and the wealth advisors are creating tools that give me better visibility but in the end the decision’s still mine.
And that’s, I hope what the goal of these fin tech companies are. I think there’s always suspicion that there’s a vested interest but I think in the end, as long as the consumer recognizes it, it’s still their decision. So, give you good information, give you accurate information, give it to you quickly when you want it. I’ll take that any day of the week and then I can make a good decision. So, I think that should be the goal of most of those businesses and our business.
Doug Hoyes: Yeah and that’s an interesting way you describe it. So, I mean I understand what you’re saying with respect to in effect getting a taxi, I may not pay less for the new service then the old service or I may. But I’m able to see what kind of car is coming, I can say I want a big car or a small car, I know exactly when it’s going to arrive. So, it’s not just about the money, it’s putting a lot more information into my hands.
Okay, so let’s take the case then of somebody who has a variable interest rate mortgage. So, you already mentioned the case of somebody who has a fixed-rate mortgage, there’s still three more years to run on it but with your app it might tell me interest rates have gone down and it’s still better for me to get a different mortgage, pay the penalties, the interest rates will be lower, it’ll help me, does that thought process change at all when I have a variable interest rate mortgage? Or is it pretty simple, interest rates have gone down, you switch. How does it work with a variable rate?
Brent Hughes: So, it’s interesting because when we – the software was built over, over, you know, just over a year’s period and everybody said to us oh, if this software were only built a couple of years ago you would have had a lot more clients right off the start. And I said why’s that? And they said well when rates go down, that’s when savings are created. And I said it actually was created for the opposite, it was created when rates start to go up.
As we know debt levels, consumer debt levels, are high, bankruptcy risks are high so you – I want more information. A rising tide will float all boats is probably the nicest way to put it but everybody’s going to have a win/win when rates are going down. It’s when rates are going up that I want the most information in my hands with the recent Bank of Canada announcements, a couple of changes over, you know, the interesting one the first Bank of Canada announcement being in July, everybody was on vacation.
So, although you had an impact and our consumers were all notified, these rates changed, the activity by consumers was quite low. They – the system told them the rate went up, they had a variable rate, it immediately impacted them. So, anybody on a variable, immediately knows that the variable rates are changing, that the prime has changed. So, they have the information but there wasn’t a lot of activity because there was – it was in the middle of summer, we didn’t go through the greatest summer of the year so there was a lot of other things going on. The September announcement will be different and was different because all of a sudden that’s the second rate increase in over a period. So, now people are going to start taking note saying okay, what’s the next announcement going to look like?
So, the software will tell you right away there’s been a change, here’s how it impacts you specifically. The decision now comes down to the consumer to pick up the phone and call, you know, their lender, their broker, our broker and say here’s my circumstances, here’s my financial position, here’s my family position, here’s my goals, all those other things have to factor in so it’s just not an automatic where I think the great discussion after a rate announcement is “should I be on fixed or variable?”
And the answer is it’s different for everybody. So, are you down to the last few years of paying off your mortgage or are you just getting into the market. So, I think you – the software will tell you that it’s changed, it will give you the information specific to you, now you need to factor in the other variables to make a decision, do you go fixed, do you go variable? I don’t think either of us could tell the other person which is best.
Doug Hoyes: Yeah and I think that’s the key point is you got to think. And so, anybody who says oh well you should definitely go variable or you should definitely go fixed doesn’t really understand that it’s a multifaceted decision. And yeah I mean I guess for the last 10 years if you go back to, I don’t know, 2008 or whatever, that time period, yeah variable rates ended up being the correct decision for most people because interest rates kept going down and down and down.
But going into a variable rate in June of 2017, well, you know, with a couple of Bank of Canada rate increases and perhaps more to come, that has not been as good a solution. However as you correctly pointed out if I’ve only got six months left to go on my mortgage or a year or two even, then the variable rate is probably less than the fixed rate. That may or may not be true but that’s why it’s not as simple as yeah you pick one or the other.
How much longer you have to go on your mortgage certainly has an impact. Is there anything else that would impact the decision? I guess the credit worthiness of the borrower perhaps has an impact as well or is there anything else?
Brent Hughes: Absolutely, the credit worthiness is obviously going to be important, we’ve had a number of opportunities where our clients come through where you look at the rate that they were paying and at first you look and go how did they end up with such a high rate? You know, when you see the system, you see the opportunity that we pass onto the broker, it doesn’t make any sense. And it was the position they were in. It could have been a recent divorce, it could have been, you know, other financial challenges they were having. So, the opportunities now to get a better rate definitely exist for some of those people.
The big thing for me and people often, either they haven’t experienced it but I did experience it, is change a job when you’re within a year before your mortgage is down, the lenders they look at you very differently. And you can be with that same lender for years and all of a sudden you’ve changed jobs because it’s a new opportunity, it’s a better role, it’s a great opportunity and you’re six months into your new job and you go back to your bank and say okay it’s time to renew your mortgage and they say well, you’ve only been at your job for six months.
And you’re going wait a second, I’ve been with you for two mortgage renewals, I’ve been at my same old job for 10 years and now all of a sudden you look at me with a little bit of a concern, it just doesn’t make sense. So, I always, anybody that ever asks me I always say, make sure you’re looking at your renewal time frame before you change that job. I think that’s an interesting factor that gets overlooked.
Doug Hoyes: Yeah and we see that with credit reports even where you live. Now of course if you have a mortgage you’re probably living in the house you live in and so you’re not moving around frequently. But yeah you’ve lived at the same house for 10 years and then you move, that can have a negative impact on your credit score. Now if everything else is positive it’s not going to make a whole lot of difference. But you’re right if you’ve switched jobs and as a result, you know, moved to a different town and therefore you’re living in a different place, those are a couple of changes that may not be perceived favourably by the automated credit scoring machine that governs all of our lives. So, it’s certainly something you’ve got to be aware of.
So, okay so final point then and I think we’ve hit on some important things here, what final practical advice then do you have for people who are, you know, navigating what is becoming a much more volatile housing market and mortgage market and how we should go about weighing our options and making informed choices. Is it really as simple as you’ve got to think and look at all the alternatives?
Brent Hughes: Yeah, I think it really is probably the simple. And, you know, obviously our software provides you with a certain level of information. There’s other software, there’s other contact points, whether it’s just really staying informed is really all I can say is that if we’ve abdicated – well, one of the things that used to make me crazy is people would go crazy when their cell phone, their mobile went up by, you know, $10, $15, $25 a month. And they were quickly jumping on the so called loyalty line to have a discussion with their carrier and would be very frustrated.
And yet our largest, generally our largest liability and one of our largest payments every month, is going towards our mortgage. So, if there’s tools or information out there to keep you informed I would say don’t assume that others are watching out for your best interest. Become informed and at that point at least you have the tools to do something about it and then you need to decide, you know, which path you would go from there. But there are some great tools out there and I think the ostrich approach that we’ve all taken, now I can raise my hand around our mortgage of burying it in the bottom drawer of a file cabinet doesn’t need to be that way.
Let’s make sure we understand especially in changing rate environment whether we’re in the best situation we should be in for the coming years.
Doug Hoyes: Yeah and I think that’s a great way to end it. I totally agree you’ve got to look out for yourself. You are the most motivated person to look out for yourself. And you’re right your house is probably the biggest expenditure that you’ll ever make in your entire life and therefore your mortgage payments over the life of that are the most money you will ever spend. In fact you spend more on the mortgage than you spend on the house because you’ve got interest tacked onto it. So, keeping track of where that all pans out is critically important. So, that’s fantastic, so, Brent how can people find the app that we’ve been talking about today?
Brent Hughes: So, we’re available on both Google Play as well as and the app store. You can also – there’s a desktop version at our website. I’m not sure whether I can share that.
Doug Hoyes: Yes, go ahead, tell us what the website is.
Brent Hughes: It’s monitormymorgage.com, so, all one word monitormymortgage.com., but it’s available in all of the mobile stores and it’s free so we hope that it can help you. And if there’s anything that anybody sees that they would like to see enhanced, we’re always open to add and adjust the software based on recommendations.
Doug Hoyes: Excellent, well thank you very much, thanks for being here Brent.
Brent Hughes: I appreciate the time.
Doug Hoyes: Excellent, well once again Brent’s app Monitor my Mortgage can be found at monitormymortgage.com so that’s all one word and then of course if you search for that in the various different app stores you can find it as well.
I think the next year’s going to be much more volatile for mortgage interest rates than what we’ve seen for the last few years. So, whether or not you’re using Brent’s app I think being aware of your options is obviously very important.
So, that’s our show for today. Full show notes including a transcript and links to everything we discussed today including Brent’s app can be found at hoyes.com that’s h-o-y-e-s-dot-com. Thanks for listening. Until next week, I’m Doug Hoyes. That was Debt Free in 30.