Episode 36: Engineering Your Financial Future

In this episode, we discuss the impact of rising interest rates on families in Ontario and explore financial strategies that engineers should consider in the current market. 

Host Jerome James is joined by Matthew Pickering, Mortgage Development Manager at National Bank, who provides practical advice and discusses the importance of building flexibility into mortgage loans. 

Matthew also highlights the detail-oriented and numbers-driven nature of engineers and how their long-term needs and goals influence their choices in homeownership and dealing with mortgage payments.

Transcript

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ENGINEERING THE FUTURE
 EPISODE 36

ENGINEERING YOUR FINANCIAL FUTURE

JEROME JAMES: This episode of Engineering the Future is brought to you by National Bank, OSPI's official banking partner. National Bank's offer for engineers just got even better. Now with exclusive access to virtual healthcare advisory and legal assistance services provided by its official partners. Find out more at nbc.ca slash engineer.

 FEMALE NARRATOR  This podcast is brought to you by OSPI, the Ontario Society of Professional Engineers, the advocacy body for professional engineers in the engineering community in Ontario.

JEROME JAMES: Welcome to Engineering the Future, a podcast presented by the Ontario Society of Professional Engineers. I am your host, Jerome James. Rising interest rates are having a profound impact on Ontario as well as the rest of Canada. Increases in mortgage payments are making it increasingly difficult for families to manage their finances. In this episode, we'll be exploring the financial strategies that engineers should consider amidst uncertainties in the current market. And here to help guide us through those uncertainties and offer some practical advice is Matthew Pickering, Mortgage Development Manager at National Bank. Matthew, welcome to Engineering the Future.

MATTHEW PICKERING: Thanks for having me today, Jerome. I'm, uh, I'm excited to be here. 

JEROME JAMES: Great. Can you give us a little bit of a foundational background of what you do at National Bank?

MATTHEW PICKERING: Yeah, absolutely. So yeah, thank you for having me today. Um, you know, I always like to give a little brief intro myself just so, you know, a lot of the time I'm, so I'm the one asking the questions with customers. So it's always nice to open up and give information about myself. So, so I'm a father of two, I have a one-year-old and a three-year-old. For those of you who know what that's like, I got my hands full here to say the least. So I, I, I, I'm not an engineer. I did go to school for economics, which in my opinion is probably, you know, going to be more beneficial for helping clients. But so right out of school, I started at a major institution at downtown Toronto and I was there for about eight or 10 years, you know, in different industries, such as wealth management, customer service, risk management, then data and analytics. What was cool for me as I joined, you know, you know, the mortgage world at a really crucial time with, which we saw with COVID, right. So, you know, being there for four years now, I've seen when rates were, you know, as low as 1% to when we saw a 4% increase in prime to, you know, rates today at 6%. So I've seen a lot of things over the last couple of years and it was a very, you know, there's a lot to happen and you're talking to all different sorts of customers and different kinds of problems. Right. So. What I love about my role is I get to talk to, you know, if someone's first time home buyers, learning to learn, you know, what, what do I need to know for buying my first house to someone up to, you know, owning up to 40 units. And, and so before we dive into there, I'd also just to kick off is working with engineers is always one of my favorites. So, uh, I mean, just, just, you know, again, you deal with a lot of different kinds of customers. So engineers are to me, a very detailed orientated client. They're asking the right questions. They're not just trying to take something for right now. They're looking at the longterm.

JEROME JAMES: So you have experience with working with engineers. So what are some of those questions that arise or issues that you need to consider when talking with engineers about homeownership or the rising interest rates and in turn those increases in mortgage payments?

MATTHEW PICKERING: Your average engineer is going to be pretty detail-orientated and numbers-driven as well, right? So they're trying to minimize any risk as possible and, you know, still trying to keep opportunity available in the future, right? So it's kind of finding a way to understand what their current needs are and what their long-term needs are and seeing how I can help there. Whether it be maybe starting to own other rental properties or maybe the goal is to pay off the mortgage as fast as possible, right? So what I love about my job is every file is completely different and it's a whole different game every time I talk to a new customer. So just kind of going through and seeing what their current needs are and providing strategies to help them with that.

JEROME JAMES: Do you find that they are more inclined to go through a certain type of financial instrument or avenue?

MATTHEW PICKERING: Yeah, no. And to, to me, it's, it's kind of like one of the key financial strategies I always like to do is build flexibility into your mortgage. Right. So, um, a mortgage loan is a loan at the end of the day, right? It's structured based on your interest rate, the amount, how long you've set it up for. So at the end of the day, it's just a loan, but there's certain ways that, you know, we can take advantage of this loan to build flexibility into your mortgage. So what I like to look at is, you know, building diversification to your mortgage. So let's say, for example, you're taking a million dollar mortgage. You know, it's no different than investments. If you're going to take a million dollars, you're going to invest it all in one thing? Most likely not, right? So why not diversify your mortgage too? And what that means is we're able to portion off your mortgage into, you know, several pieces. So Let's say for example, again, million dollar mortgage, you take 500,000 in a three-year fix rate and then 500,000 in a five-year variable rate. This diversifies your mortgage so when rates went up the way they did, you're not feeling as much as if you were all variable or if rates are going to be sticking around a little longer, you're benefiting from the fix. I mean, everyone's slightly different, but by being able to diversify your mortgage and playing it that way is a great way to go. And even with the diversification, you can also do it by different years, right? So in that example, you're taking a three-year fix and a five-year variable. So that means half your mortgage is up for renewal in three years. So imagine if your mortgage was up for renewal this year, rates are over 6%. A couple of years ago, they were around 1% or 2%, right? So the year you renew can be a lot. So not putting all your eggs in one basket, by diversifying your mortgage and when you're up for renewal and what kind of rate you have is a great way to strategize your mortgage.

JEROME JAMES: Excellent. I've never heard that before. Can you explain the concept of refinancing in the context of a rising interest rate in this environment and how it would impact personal finances and a mortgage that someone would have?

MATTHEW PICKERING: Yeah, absolutely. Good question. So refinancing has actually been one of the biggest, uh, you know, my most volume of files this year. So what refinancing is, is it could be a multiple thing. So let's say your mortgage is up for renewal and maybe you're at another institution. By me bringing you over to Nashville bank with your mortgage, uh, that would be considered refinancing, even if you're not taking any extra funds. So refinancing is more or less you're, they're redoing your mortgage. The benefit of refinancing too is maybe let's say you're either an existing customer or you're looking to do something is you can consolidate debt. So consolidating debt is a very big thing with refinancing. And, you know, for the customers that I've been putting on, you know, credit card debts or unsecured line of credits or have our loans, they're paying a lot higher interest given what, even despite what the mortgage rates are now. So we'll go through a refinance application and consolidate sometimes, you know, anywhere from 20,000 of debt to almost 200,000 worth of debt. We do our analysis to say, okay, based on this debt we've consumed in the mortgage, you're now saving X amount monthly. So, you know, despite the rates being higher, they're still going to be lower than what, you know, when you put on your credit cards or anything like that. And to me, like, to be honest, sometimes refinancing has a bad name out there. I think some people think like refinancing is like, oh, maybe I have to break my mortgage, which isn't the case, but it's more so like it has a bad name. But to me, I think the problem is putting on that level of debt. So when I help customers refinance for consolidating into their mortgage, um, you know, we're getting it all cleaned up. And the problem to me is if next year they call me back again saying, Hey, I just put on another, well, I'll just say a hundred thousand of credit card in line of credit debt. Well, we're back in that situation. So we may have not set you up for success. So it's also planning based on your income versus your expenses. Um, and that's where, you know, refinancing can help you, but we want to make sure we stick to what our plan is.

JEROME JAMES: Excellent. What considerations should engineers keep in mind when deciding between a fixed rate and a variable rate mortgage to best manage their finances in these uncertain times? And I know you were pointing to something that was a mix of the two. And if you want to elaborate more on that?

MATTHEW PICKERING: Yeah, absolutely. No, absolutely. So, I mean, fixed and variables always been in debate despite what the rates are today. Right. So, and to me, it really comes down to your risk level. So, I mean, variable is going to change. You know, our payments change when prime changes. So when the bank of Canada announces their change, your mortgage payment will change. So there's a lot more, there's, there's more risk to it just naturally. Um, but there's also more benefit to it as well, right? So with variable, you have the options of locking into fix at a later date. So we offer a five-year variable. Let's say you take the five year and, you know, two years go by, you can now lock into a three-year fix if you want, as long as the remaining term is equal or higher of whatever, you know, your original loan was, you can always lock into a fix. So there's some benefit of the variable. Typically your variable is going to have a lower penalty than fixed. Their penalty calculations are completely different. Fixed is going to be based off of, so if you have a fixed rate mortgage and you're going to break it, it's going to be based off of what your balance is, what's your remaining term. So let's say you take a five year and you want to break it in year two, it's going to be higher penalty than if you break in year four. And then what's the interest rate differential? So that means what do you currently have as your interest rate? And then what is the rate available at time? So if you're trying to break your mortgage to get a lesser rate, you're going to have a higher penalty. If you're trying to break your mortgages and rates are higher than what you have locked in, the penalty is going to be lesser because you're taking a higher rate. So fix is just based off a calculation and it's constantly changing based on the point in time where variables just three months of interest. So it's consistently three months of interest. If you break in year one or year four, I'm just going to do that too. So my thing is always understanding the client and understanding their needs, right? So. It's to me, what is the risk level? If there's someone that's not going to sleep knowing their mortgage payment may go up or down, then FIX is probably the right tool for you. Naturally, you do pay a little bit more interest on a fixed rate mortgage just historically, but it's the safety net of knowing my mortgage isn't changing for the next three years or four years or five years. And now I can build my planning and my savings around what I know my expenses. So it's understanding what the risk level is and also understanding what their next steps are in life. Let's say I know they're going to be moving in one or two years. Do we want to lock into a four year or five year? Probably not, right? Maybe we want to line it up with their move. Or let's say, for example, I know they're going to Go from a salary employee to a self-employed. Well, we know, you know, we need a two-year history for self-employed. So maybe we want to, you know, buy that time with your mortgage. So it's getting to understand what their, you know, their plan is, and then providing that advice that best tailors them. And like I was mentioning earlier, you can always diversify your mortgage by taking multiple portions. So that's just something, and it's not like one's ranked higher than the other. There's still the overall mortgage held at national bank, but they're just portions, which allow you to kind of diversify, you know, again, but not put all your eggs in one basket with interest rates in terms.

JEROME JAMES: So, that's an interesting concept of going from being an employee to then being a small business and how that affects your decision making on the type of mortgage that you're going to take.

MATTHEW PICKERING: Absolutely. No, and same idea with retirement, right? If someone's looking to retire, you want to plan ahead because they may not qualify before they retire, right?

JEROME JAMES: Or after they retire. Interesting. Let's talk about risk management. How does this concept apply to mortgages? Like just from like a textbook perspective.

MATTHEW PICKERING: Yeah. And then having a risk management background, again, it's, it's multiple things. So it's, again, diversifying your mortgage, like I mentioned earlier, even if, for example, you have multiple properties, it's diversifying all your mortgages. So are all your mortgages held at one institution? Are they all going to be up for renewal at the same year? Right. So finding ways to build flexibility there. But also like building flexibility is, is, can be with your current, let's say you just have one mortgage. There's a lot you can do there too. So. One of the things with the rate now is when you're going through an application is there's a term called your amortization. And this is the amount of years it's going to take you to pay off your full mortgage. So you're going to take a mortgage term, let's say three year, four year, five year, but your amortization is how long is it going to take? So the highest we can go is a 30 year in Canada. So by being able to use, you know, that as a variable in our calculation for your mortgage payment, a lot of people right now are extending their amortization to 30 years. That just means it's going to take you the full 30 years to pay off. But, and so people are like, well, I don't want to re-extend it. I want to make sure it's paid off early. You're able to change your amortization anytime you're up for renewal or going to refinance. So let's say you have to get three year fix. You can, you can change it to whatever you want in three years. So by being able to, um, extend it to modify your mortgage payment to get lesser, will build you time when rates are high like right now. And we have certain clauses in our mortgage agreements that allow you to pay off your mortgage faster. So despite us extending to 30 years, you're now, you know, we can take some advantage of some of these clauses to pay off faster. So for example, let's say you have 20 years and your monthly payment's very high because it's a high rate and you have 20 years left. What we can always do is extend it to 30 years and then add an optional payment to get you wherever that difference was. So if you're, you know, let's say you need an extra $700 to get you back to that 20 years, we can extend you to 30 years, add the optional payment of that $700 in this example, and then we know you're paying off in 20 years. But the benefit of this is if anything ever happens to you, let's say for example, jobs change or income levels are changed, maybe there's a pause in something there and you can always cancel this optional payment and now you've reduced what you owe for months. Where if you keep it at a short amortization, you're mandatory to pay that amount every month and there's no flexibility there. So if something happens and you now want to extend it to 30, you have to either refinance or you have to wait till the end of your term. So you don't really have as much flexibility.

JEROME JAMES: Wow, I didn't know that that was an option. That's a really interesting peace of mind type of tool.

MATTHEW PICKERING: And also to add with risk management, right, there's a lot we can do there. So a couple of other things is, you know, let's say, for example, you're buying a property and, you know, to me, risk management is what do I have as a safety net available? You know, if I'm putting all my savings towards this new property, what do I have available, right? For people looking to put maybe 22% down payment versus 20%, let's do the numbers. Let's run the numbers of what your payments are going to look differently. Maybe it's worth keeping that extra 20, 30, 40,000 in your savings if your monthly mortgage payment is only maybe $50 more a month. Especially with times right now, building savings is so important because again, there's a lot of unknown and there's, you know, things are a little more expensive. So by building savings allows you to tap into that when you need it. And even, for example, one of our big things that we offer is a home equity line of credit. So home equity line of credit, what that is, it allows you the equity in your home on a line of credit. So we have, and every bank will have it called differently, but ours is called the all-in-one. What the all-in-one is, it's a home equity line of credit, and it can be integrated with your mortgage. So let's say, for example, you own a million dollar home, and you have a 400,000 mortgage. We can add a home equity line of credit up to 65% if there's no mortgage or 80% if there's mortgage and line of credit. But being able to add a home equity line of credit gives you access to your equity at a very lower rate compared to an unsecured line of credit because a home equity line of credit is a secured line of credit which is secured against your property so it's a much better rate. Um, and it just has, this is there as a safety net. Um, so it's, it's a good way to access your equity and leave it available. If you have it available, you're not going to pay anything. You only pay based on a balance.

JEROME JAMES: That's a really great safety financial tool that I'm sure that a lot of your customers are taking advantage of. Are there other tools available to engineers and homeowners that can help them proactively manage their finances as interest rates flux and the mortgage payments may become a concern?

MATTHEW PICKERING: Yeah, for me, the best, and again, working with engineers is I always desired because one, we offer a program for engineers. What this is, is preferred rates. So we actually, for your home equity line of credit rate, your standard rate is going to be prime plus a half. That's normal across the industry. With engineers, we're able to offer a professional package of prime plus a quarter. So it's a quarter decrease versus a regular customer. What our program is, it's, you know, you get the home equity line of credit rate at a desired rate, even for example, a mortgage, if you're, if you don't need the home equity line of credit and you just need a mortgage, we're able to leverage your, your profession to, you know, try and get you a preferred rate. It also comes along with a requirement of a bank account. We offer a free, up to three free bank accounts for the clients, if they have an engineering job or a degree. Um, so they can open up one of those at no cost, and then they would be required to take a MasterCard as well. And there's, there's a few available depending on their needs, but this is a great program. And what's, what I like about too, is the rates lower than a regular customer, which also means for me, the qualifying rates lower. So I'm able to qualify the, the, an engineer for slightly more mortgage or home equity line of credit because I'm lowering the rate compared to a regular customer. So it's a great, it's a great product and tool. And to be honest, it's one of our better professional packages as you know, we have a great relationship with engineers at National Bank. So it's a good thing there. Even on that, you know, there's other things, you know, to me, again, it always comes back to having being able to have savings. we can always set up systematic savings, right? So if we know, you know, you're comfortable putting aside $200 a month, we build a systematic savings account that, you know, how this withdrawal from your salary account comes into your account and that builds a safety net as well, right? So there's a lot of things we can do based on your needs and building your flexibility.

JEROME JAMES: That's great. That exists for engineers. Are there any government programs or incentives available in Ontario or nationally to assist engineers and homeowners in dealing with financial challenges posed by these rising interest rates.

MATTHEW PICKERING: Yeah. So it's not so much geared towards just the engineer, but there's a lot of this government's trying to do to help. And the biggest thing that's been rolled out this year is the first home savings account. So you'll see referred to as the FHSA, first home savings account. So national bank was actually the first to roll it out and it's not a national bank product. It's, it's just an account type. So it's similar to like a TFSA or an RSB. It's an account type that allows first-time homebuyers to save and have benefits from a taxation perspective. So what I like about it is National Bank was quick to roll it out. It's available at all our branches, like for example, some other major banks are slow to roll it out, but it allows you to put up to $8,000 into the savings account per year and it limits out of a $40,000 total lifetime. Uh, but the benefits of it is, I mean, first time home buyers can, you know, put money in there and it's tax adaptable. So whatever you put in is going to come off of what you, your, your total income is at the end of the year when you do taxes. Um, so that's similar to an RSP, but the difference between an RSP and an FSA is, um, There's less requirements. So RSPs, if you put your money in an RSP and you're pulling it out for a first-time home buyer, it has to be paid back over 15 years. This new account, the first home savings account, doesn't have to be repaid back. So it has a lot of benefits of the TMSA, but it has the tax benefits of the RSP. Even so, like, for example, you put funds in there in the new account, you can pull that out right away. For an RRSP, you have to wait 90 days from when you contribute. So for any, you know, young or first time home buyers looking to build up savings, it's a great tool and I'd be more than happy to help there. But it just allows you to do some things there to build up savings, have a tax deductible, and even, for example, any gains or income you make from, you know, whatever it's sitting in, you're able to, it's all tax deductible, similar to a TMSIC.

JEROME JAMES: That sounds like a really great tool for, for saving.

MATTHEW PICKERING: Yeah. And even, even for other first time home buyers, there's, there's other, you know, government incentives out there. So for example, the land transfer tax refund is, is one of the bigger ones. So it's a, it's a rebate up to $4,000. So if you're a first time home buyer, make sure you let your lawyer know that you're a first time home buyer. There's a, there's a rebate up to $4,000. Let's say, for example, I'm a first time home buyer and I don't know, my dad's going to help co-sign who's not a first time home buyer because there's two of us and only one of us are a first time home buyer. You're only inclined to 50% of the rebates. In that case, you'll get 2000 back. But it's these conversations to have with, you know, mortgage specialists like myself to get ahead of, you know, what are the total of my closing costs? What are, you know, what can I do to help because I'm a first time home buyer? Maybe I don't know so much. So again, the government's trying to help these first time home buyers enter the real estate industry. It's just, it is, there's some challenges, of course, with prices on the, on the rise and all that good stuff.

JEROME JAMES: Wow. Matt, we covered so much grout today. Thank you for taking us through the intricacies of the different financial tools that you provide through National Bank. Is there anything else to sum it all up that you would like to say to the engineers in Ontario?

MATTHEW PICKERING: Yeah, no, absolutely. So my biggest advice right now is start early. So what that means is let's say your mortgage is up for renewal in four months, five months, start early. So with rates, we can hold a rate up to three months and six months. So, um, you know, your rate's going to be a little better when we have a three months hold or six months hold, but still based on what we've seen over the last year, rates are constantly changing. And, and for example, you're, you're starting early. This allows me to see different times of the year where maybe there's a dip in rates or maybe For example, we have a latitude that we have to keep our rate in. Maybe there's a dip in our latitude where we can know we can get a little bit extra off the rate than what it is a few weeks ago. So for people just kind of calling saying, hey, I close my mortgage up for renewal in three weeks or I'm buying a house that closes in three weeks, most likely whatever you're getting off the get go is where you're going to end up with. But if we have a little bit of times, I would say anywhere from the three to six months is when you want to start. Uh, this allows us to kind of get something locked in. Let me allow my time to chip away at it and see if I can lower the rate. Um, and building a relationship with you is important as a customer is, you know, if I'm able to start a file, I get to know you, I know I'm going to get attached and try to help you as much as I can. So, you know, if we have something started, it allows me to kind of see where I can help you with it within my hands. Right. So if you're just shopping around calling every bank, what's your best rate? You're most likely not going to get it. And my advice is limit, you know, work with multiple lenders. It doesn't hurt. I mean, I would love to help everyone on national banks. Sometimes they may not qualify or maybe there's a different timing. They get a better offer because they started earlier. But working with maybe two or three mortgage specialists, in my opinion, is the way to go. You're able to kind of look at what your options are, look at different rate options. And why I really enjoy working with Nashville Bank is it's given me a lot of latitude to win over business. So I would say we're a major bank, we're a top six major bank, but I would say we're top three with rates. So there's not many times in the year where I'm going to lose, you know, business to, you know, another major lender. So that's where I kind of have the expertise of just building out my, You know, the number of files, the number of customers I talked to, seeing where I can get things done. So this year has been very, you know, not everything fits in this perfect box of qualifying. It's how do we find exceptions? What is the exceptional part of the application for us to give you financing beyond what you qualify for or get a rate beyond what, you know, what our standard is. So that's where I've kind of built up the expertise of know where to push on files and get things done and, you know, find a win for the customer.

JEROME JAMES: Wow, that sounds like some great advice. Matthew, thank you for sharing your time and expertise with us today. It's clear we're going to have to live with a certain amount of uncertainty for a while when it comes to interest rates, but with a little strategic planning, engineers can not only manage that uncertainty, but continue to engineer their financial future. Once again, thank you so much for being with us here today.

MATTHEW PICKERING: No, my pleasure. And again, thank you for having me. I'm happy to help where I can.

JEROME JAMES: We've been joined by Matt Pickering, Mortgage Development Manager at National Bank. I'm your host, Jerome James. You've been listening to Engineering the Future, and we'll see you next time.

FEMALE NARRATOR: From all of us at OSPI, the Ontario Society of Professional Engineers, thanks for listening. Please be sure to subscribe so you don't miss an episode.