Prime Change
Tracy Head • June 18, 2024
On June 5 The Bank of Canada announced they were dropping their key policy rate. In practical terms this meant that prime rate dropped by a quarter per cent (.25 per cent).
I’ve had many conversations since the announcement about how this affects (or does not affect) my clients’ mortgage rates.
Fixed rates change based on many criteria; the key factor I watch is the overnight bond yields. When this figure drops, ideally fixed rate mortgage products will drop also.
Key to note that this means new mortgages may be offered lower rates. If you are already locked in to a fixed rate mortgage, your rate stays the same until your mortgage reaches its renewal date.
If you are in a variable rate mortgage this will affect you in one of two ways.
If you have a static payment on your variable rate mortgage (the payment does not change based on changes to prime until there has been a dramatic increase to the prime rate) this change to prime rate means more of your payment will be going towards the principal of your mortgage and less to interest.
If your variable mortgage has an adjustable payment this means your payment should go down next month because you will be paying less interest.
For the last few months it has felt like many people have been waiting for this announcement. It has been interesting to see what has happened to the fixed rates offerings from lenders since the change to prime.
Coincidentally the overnight bond yields have been dropping for the last few weeks as well.
We are seeing rate drops and specials from multiple lenders.
I feel like this has created a flurry of activity with home purchases from clients that have been sitting on the sidelines waiting for positive news.
If you have been shopping and have a pre-approval or rate hold in place, I suggest you connect with your mortgage person to see if there is a better rate available for you.
Changing gears a bit:
If you are already a homeowner, make sure you claim your Home Owners Grant to ensure your property taxes are calculated correctly for this year.
If you purchased a home over the last year and your lender is collecting your property taxes, check the upper right corner of your property tax bill to confirm your lender is listed. If the lender’s name is not there, reach out to your lender directly to make sure they are set to pay your taxes appropriately.
Sometimes with the first year there can be a disconnect. Its easier to be proactive and catch this before you get a surprise bill with a penalty for not paying your taxes on time.
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.
