Prime Drop
Tracy Head • July 26, 2024
With the announcement this week that prime had dropped by a quarter point (.25 per cent) I had a number of calls from clients wondering how this would affect their mortgage.
We haven’t seen any changes to what lenders are offering for fixed rates yet. This may follow, but fixed rates follow the overnight bond yields as opposed to prime rate.
For clients who have variable rate mortgages, this change to prime means that the interest cost on their mortgage will decrease by that quarter point as well.
There are two types of payments with variable mortgages.
Some lenders have a static payment, meaning regardless of what prime does your payment stays the same. If prime goes up you pay less towards principal and more towards interest. If prime goes down, you pay more towards the principal of your mortgage.
The second type of payment on variable mortgages is an adjustable payment. This means that as prime changes your payment also changes. You pay the same amount against the principal of your mortgage, but your payment will drop if prime drops, or increase if prime increases.
Some people prefer a static payment for budgeting purposes. Others are comfortable with a little fluctuation with their payment amount.
What does a drop in prime equal in dollars and cents?
As an example, I ran the numbers for a $500,000 mortgage priced at prime minus one percent using 5.95 per cent, then at 5.7 per cent to reflect where clients might be right now.
In this example, the payment decreased by $74.00.
$74.00 a month may not seem like a big deal, but that covers either my hydro or my natural gas bill every month.
I feel as if many people have been sitting back waiting to see what direction the government is going to take with respect to monetary policy.
Over the last few weeks it feels like our market in the Okanagan has been picking up. It will be interesting to see if this most recent change sparks changes to the fixed rates as well, and if that translates to better renewal rates and more home sales.
Side note: if you have a home purchase in the works that is set to close soon, I encourage you to finalize your home insurance policy sooner rather than later. So far we have been fortunate, but if there is an active fire within a 50 km radius some insurance companies will not provide coverage for new policies. The companies that do charge higher premiums because of the perceived risk.
If there is one question I hear more than any other from Canadians looking to buy a home, it's this: "How much can I actually afford?" It's a great question, and frankly, it's one that deserves more attention than simply finding out the maximum mortgage amount a lender is willing to approve. While mortgage qualification guidelines provide a useful starting point, they don't always tell the whole story. The amount a lender says you can borrow and the amount you can comfortably afford are often two very different numbers. Let's start with what affects affordability. One of the biggest factors is the type and amount of income you earn. A salaried employee with a stable employment history will generally have a straightforward qualification process. However, self-employed individuals, commissioned salespeople, seasonal workers, and those with multiple income sources may qualify differently. Lenders carefully examine the stability and consistency of income when determining how much mortgage financing they are willing to provide. Consumer debt is another major factor. Credit card balances, lines of credit, car loans, personal loans, and other monthly obligations all reduce purchasing power. Every dollar committed to debt payments is a dollar that cannot be allocated toward a mortgage payment. It is not uncommon for borrowers to increase their purchasing power significantly simply by reducing or eliminating high monthly debt obligations before applying for a mortgage. The size of your down payment also plays an important role. A larger down payment reduces the amount you need to borrow and often improves your overall financial position. In some cases, a larger down payment can help borrowers qualify for homes that might otherwise be out of reach. It can also lower monthly payments and reduce the total amount of interest paid over the life of the mortgage. Of course, lenders use formulas and qualification ratios to determine affordability. These calculations consider mortgage payments, property taxes, heating costs, and other obligations. However, these formulas do not always account for the realities of everyday life. That's why I often encourage clients to think beyond what they can qualify for and focus on what they can comfortably live with. A mortgage should support your life, not control it. Many Canadians are surprised to discover that once they factor in groceries, fuel, insurance, utilities, childcare, activities for children, pet expenses, travel plans, and rising day-to-day living costs, there is less room in the monthly budget than they initially expected. Homeownership also comes with unexpected expenses. Furnaces fail. Appliances break down. Roofs need repairs. Vehicles require maintenance. Life happens. If your mortgage payment consumes every available dollar each month, even a relatively small unexpected expense can create financial stress. For this reason, I often recommend that homebuyers leave some breathing room in their budget whenever possible. Choosing a home that costs slightly less than the maximum amount you qualify for can provide flexibility and peace of mind. It allows you to continue saving for retirement, build an emergency fund, take a family vacation, or simply sleep better at night knowing you have a financial cushion. Before making an offer on a home, I encourage buyers to look at the complete monthly picture. Consider not only the mortgage payment but also property taxes, home insurance, utilities, maintenance costs, and any strata or condominium fees. Then compare those costs against your current spending habits and financial goals. The goal is not simply to buy a home. The goal is to own a home comfortably while maintaining the lifestyle and financial security that matter to you and your family. The most successful homeowners are often not the ones who borrow the most money. They're the ones who make thoughtful decisions, leave room in their budget for life's surprises, and build long-term financial stability along the way. So the next time you ask, "How much can I actually afford?" remember that the answer isn't just about what the bank will approve. It's about what allows you to enjoy your home while still enjoying your life.
One of the most common misconceptions I hear from clients who are self-employed is that getting a mortgage is either impossible or requires years of perfect financial statements. Fortunately, that's simply not true. Canada's workforce has changed dramatically over the past decade. More people than ever are running their own businesses, working as contractors, driving revenue through side hustles, consulting, freelancing, or operating incorporated companies. Lenders have adapted to recognize that self-employed borrowers often have strong incomes, even if their tax returns don't tell the whole story. The key is understanding that mortgage qualification for self-employed individuals is different—not necessarily harder. Why Self-Employed Income Can Be Challenging Most traditional mortgage lenders rely heavily on income reported to the Canada Revenue Agency. The challenge is that many business owners work with accountants to legitimately reduce taxable income through business deductions and write-offs. While this strategy can lower taxes, it can also create challenges when applying for a mortgage. For example, a business owner may generate $150,000 annually but only report $80,000 in taxable income after deductions. A lender reviewing only tax returns may see a very different financial picture than the reality of the business. Fortunately, lenders have developed several solutions specifically designed for entrepreneurs and business owners. Traditional Income Verification The first option is conventional financing. Many self-employed borrowers qualify through standard programs by providing two years of Notices of Assessment, T1 Generals, business financial statements, and supporting documentation. This route typically provides access to the lowest available interest rates and is often ideal for borrowers whose reported income accurately reflects their earnings. However, when taxable income doesn't fully represent actual cash flow, alternative solutions may be more appropriate. Insured Stated Income Programs One of the most valuable tools available to self-employed Canadians is the insured stated income mortgage program. These products are available through lenders that work with mortgage insurers such as Sagen and Canada Guaranty. Under these programs, eligible self-employed borrowers can qualify based on a reasonable stated income amount that aligns with their occupation, industry, business revenues, and overall financial profile. Lenders still perform due diligence. Borrowers must demonstrate that their stated income is reasonable and supported by the business. Documents such as business licenses, GST registrations, articles of incorporation, bank statements, and proof of business activity are commonly reviewed. This program can be a game-changer for successful entrepreneurs whose tax returns don't fully reflect their true earning capacity. Generally, borrowers must have been self-employed for at least two years, maintain good credit, and provide a minimum down payment that meets insurer requirements. Business-for-Self Programs Through Alternative Lenders For some borrowers, particularly those with shorter self-employment histories or more complex income situations, alternative lenders can offer additional flexibility. These lenders often take a more holistic approach, reviewing business bank statements, retained earnings, contracts, assets, and overall financial strength rather than focusing solely on taxable income. While rates and fees may be slightly higher than traditional financing, alternative lending can provide an excellent stepping stone toward future conventional financing. The Manulife Small Business Owner Program One niche solution that has generated significant interest among self-employed Canadians is the Manulife Bank Small Business Owner Program. This program is designed specifically for incorporated business owners and can provide an alternative method of income qualification by looking beyond traditional personal income reporting. In many cases, the program considers factors such as corporate financial performance, retained earnings, and the overall health of the business. This can be particularly beneficial for incorporated entrepreneurs who intentionally leave profits within their company for growth and tax planning purposes. Programs like this recognize a reality that many business owners face: what appears on a personal tax return may not accurately represent their true financial strength. Credit Still Matters Regardless of which mortgage program is being considered, credit remains one of the most important factors. Strong credit scores demonstrate responsible financial management and can significantly improve both approval odds and financing options. Before applying for a mortgage, self-employed borrowers should ensure that payments are current, credit card balances are managed responsibly, and any errors on their credit report are addressed. Preparation Makes All the Difference The most successful self-employed mortgage applications are usually the result of preparation. Having organized financial records, current tax filings, business banking information, and supporting documentation readily available can make the approval process significantly smoother. Working with a mortgage broker can also be particularly valuable because brokers have access to a wide range of lenders, including major banks, credit unions, monoline lenders, and specialized self-employed programs that may not be available directly through a branch. The Bottom Line Being self-employed should not prevent you from achieving homeownership. Today's mortgage marketplace offers more options than ever before for entrepreneurs, contractors, consultants, tradespeople, and small business owners. From traditional income verification to insured stated income solutions and specialized programs such as Manulife's Small Business Owner Program, there are pathways available for many different situations. If you're self-employed and considering a home purchase or refinance, don't assume the answer is no. Often, the challenge isn't qualifying for a mortgage—it's simply finding the lender and program that best understands how your business operates.
