CMHC's Big Announcement - And Why It Has Little Impact
On June 3rd, Canada Mortgage and Housing Corporation (CMHC) took the mortgage industry by surprise when they announced significant changes to their underwriting guidelines, effective July 1st. These will impact buyers with less than 20% down. The following week the other two mortgage default insurers in Canada, Genworth and Canada Guaranty, announced they would not be following the same tightening measures. This has taken most of the impact out of CMHCs changes, as lenders will just send files that do not fit CMHCs tighter measures to the two insurers that allow them. That said, it is still important to understand what they are and how they may impact some home buyers. CMHC Changes To Underwriting Starting July 1st, CMHC will implement the following changes: Maximum affordability ratios dropped - Maximum TDS (Total Debt Service - the share of income that goes toward paying all housing costs, including mortgage, taxes, condo fee and heat) will be dropped from 39% to 35%. The maximum GDS (Gross Debt Services - the share of income that goes towards paying all housing costs as well as any other debt commitments) will be dropped from 44% to 42%. For a strong credit buyer without debts it will drop your purchasing power by approximately 10%. Tougher credit qualification - at least one borrower must have a beacon score above 680 (currently 600). No borrowed down payments - (ex.unsecured line of credit) You can check out their media release here: https://www.cmhc-schl.gc.ca/en/media-newsroom/news-releases/2020/cmhc-reviews-underwriting-criteria Who Will Be Impacted? Now that the other two insurers are not tightening rules, most borrowers will not be impacted. But there are those that do not have the option of using Canada Guaranty or Genworth that will have to meet tighter requirements. Here are some examples: Mobile Home Purchases - CMHC is the only insurer who offers default insurance on mobile home purchases on rented or leased land, so those buyers will need to meet the tougher requirements. Porting CMHC Insurance - Buyers are able to port their default insurance policies in a purchase, which is particularly beneficial if you are selling and buying after only a year or two in a property. If your first property purchase was default insured with CMHC, then in order to port it you would need to qualify for the new purchase under the tougher requirements. One Less Option - There are many situations where one insurer is not willing to proceed, where another will. They can decline because of a feature of the property, location of a property, condo document concerns, or something they deem risky about the buyer. In these situations, if a buyer is purchasing beyond CMHCs new affordability maximums, or their credit score does not meet the new requirements, CMHC will not be an option. For these buyers, instead of three chances for an approval, there are now two. Cautious Lending Market While it was a win for consumers to have Canada Guaranty and Genworth stay the course instead of following CMHCs tougher guidelines, there is still an overall shift in the lending environment. It is simply more cautious. Lenders and default insurers are making less exceptions and choosing not to approve borderline files (ex. weak credit, recent income drops, etc.). So even if you do not have to meet CMHCs new requirements, improving your credit, paying down debt, and ensuring you have a thorough pre-approval done before you go out purchasing will all help you be successful when you purchase. Contact me if you have any questions about your mortgage and how they are impacted by these changes.READ MORE
CMHC Tightens Up Borrower Requirements
CMHC (Canada Mortgage and Housing Corporation) has just announced changes to their underwriting, effective July 1. They are one of three default mortgage insurance providers in Canada. Every mortgage that has less than 20% down payment needs to be default insured. We are still waiting to see if the other two insurers, Genworth and Canada Guaranty, follow along with these changes. If so, it will make borrowing for those with less than 20% down more difficult. CMHC announced the following changes: Maximum affordability ratios dropped - Maximum TDS (Total Debt Service - the share of income that goes toward paying all housing costs, including mortgage, taxes, condo fee and heat) will be dropped from 39% to 35%. The maximum GDS (Gross Debt Services the share of income that goes towards paying all housing costs as well as any other debt commitments) will be dropped from 44% to 42%. Tougher credit qualification at least one borrower must have a beacon score above 680 (currently 600). No borrowed down payments (ex.unsecured line of credit) You can check out their media release here: https://www.cmhc-schl.gc.ca/en/media-newsroom/news-releases/2020/cmhc-reviews-underwriting-criteria How Could This Impact You? If all the insurers move ahead with this, here is how it will impact you: Decreases your buying power - for a strong credit buyer without debts it will drop your purchasing power by approximately 10%. Must have strong credit to purchase Revisit your pre-approval once these rules come into effect your maximum mortgage may change Why Is CMHC Doing This? CMHC has recently stated they are concerned about house values dropping and how that would impact new home buyers. They are concerned they could become underwater, or owe more on their mortgage than their home is worth. To counteract that they are reducing the size of mortgage new buyers can take on and lending only to borrowers who are stronger from a credit perspective. To track any updates related to this, please connect with me on my Facebook page. I will post what the other insurers choose to do in response to this announcement: https://www.facebook.com/MichelleLapierreEdmontonMortgageREAD MORE
COVID-19 Mortgage Questions
COVID-19 is impacting all areas of our lives right now, including mortgages and the current lending environment. This is a summary of the topics where I am seeing the most questions arising. Is Real Estate Open? Yes, real estate is still considered an essential service in Alberta and realtors, mortgage lenders, appraisers, and lawyers are allowed to be working right now. And, YES, people are still buying and selling homes right now. Wherever possible our industry members are meeting and working remotely and when in-person work is required, there have been adaptations to make it as safe as possible. Recent changes in real estate include new guidelines for showing homes, the use of peek-a-boo viewings by appraisers to avoid entering a home, and electronic signature of any document that does not require a signature in ink (ex. offer to purchase, mortgage commitments, etc.) Mortgage Deferrals - How Do They Work And Should You Defer? There has been a lot of confusion on this topic. This was poorly presented in the media and made to sound like this was a federal program that automatically gave a 6-month deferral for anyone with a mortgage. This is NOT the case. While default insurers (CMHC, Canada Guaranty, Genworth) are all working together and supporting this, ultimately it is up to each lender to decide how and if they choose to offer a deferral to a mortgage holder. How Do Deferrals Work? For the most part (because this can vary by lender), if you can confirm that you have had financial hardship as a result of COVID-19 (ex. job loss, loss of tenant income) a lender may grant you from 1 to 6 months of deferred mortgage payments. These payments are added onto your mortgage balance at the end of the deferral period, which will increase your payments slightly for the remainder of your mortgage. You are effectively paying interest on your interest for the months you defer because your regular monthly payment that you deferred has an interest component and then gets added on to the mortgage balance and is again charged interest. Its cheaper than any other loan you could get, but it definitely is not free money. Example: You have a $300,000 mortgage at 2.99% with a 20-year amortization and $1,659.52 monthly payment. If you defer 6 months of payments, your new mortgage balance at the end of the deferral period is 309,957.12 and your new monthly payment is $1,746.83. You will pay $4937 more in interest costs over the remaining 19.5 years than if you paid the mortgage without a deferral. The lower your remaining amortization is, the greater the jump in your payment after the deferral period ends. Lenders can vary on how they do deferrals, but this has been the most common approach. Should You Defer? The answer is yes, if you need it. If you had a job loss or income drop and are struggling then this absolutely makes sense to do. If you dont need it, then do not do it as it is adding interest expense to your mortgage unnecessarily. If you do defer, I recommend requesting something in writing and keeping that in your mortgage file in the event they mistakenly report your deferred payment as a late payment to your credit report. Heads Up - You Cant Switch Your Mortgage While In A Deferral This is for those with a renewal coming up. If you do request a deferral and that period lands over your maturity date, you will not be able to shop rates and move it to another lender. No new lender wants to take in a mortgage that is currently not being paid per original contract agreement. If your maturity lands after your deferral period ends, as long as your financial hardship has resolved (ex. you have employment again), that prior deferral will not impact your ability to switch to another lender. Mortgage Rates Are Very Low Right Now, Right? Yes and no. Historically speaking, rates are still excellent. But, as people have watched the announcements about the Bank of Canada (BOC) dropping their benchmark lending rate, some assume they could get that low of a rate today. Variable and fixed rate mortgages have different drivers, but in both cases the increased risk in this lending environment and liquidity concerns have banks building that risk into the rates they are offering consumers. Variable Variable mortgages are sold based on a plus or minus to the lenders prime rate. For example, you may have a variable at prime -0.65%. As the BOC moves their benchmark policy rate, lenders move their prime lending rate accordingly. The BOC has announced 3 rate drops totalling 1.50% since March 4th. Most lenders prime was 3.95% prior to those drops, and their new prime rate today is 2.45%. So, if you are in that prime -0.65% variable your rate just went from 3.3% to 1.8%. But, if you are wanting a new variable mortgage today, they are being sold around prime, so your rate today would be around 2.45%. Fixed Fixed rates are generally priced based off bond yields. Bond yields dropped drastically through February and March but federal fiscal stimulus measures, including bond buy-backs, stabilized the market. And with concerns around increasing mortgage defaults and liquidity, it costs more to lend, and that is being passed on to consumers. So, while current bond yields would normally translate to a 2.3% 5-year fixed rate on an insured mortgage, rates are actually sitting around 2.69%. And for conventional mortgages where lenders do not have an insurer protecting them if a consumer defaults, those rates are even more conservative as I write this, sitting around 2.99% for a 5-year fixed. In other words, lenders are way more comfortable when they have a default insurer backing a mortgage and are pricing accordingly. Are Lenders And Insurers Still Giving Out New Mortgages? Yes they are. But there are a few things we are seeing right now as they adapt to a very volatile environment: less exceptions when lending more focus on fallback, or how much money a buyer has in addition to down payment higher rates and more limitations on mortgages for rental properties; one lender announced they are no longer lending on rental properties in Alberta at this time, and we may see more lenders follow suit bigger gap between rate holds and live offer rates. In other words, lenders are not comfortable being as aggressive on a rate they hold for you for 120 days while you shop as they are on a rate when you have made an offer. Income confirmation is more rigorous and may involve a double-check prior to possession or funding day Contact me if you have any questions about your mortgage and how they are impacted by these changes.READ MORE
Reverse Mortgages - The Most Misunderstood Mortgage Product - What Is It Used For?
In my last blog I wrote about reverse mortgages and the many myths around this mortgage product. This outlines the most common uses for them. I am taking the time to highlight it because, while it is not a product for everyone, it is so misunderstood that it is often overlooked in situations where it may be the perfect solution. The reality is that more and more older Canadians are struggling financially. And even if their extended family is aware of these financial struggles, they are not always in a position to help. But, when you own your home, there are options. What Is A Reverse Mortgage? A reverse mortgage is a way for Canadian howeowners 55 or older to access up to 55% of the value of their home without the standard credit or income qualifying requirements. The amount of equity you can pull out is dependent on your age, property type, and property location. It is a loan secured against the value of the home, but unlike a traditional home equity line of credit or conventional mortgage, there are no monthly mortgage payments for as long as you live in your home. The interest owing is added to the loan amount and paid out when you sell or move out. Reverse Mortgage Uses Health Care and Support Costs Assisted-living facilities are very expensive so many people choose to stay in their homes as long as possible, paying for the additional health care and supports they need to manage. These can easily exceed pension income and other family members may not be in a position to assist, or individuals would prefer to remain independent from family help. So rather than moving, reverse mortgages can be structured to pull a monthly income from the equity in a home to pay for the supports needed to stay there longer. Home Maintenance, Retrofitting, and Special Assessments Many mature Canadians can manage their daily cost of living on fixed incomes, but the unexpected larger costs can be difficult to handle. Large maintenance items such as replacing a roof or furnace, retrofitting to make a home more suitable to physical limitations, and special assessments for those living in condominiums can overwhelm a fixed income. A reverse mortgage can be used to pull out lump sum amounts to manage large, unexpected home ownership costs. Grey Divorce In the event of a divorce or separation in retirement, the matrimonial home often needs to be sold or one party paid out. Under new, tougher mortgage requirements it can be difficult to qualify for a traditional mortgage while on a much smaller retirement income. Clients often do not want to cash RRSPs or investments that will be their future retirement income, so a reverse mortgage can be used to purchase a new property or to pay out the other spouse for their portion of the equity instead of cashing out investments, paying cash for the property, and then struggling without the investment income in future years. Consolidate Debts If debt becomes a problem in your golden years, it can be overwhelming with no access to traditional mortgages. The alternative that many older Canadians end up with is a private mortgage solution. These are at very high rates, high fees, and they still have a monthly payment requirement which usually ends up creating a new cash flow problem. A reverse mortgage can be used for those with poor credit and debts but with far lower costs. The unique feature of being payment-free also can solve the cashflow problem that created the debt situation in the first place. Income Supplement In the later years when RRSPs and other investments are running out, a reverse mortgage can be set up to create a monthly income payment to you from the equity of the home. Roughly a quarter of reverse mortgage clients are using reverse mortgage funds to supplement their income where their retirement savings have fallen short. Gift A reverse mortgage is becoming a popular solution to provide an early inheritance for children and grandchildren that can help them purchase a home or pay for education. By gifting in life, they can benefit from seeing the impact of their inheritance. Purchase Another Property Second homes, such as a vacation property in an international location or a cabin, can be difficult to finance. Reverse mortgages can be used on their primary residence to make that purchase. Contact me if you have more questions or would like to explore whether a reverse mortgage may be a fit for you or a loved one.READ MORE
Reverse Mortgages - The Most Misunderstood Mortgage Product - Forget What You Think You Know
If you are retired or have aging parents, you need to read this newsletter. Before I became a Broker, I flinched at the term reverse mortgage. Like so many Canadians, much of what I knew about them came from US news and advertisements. These products in the US are completely different than here. In Canada, reverse mortgages are governed far more tightly. In fact, only two banks offer them in Canada and the industry leader has been selling them for over 30 years. The more I have learned about reverse mortgages, the more I see them as a key tool for some seniors and their families. Lets break down some of the most commonly held misconceptions. In my January newsletter I will break out how these mortgages can be used to help mature Canadians stay in their home longer, maintain financial independence, and meet other personal goals. What Is A Reverse Mortgage? A reverse mortgage is a way for Canadian howeowners 55 or older to access up to 55% of the value of their home without the standard credit or income qualifying requirements. The amount of equity you can pull out is dependent on your age, property type, and property location. It is a loan secured against the value of the home, but unlike a traditional home equity line of credit or conventional mortgage, there are no monthly mortgage payments for as long as you live in your home. The interest owing is added to the loan amount and paid out when you sell or move out. Reverse Mortgage Myths MYTH #1 - I will lose ownership of my home. Just like any other mortgage, the home is used to secure the loan. The mortgage lender is registered as a standard charge on the title in first position. The homeowner maintains title ownership and control of their home. MYTH #2 - I will owe more money than the house is worth. 99% of clients have equity remaining in the home after the loan is repaid. In the rare event that the home depreciates in value and the loan amount due is more than the sale amount of the property, the lender would cover the difference between the sale price and the loan amount. It is a non-recourse loan. You would never be forced to sell if the amount owing exceeded the value or asked to pay the difference. MYTH #3 - The bank can force me to sell or can foreclose at any time. A reverse mortgage is a lifetime product, and as long as the property taxes and insurance are in good standing, the property remains in good condition, and the homeowner is still living in the home, the loan will not be called even if the house decreases in value. MYTH #4 - Surviving spouses are stuck paying the loan after the homeowner passes away. If a homeowner passes away, as long as their surviving spouse is on title to the property, they can choose to remain in the home without having to make a repayment. The loan is due when both applicants move out or the property is sold. MYTH #5 - I cant get a reverse mortgage if I already have an existing mortgage. A reverse mortgage can be used for a purchase, for debt consolidation, to pull equity out in a lump sum or in the form of a tax-free monthly income, or to restructure a current mortgage to eliminate monthly payments. MYTH #6 - Reverse Mortgages are very expensive with high rates so they should only be used as a last resort. The rates offered are generally more favourable than alternative lenders rates, as well as those on second mortgages or unsecured loans. They are generally priced slightly higher than a HELOC (Home Equity Line of Credit). But they also have the added benefit of no required monthly payment. This can be a key feature for those trying to live on a fixed pension income or stretch out retirement savings, and well worth the slightly higher rate. Contact me if you have more questions or would like to explore whether a reverse mortgage may be a fit for you or a loved one.READ MORE
Managing A Mortgage In Retirement - A New Canadian Reality
More and more Canadians are hitting retirement with a mortgage or other debts. While some choose to take a mortgage while their investments make them more return; for many it is simply a necessity. The flexibility to have mortgage freedom should still be the focus and goal of all homeowners. But what if that milestone is fast approaching and you just cant get there? Or, you are past retirement, you do have debts, and you are struggling on a pension income? According to Statistics Canada, 34% of retired people over 55 are still carrying debt. Equifaxs most recent quarterly report in September noted the highest delinquency rate increase was for Canadians over 65 at 7.13%. The new reality for many Canadians changes the conversation from you must pay your mortgage and debt off to how can I work these into my new retirement cashflow and budget. So, what are your options? There are a number of ways retirees can balance their budget while still carrying debt. Focus on Monthly Cashflow vs. Mortgage Payoff If a mortgage cant be paid off prior to retirement, the goal changes from mortgage freedom to the ability to manage your housing costs on a new lower income. Making sure your monthly expenses do not exceed your monthly income becomes the focus. Here is an example: Jan is within a year of retirement. A divorce 5 years ago set her finances back and she will be retiring with 10 years left on her $80,000 mortgage. Her monthly payment is currently $770. She has a small amount of savings but only wants to use that for unexpected costs. She manages the mortgage and other housing costs without a problem on her current income, but with her new pension income it will be difficult. Keep Mortgage As-Is: $1915 monthly income ($915 Old Age Security and $1000 Canadian Pension Plan) -$770 mortgage payment =$1145 monthly to pay everything else Thats 40% of her pension income used up on just her mortgage payment! Refinance - Amortize $80,000 at 2.89% over 25 years: $1915 monthly income -$375 mortgage payment =$1540 monthly to pay everything else This leaves Jan with $395 more per month! Other Retirement Strategies In addition to restructuring your current mortgage, you may also consider these options: Refinance - Paying off high interest debt or debt with high monthly payments (ex. vehicle loan) into a lower monthly mortgage payment. Downsize- Does moving to a smaller or lower cost property improve your financial sustainability? Home Equity Line Of Credit (HELOC) - even if you are mortgage free, set this up now so you have a way to access your equity if you need it for emergencies or to pay for a downsize once you retire. Reverse Mortgage - people have an adverse reaction to these in Canada because of far inferior products sold in the U.S. Our reverse mortgages in Canada have the necessary consumer safeguards in place. They are an important option for someone in the later years of retirement where they often hold high equity in a property, need to access it to survive financially, cant qualify or manage the payment on a standard mortgage, and selling or moving is not a viable option. I have taken specific training in this product, and while it is not a fit for everyone, it can be life changing for those that are. Mortgage Planning - Ideally BEFORE Retirement If retirement is in your near future (1-5 years) you should be talking to me now. If you are heading into retirement with a mortgage, have a mortgage professional look at your cashflow and your mortgage options BEFORE you are on reduced income. Mortgages have become more and more difficult to qualify for and you may not qualify for what you need once you are on a lower income. Planning ahead while you are still on your pre-retirement income can be much easier and give you access to more mortgage products. If you are already retired there are still options. Yes, you can qualify for a mortgage in retirement! It just may be a much lower amount. Contact me to see how a mortgage can be incorporated into your retirement plan.READ MORE
New Mortgage Incentive - Understand The Benefits And How It's NOT Just For First-Time Buyers
Its here! The First-Time Home Buyer Incentive (FTHBI) officially kicked off on September 2nd, and is available for mortgages with closing dates/possessions starting November 1st. Almost all large lenders are now on board to process them. Program Basics Qualified buyers with a household income of $120,000 or less can apply for a Government of Canada shared-equity loan that will provide an additional 5% of down payment on a re-sale home, or an additional 10% down on a newly built home. The additional down payment is in the form of a shared-equity loan that will be registered to your title as a second mortgage. This loan will lower your mortgage and therefore decrease monthly mortgage payments, making home ownership more affordable. Repayment is due when you sell or after 25 years, whichever happens first. It can be prepaid at anytime without a pre-payment penalty. The amount you will pay back is the same percentage you borrowed from them, but at the fair market value of your property when you re-pay. They share the equity you gain or the loss you incur, depending on what your market value has done. For more details check out the Government website link below or call me 780 756 5363: https://www.placetocallhome.ca/fthbi/first-time-homebuyer-incentive.cfm The Incentives Impact - Example Without Incentive: $400,000 Purchase price - $20,000 Minimum down payment of 5% = $380,000 Mortgage + $15,200 Mortgage default insurance premium of 4% = $395,200 Total loan amount Monthly payment based on 2.64% rate over 25 years: $1,798 With Incentive (On Newly Built Home): $400,000 Purchase price - $20,000 Minimum down payment of 5% - $40,000 Additional 10% down payment from the Governments FTHBI = $340,000 Mortgage + $9,520 Mortgage default insurance premium of 2.8% = $349,520 Total loan amount Monthly payment based on 2.64% over 25 years: $1,590 PAYMENT SAVINGS: $208 per month DEFAULT INSURANCE PREMIUM SAVINGS: $5,680 Key Benefits: Lower Payments / Home Affordability - your monthly payments are lower which allows you more cashflow, or a way to pay down your mortgage faster if you use the savings to pay it down. Transaction Savings - the media and government have focused on the lower payment aspect of the incentive, but in my opinion an even greater perk is the reduced mortgage default insurance premiums when the additional down payment from the incentive is factored in. On my example above, the transaction savings of $5,680 are very significant. NOT Just For First-Time Buyers - the programs definition of a first-time buyer may surprise you as it does not line up to the CRAs definition of first-time buyer for the RRSP program; it is far more flexible, and only one borrower needs to meet the definition. The FTHBI will actually qualify many people who already own a property or who recently owned but had a marital breakdown. Here is their definition: You are considered a first-time homebuyer if you meet one of following qualifications: you have never purchased a home before you are experiencing the breakdown of a marriage or common-law partnership (even if you dont meet the other first-time home buyer requirements). in the last 4 years, you did not occupy a home that you or your current spouse or common-law partner owned At least one borrower must be a first-time homebuyer, as per the definition. Negative Impacts: I would be remiss to list benefits and not the negative impacts of this program. Here are some considerations before you jump on the FTHBI bandwagon: Cost Of The Loan Uncertain - The cost of payback is the same percentage that you borrowed, but applied to the market value of your home when you sell, pay out the equity program early, or hit the 25-year point at which you have to pay it. You cant calculate what the loan will cost you without knowing the market value when you pay it out. Flippers and Renovators Beware - if you plan to extensively improve a propertys value, then the government will also benefit from that improvement. This would be an example of when it would not make sense to use the FTHBI. Complexity And Unknowns - No question, using the program will make future borrowing on your property more complex. Expect more hoops at refinance, renewals, and sale as the FTHBI will be registered as a second mortgage and will have to be addressed in each of those scenarios. And with any new program, until borrowers start using it and more time has passed, we wont know all of the impacts. Increased Legal Costs - There will be more legal costs to a transaction because this requires two mortgages, not one, to be registered. Your lawyer may also charge you more to process for the same reason. I do think the default insurance premium savings, particularly with a 10% incentive on a new-build, outweigh these costs but you should understand them. This program is complex even for those of us working in mortgages everyday. If you are interested in using the FHBI, reach out to me early to answer questions and understand if this will be a fit for your purchase.READ MORE
First-Time Homebuyer Incentive - What We Do And Don't Know
Since it was proposed back in March, the First-Time Home Buyer Incentive (FTHBI) is slowly taking shape. While it is being touted as a measure to address affordability by the federal government, the response has been mixed. On one hand, it has been criticized as an overly complex program that does not address how difficult it is to qualify for a mortgage, and is simply a strategy to win millennial voters over with an approaching election. On the other hand, it does lower carrying costs and could appeal to those lower-income buyers who are hesitant to commit to home ownership because of the monthly costs. This solution was also chosen because it has a low inflationary impact on housing prices. Regardless of how it is viewed, it is clear the Government is pushing to roll this out before the election. While we wait for clarity from lenders on if and how they plan to implement the FTHBI, here are the high points of what we know and what I still see as the gaps in understanding today: What We Know For first-time buyers with a qualifying income of $120,000 or less, you can apply for a Government of Canada shared-equity loan that will provide an additional 5% of down payment on a re-sale home, or an additional 10% down on a newly built home. The additional down payment is in the form of a shared-equity loan that will be registered to your title as a second mortgage. This loan will lower your mortgage and therefore decrease monthly mortgage payments, making home ownership more affordable. September 2, 2019 - start date for applications November 1, 2019 - start date for closings (possession dates) Repayment is due when you sell or after 25 years, whichever happens first. It can be prepaid at anytime without a pre-payment penalty. The combined mortgage and FTHBI amount is capped at four times your qualifying income. The amount you will pay back is determined by the fair market value of your property when you sell or pay back the loan. They share the equity you gain or the loss you incur, depending on what your market value has done. You pay back the same percentage you borrowed, but of the current value when paying it back. You must have the minimum down payment (5% of the first $500,000 of the lending value and 10% of the lending value above $500,000) from traditional sources to participate. This can be gifted from a relative, saved, or withdrawn from an RRSP. No flex down allowed (borrowed down payment). Mobile/manufactured home purchase will only qualify for the 5% loan, even if brand new. At least one borrower must be a first-time buyer, as per the definition given by the Government of Canada. (see resource link below). It must be an insured mortgage, through any of the three insurers, with the first mortgage greater than 80% of the value of the property. The insurance premium is based on the loan-to-value of the first mortgage only (i.e. after the Incentive is added to down payment) What We Do Not Know Renewals - will you be able to switch lenders for better rates at renewal? Because the governments interest will be registered as a lien or second mortgage against your property, it makes switching lenders more complex. Clearly consumers would be at a disadvantage when it comes to negotiating a new rate at renewal if their lender knows they are not able to move the mortgage elsewhere. This has not been addressed. Income Calculation - this entire program is really based on your household income level. So what number will be used to determine your household income: Your salary? Your Notice of Assessment income level? The nitty gritty details of how this will work are still unknown 6 weeks from the start of the program. Lender Participation - The only way this program can be accessed is if mortgage lenders support it and are given the time to set up their systems to actually process them. We have not heard any announcement from a major bank supporting the government announced timelines. The program itself has been criticized as an election gimmick more than an effective tool to get people into homes. Will it make sense for lenders to scramble to change IT platforms, revise underwriting, and train staff on a program that could disappear post-election? We await take-up from lenders for the answer. Pay It Back At 25 Years Or...? - It has been laid out that the government loan must be paid out at 25-years or sooner, but what happens if at that deadline you do not have the means to pay it out with savings or do not qualify for a refinance to clear it? Would the government force a sale or foreclose? ADDITIONAL RESOURCES Government of Canada - First-Time Home Buyer Incentive Website https://www.placetocallhome.ca/fthbi/first-time-homebuyer-incentive.cfm Edmonton Journal Article - Determine If The First Time Home Buyer Incentive Makes Sense For You https://edmontonjournal.com/life/homes/determine-if-the-first-time-home-buyer-incentive-makes-sense-for-you This program is complex even for those of us working in mortgages every day. If you are interested in using the FTHBI, reach out to me early to understand if this will be a fit for your purchase. And expect further clarifications and updates from the Government as we approach the September 2nd implementation date.READ MORE
Mortgage Considerations When Property Values Drop - Don't Be Caught By Surprise
Broadly speaking, properties in Alberta have seen a decrease in value in the last couple of years. This has been more prominent with certain property types (condos for example) and locations, but lower property values are a new reality for many Albertans. In this environment there are new considerations for managing your mortgage: Plan To Stay Put Longer - Purchase Accordingly Without an increase in values to help cover the costs of selling, it will take more time to be able to sell, clear your mortgage balance and any costs of selling (realtor fees, mortgage breakage penalty), and come away with down payment for your next purchase. This is particularly true for those who buy with minimum down payment and have the mortgage default insurance premium added into the mortgage. The best way to prepare for this is to purchase a property that you can stay in longer, if possible. Higher Down Payment Or Make Mortgage Pre-Payments - Protect Your Equity Position We all know that having a higher down payment and paying off your mortgage saves you in interest costs, but it does something else...it protects your equity position. Your equity position is the current value of your property minus the mortgage balances owing on it. Having a higher down payment when you purchase or paying down your mortgage more aggressively both allow you to sell sooner and not be upside down, where you owe more on your property than it is worth. If you are concerned that you are in this position now, you can maintain your flexibility to sell in the future by paying extra on your mortgage to reduce the balance. Dont Count On A Refinance - Pay Debts Down When property values are increasing it can allow you to refinance or restructure your mortgage and draw on that home equity. This is often done to clear higher interest debts. In order to refinance, 20% of the current value must remain in the property. When property values are flat or drop, it takes more time before your mortgage balance will be low enough to allow a refinance. This means debts will need to be paid down without using the equity in your home. While I still do many successful refinances, I am seeing more clients who want to consolidate debt but their property values do not allow it. Plug away and pay that debt down! Purchase and Refinance Plus Improvements - Do Those Renovations At The Start This one is for my house hunters! Much like refinancing to pay out debts, homeowners often refinance to add a home equity line of credit or draw equity out to pay for home renovations or repairs. Now that it takes more time to be in the equity position to allow a refinance, the purchase plus improvements mortgages at time of purchase have become an even more important tool. This allows a buyer to build in a renovation, paying for a new roof, new flooring, or a finished basement at time of purchase. There is a refinance plus improvements product as well for those who JUST have 20% equity and want to build in a renovation. Renewals - Call Me! Lenders know it is tougher to qualify to switch your mortgage when property values move down, and they are quoting rates higher as a result. DO NOT ASSUME you do not qualify. I have successfully moved many clients to new lenders saving them thousands! If your current lender offers you competitive rates, great. But you will not know if they are competitive without speaking to a broker, and if they are not, you do not want to miss out on significant savings! Until we see a significant up-tick in the housing market that would push up values, it is important to understand how your mortgage options are impacted. If you have any questions please do not hesitate to reach out.READ MORE
Benefits Of A Buyer's Market - Don't Miss An Opportunity
You may have seen For Sale signs lingering on your neighbors lawn, lower values on your property tax assessments, or maybe you have even experienced difficulty selling your own house. Our Edmonton real estate market has been seeing the impact of a slow economic recovery from the Alberta recession from 2015 and the impact of tougher mortgage lending requirements. Lending on insured mortgages changed drastically in the fall of 2016, and the lending market tightened again in January 2018 with stricter requirements on how residential mortgages need to be underwritten, along with a stress test for conventional mortgages. All of this has added up to a challenging real estate market in Edmonton and area, and really for most of Canada. But in this environment, there is an upside for buyers looking to enter the market. Benefits Of A Buyers Market Whenever a market is seeing this type of downward pressure, consumer confidence takes a hit and people pull back from what they perceive as risk. In reality, times like this can be a fantastic time to enter the market: More Bang For Your Buck - With property values slipping down, you get more value for your dollar. This is particularly true at higher property prices. You may get less for the property you sell but you are getting that discount and MORE at higher values in a move-up. Low Interest Rates - A benefit of a weaker Canadian economy has been a reprieve from the increasing rates we saw over the last 18 months. Interest rates have continued to slip down from where they were this fall and winter, making mortgage payments more affordable again. Less Pressure - When the market is hot, you feel much more pressure as properties sell faster and you need to make decisions to write offers quicker. There is also a push to shorten the time you have for financing and home inspection. In a slower market these pressures lessen, giving buyers more time to make a good decision and prevent buyers remorse later. More Choice - Although listings are currently down from their peaks last year, they are still high. And, we will likely see them move higher as we move into spring. This increase in listings provides buyers with a greater selection and higher likelihood of finding a property that meets your needs. NOTE: I have had 3 clients experience multiple offers in the last 2 weeks. Even in a buyers market, a property that is well prepared for sale, in a popular location, and listed at a fair price WILL get attention. Is This Bottom? The answer is: we dont know. In any market down turn, we do not know what bottom is until we are on the other side of a decrease and prices have already climbed back up again. And guess what, at that point you have often missed the best opportunities. When Is The Right Time? The right time is a lot more about what is happening with you than what is happening in the market. If you are financially prepared to buy a property, are buying within your affordability, and are purchasing something for the long term, consider the benefits of buying in a market with these types of opportunities. I am always happy to complete a mortgage review, discuss your mortgage options, and help you plan for your purchase goals.READ MORE
Payment Frequency And Interest Costs - What You Can Save
There is a commonly held belief that that increasing the frequency of your mortgage payments pays your mortgage off significantly faster. For example, paying bi-weekly versus monthly will allow for much faster mortgage paydown. This all stems from confusion around the fact that there are two types of payments - regular and accelerated. Here are the definitions of the various payment frequencies and an example of the impact of payment frequency on interest costs. Payment Frequency Options Monthly - one payment per month; 12 payments per year Semi-Monthly - Monthly payment x 12 / 24 (or half the monthly payment); two payments per month; 24 payments per year Bi-Weekly - Monthly Payment x 12 / 26; payments every two weeks; 26 payments per year Accelerated Bi-Weekly - Monthly Payment x 13 / 26; payments every two weeks; 26 payments per year Weekly - Monthly Payment x 12 / 52; payments every week; 52 payments per year Accelerated Weekly - Monthly Payment x 13 / 52 payments every week; 52 payments per year Interest Savings By Payment Frequency Lets break out the total interest savings over 25 years for each payment frequency versus the base required monthly payment. This is for a mortgage of $300,000 amortized over 25 years at 4%. This is a bit simplistic because it does not take into account the varying terms and rates within the life of a mortgage, but it will still illustrate how much payment frequency drives interest savings. Monthly payment = $1578 ($173,420 interest paid over the life of the mortgage...GULP) Semi-Monthly payment = $789; interest savings $390 Bi-Weekly payment = $728; interest savings$420 Accelerated Bi-Weekly payment = $789; interest savings $24,550 and mortgage paid off 3 years 1 month early Weekly payment = $364; interest savings$605 Accelerated Weekly payment = $395; interest savings $24,820 and mortgage paid off 3 years 1 month early While there is a slight benefit to paying more frequently this is a very minor amount. The amount you pay extra, above your base mortgage amount, is what has the big impact. This can be done by setting your mortgage payments to be accelerated, or by using other pre-payment options such as lump sum payments or by calling to increase your payment. You shorten your mortgage and save significant interest costs by increasing your mortgage payments, not by paying more frequently. If you have goals for paying off your mortgage faster, lets come up with a plan! Small amounts over time add up to a big impact later.READ MORE
Separation And Your Mortgage - The Matrimonial Home
As the largest asset in most relationships, the matrimonial home often becomes a major focal point in a separation. In turn, mortgages become a key part of separation discussions. Here are some common options for dealing with the matrimonial home in a separation: Sell This is definitely the simplest way of putting joint debts behind you by releasing all ownership and mortgage obligations. One Party Stays Mortgage Lender Releases Other Party If one person would like to stay in the home you can start by contacting your mortgage lender to get the other person released from the mortgage. They will generally confirm that the remaining person can handle the mortgage on their own. This only works if you do not need to pull equity out of the property to pay out the person leaving the home. You do not want to be removed from title until you are removed from the mortgage loan. You would still be responsible for the debt and any fallout from missed payments or default (including impact on your credit!) but have no ownership rights. One Party Stays - Refinance To Remove Other Party If you do need funds to pay out the party leaving or if your current mortgage lender will not release them from the mortgage loan, then you should consider a refinance. This is where the mortgage is fully restructured to take one person off the mortgage. This only works if you have significant equity in the property because refinances are limited to 80% of the current value of the home. The person who will keep the property needs to be able to qualify for the home on their own. One Party Stays - Spousal Buyout If one party would like to stay but you do not have 20% equity in your property for a refinance, there is still an option to buyout your spouse. This is an insurer program than not all banks use, so you want to speak to a mortgage broker about this option. One party can purchase from the other with the minimum required down payment (5% down payment on the first $500,000 of value and 10% down payment on any value above $500,000). It is treated as a new purchase so the amortization can be up to 25 years and there is no limitation on the type of term or product. Here are some conditions and features of a spousal buyout: The down payment can be equity in the house Valid for marital and common law separation, and some joint ownership situations Only available on the primary residence in the relationship (no investment properties) Both individuals must have been on title prior to the separation There must be a legal separation agreement in place The purchaser must still qualify based on income, credit, etc. An appraisal determines the sale price No realtor involvement Standard mortgage insurance premiums apply The current mortgage lender must allow it. Some value mortgages do not allow a private sale to a related party (ex. BMO Low-Rate Mortgage) The seller is now off the property title and off the mortgage, allowing them to move on to a new purchase if they choose. If you are going through a separation or know someone who is, I can provide information about the mortgage options available and help prepare you to qualify for the new financing you may require.READ MORE
Interest Rate And Your Buying Power - What Is The Impact Of Increasing Rates?
The story of 2018 was one of increasing interest rates and a tighter lending environment. I was recently asked - how much are buyers impacted if rates continue to move up? Your maximum mortgage is determined by two calculations. The first, called GDS (Gross Debt Service) is the percentage of your gross income going towards your housing costs, including the mortgage payment, property taxes, heating, and half of the condo fees. Under standard guidelines for an insured mortgage (less than 20% down payment) GDS can be no more than 39%. Your TDS (Total Debt Service) is the percentage of your gross income going towards your housing costs and other debts. TDS can be no more than 44% of your gross income. As interest rates increase the mortgage payment factored into these calculations goes up, pushing down your maximum mortgage amount. The Numbers For this example, I assumed a household income of $80,000, property taxes at $3500/year, no condo fee, and for simplicity, no debt. I also assumed this was an insured mortgage, so a maximum amortization of 25 years, and GDS/TDS ratios of 39%/44%. Here are the maximum mortgage calculations for a range of interest rates: 4.34% - maximum mortgage $400,900 5.34% - maximum mortgage $363,200 - $37,700 less or a 9.4% drop 6.34% - maximum mortgage $330,700 - $32,500 less or an 8.9% drop 7.34% - maximum mortgage $302,600 - $28,100 less or an 8.5% drop Rule Of Thumb Based on this range of interest rates here is a good approximation or rule of thumb: When rates increase by 1%, buying power drops by 9%. . Its All About The Qualifying Rate, Not Your Interest Rate When looking at these calculations it is important to remember that the interest rate you actually get is not what is important for your qualifying mortgage amount. The stress test implemented in fall 2016 required lenders to qualify insured mortgages at the Bank of Canada Benchmark Rate, not the rate you actually get. That rate is currently 5.34%. The stress test on conventional mortgages (those with 20% or more down) implemented in January 2018 are even harsher, requiring you to qualify at 2% above the rate you actually get or the Benchmark Rate, whichever is greater. Get pre-approved today under current rates and guidelines and find out where you stand. If you wait to purchase and rates have increased, you may find you no longer qualify for the purchase price you are targeting. By knowing where you stand you can be ready to jump on a good opportunity as it comes up.READ MORE
Mortgage Coming Up For Renewal? Most Insured Mortgages Can Switch Without A Stress Test
Is your mortgage renewing this spring? Are you concerned you may not qualify under the new mortgage rules? Then this newsletter is for you. Two years ago there was a new stress test applied to insured mortgages. This required buyers with less than 20% down payment to qualify based on a mortgage payment calculated at the Bank of Canada Qualifying Rate (aka Benchmark Rate) instead of their contract rate, or the rate they actually get. It effectively dropped buyers maximum mortgage amounts. But there is a little-known loop hole to the new stress test that could save you a lot of money. I have had several people tell me they are not shopping lenders or rates at renewal because they do not think they will qualify under the new stress test. Lenders know this and many of them (particularly credit unions and big banks) are offering inflated rates to their renewal clients. Dont miss out on the savings you can get from a switch! Insured Mortgages Best Rates and Stress Test May Not Apply For an insured mortgage that closed prior to Nov. 30th, 2016, that mortgage can be transferred to another lender qualifying at the 5-year fixed contract rate (ex. 3.69%) they get instead of the tougher stress test rate (5.34% currently). Your mortgage insurance can also travel with your mortgage to the new lender. This means that not only do you qualify under the easier guidelines, but you also have access to todays best rates which are given to those with insured mortgages. Where This Does Not Apply Here are situations where this loophole does not apply: Your mortgage is no longer insured because you have refinanced or changed the structure of the mortgage You had more than 20% down when you initially purchased You want a variable rate mortgage or fixed rate shorter than 5-years - these still need to qualify at the higher Benchmark Rate. Lenders who do not honor this policy - this is where a broker can help! . Call Me and Call Early More and more lenders are counting on you not to shop your mortgage rate at renewal. Keep more money in your pocket! Call me to confirm what your options are at renewal. And call early you can hold a rate up to 4 months ahead of your maturity/renewal date! If your renewal is further out and you want to be reminded, just send me a note and Ill set you up with a renewal reminder so you hold a rate early. In an increasing rate environment, being early to hold a rate at renewal can translate into significant savings!READ MORE
When Should You Start Your Pre-Approval? The Earlier The Better!
If buying a home is a consideration in the next year, it is time to sit down and talk financing. I often sit down with buyers 6-12 months ahead of their planned purchase. If you are selling and buying, it is even more complex and you definitely want to understand your financing options prior to listing your current property. By doing a pre-approval early you get the following benefits: Find Out If You Qualify With mortgage rule changes over the past few years, it has become more and more difficult to qualify for a mortgage. It is very important to get a sense of where you stand early in the process and make sure you are prepared. If you do qualify, for what property type and amount? If you do not qualify, what can you do to get yourself to where you want to be? Often there are things that can be done to better position yourself for a purchase. For example, you may need to get access to your equity for down payment or perhaps paying off a credit card or reducing a mortgage payment on another property you own could allow you to qualify. Learn Mortgage Options Before A Time Crunch Once you write an offer on a home, you are under a condition deadline to get your financing complete. This can be an intense time and so difficult to make thought-out decisions. Understanding various types of mortgages (ex. fixed vs. variable) and different mortgage features before writing an offer can allow you the time to think through what is the best fit for you. You can avoid a quick decision under time pressures that you may regret later. Fix Credit Issues By starting early, you have time to repair credit or even fix errors on your credit report. These can take time to clear up or improve, so it is far better to deal with them before you write an offer and are in a time crunch. Dont Miss Unexpected Opportunities If the perfect property or an excellent deal comes up earlier than you expected to purchase, you want to be able to take advantage of the opportunity. Gather Documents Ahead Tighter mortgage financing has meant more documents are required by lenders to confirm your mortgage approval. By gathering that paperwork during the pre-approval stage, it makes financing faster when you actually write an offer and have a deadline to meet. Know How Much Money You Need Meeting early can give you the time you need to save for not only the required down payment, but also for the additional costs associated with buying a home. A home is likely the largest purchase you will ever make. By starting your financing early and educating yourself, you will feel more in control of the process and make better, informed decisions along the way. Contact me early for your pre-approval meeting!READ MORE
Paying Realtor Commissions - Why Lower Is Not Necessarily Better
Whether you are a buyer or a seller, it is important to understand how your real estate agent is getting paid. This is actually a difficult topic to tackle because there are more and more variances to realtor commission structures. I will do my best to explain how the most common structure works and other considerations when negotiating lower commissions. Selling / Listing Realtor Commission With the most common commission structure, a realtor charges a percentage of the sale price as the cost of their services for selling your property. For example, 7% of the first $100,000 and 3% of the balance. On a $350,000 home the cost is $17,500. This is typically split with the buyers realtor. The listing realtor gets $8,750 and the buyers realtor gets paid $8,750. For the listing realtor, the fee has to cover all of the realtors costs to list your property: professional photographs, advertising and promotions, staging, brokerage fees (these can be as much as 50% of their commission on any sale or purchase), their time, and other general costs of doing business (gas, errors and omissions insurance, office supplies, office rental, etc.). Buyers Realtor Commission As I mentioned above, a buyers realtor is generally paid by the sellers realtor as part of the listing commissions they pay. In most cases, a buyers realtor is free to the buyer BUT if the seller chooses a low commission structure or no commission structure, the buyer may need to pay for some or all of their services directly. This fee is paying the buyers realtor for their vehicle and gas costs, negotiation services, research (property, market and neighborhood), brokerage fees, their time, and other general business costs (gas, errors and omissions insurance, office supplies, office rental, etc.). Discount Commission - Understand The Impact Over the years, there have been many new commission structures from discount brokerages. These range from listing commissions that include no buyers agent fee or a greatly reduced amount (ex. 2% of the sale price). If you choose to sell using one of these structures or negotiate a lower fee with your realtor, it is important for you to understand some of the potential unintended consequences: De-motivating Other Realtors - With the most common commission structure, any other realtor has as much motivation to sell your property as your own agent because the pay is equivalent. When you reduce the realtor commissions that you are paying, you are decreasing the commissions that the buyers realtor is paid and de-motivating them to sell your property. Creating A Buyer Barrier - Buyers sign agreements with realtors at the start of their relationship to determine what they will pay them, so that they are paid for the time and expenses they put into their search. If the buyers realtor is not paid through proceeds of the sale by the seller, the buyer has to pay those costs. Many buyers will not be willing or are simply financially unable to handle those additional costs. And while they may still write an offer requesting the seller pay, they may also just move on to the next property that does not have this complication. Less Spent On Your Listing - If you reduce what your realtor will get paid when you sell, you are giving them less budget to spend on listing your property. This could mean smartphone pictures instead of professional pictures or videos, no social media advertising budget, no staging. These are all things that improve your chance of selling faster and/or at a higher price. Buyer Access To View Your Property - Most full-service realtors would have a key lockbox on your front door to allow other realtors access to view the property with their clients. If you do not have a lockbox and need to be home for a buyer to see a property, it can significantly limit the times available for them to view. If it is not convenient for the buyer, or they do not feel comfortable viewing the property with the current owner guiding them, they may just move on to the next property. Experience and Expertise - service and experience should also be a factor in your decision on who to hire. Is the lower commission still getting you the service and expertise you want? These lower commission structures can still be successful. People use these structures all the time to sell and buy. If your property is in a high demand neighborhood with little listing competition, using a discount commission may not impact you. But as we adjust to buyers having more power with higher inventory and more listing competition, it is important to understand how your realtor commission structure can improve or impede your ability to sell. Before hiring a listing realtor, understand how they are paid, how your buyers realtor will be paid, and what services and experience you are getting in return for those fees.READ MORE
Helping Your Kids Buy - Co-Signing Versus Gifting Funds
With high property prices and tougher mortgage qualifications, parents are stepping in to help their kids purchase more and more. Here are two ways they can help - acting as a co-signer and/or giving them funds for down payment, and some considerations for each. Co-Signing A Mortgage If a buyer does not have the income or credit established to qualify for a mortgage, a parent may be asked to act as a co-signer. When you agree to co-sign on a mortgage you are fully responsible for that mortgage. Here are some considerations for anyone considering to act as a co-signer: Undefined length of commitment - A parent can only get off the mortgage when the lender releases them from the mortgage, which is unlikely unless the childs position has greatly strengthened. The other way to get off is to refinance, but this can only be done once there is a 20% equity position, so again it can take many years. Responsible for payments - If the primary mortgage holder has difficulty making the payments or pays late, any delinquencies also impact the co-signers credit. The co-signer is ultimately responsible to keep the mortgage current as well, meaning that to avoid bruised credit or a foreclosure that would forever impact their ability to access financing, they would need to catch the mortgage up. The buyers income should be able to support payments - When a parent with significant income comes onto the file, it increases the maximum amount that can be purchased. The risk to this is that it is easy for the buyer to over-purchase and end up with a payment that is more than they can afford without the co-signer contributing to the carrying costs of the property. Impact on the co-signers future access to funds - When the co-signer tries to qualify for a mortgage or other loans for themselves in the future, lenders will take into consideration that they also need to be able to cover the carrying costs on any property they co-signed on. This can limit the amount of funds they can access in the future for their own purposes. Gifting Down Payment Another option parents look at is giving funds to the child for down payment. Im referring to a true gift, one that does not need to be paid back. Here are some considerations when gifting funds: The gifter has less control - When a parent gifts funds, they will not have an interest in the property their child purchases or what they choose to do with it down the road. Because they are not tied to the property or mortgage, the child can make decisions without them being involved. If you are going to gift funds you do it with no strings attached! All mortgage lenders will ask you to sign a gift letter declaring it a true gift and you are recognizing that you have no interest in the property your child purchases. It may reduce the impact on the gifter in the future - By not being tied to the property and mortgage, a gifter limits the future financial impact on them personally. Their credit is not impacted by any late or lack of payment on the buyers part and it has no impact on their future ability to qualify for loans and mortgages. Give only what you can afford - If a parent will go into debt to gift down payment funds, or if it leaves them with no savings in case of an emergency, they may want to reconsider their position. As you can see, gifting funds creates far less future ties to a childs purchase and can avoid complications down the road, which is why I usually recommend it as a preferred approach. It keeps accountability for the mortgage with the person who is actually living in the property. If someone does choose to co-sign, they should be in a very strong financial position and able to carry the mortgage they co-sign as well as their own financial obligations. And if a parent chooses to gift funds instead, it is important to let go and give those funds knowing they are trusting it in their childs hands from that point forward. If you have questions about the options available to you to help someone purchase a home, I am happy to talk you through them.READ MORE
Retirement On The Horizon? Mortgage Free Or Not - Call Me First
If you are coming up on retirement in the next few years, it is a great time to think through your mortgage needs in this next phase. It is more difficult to qualify for a mortgage when you retire, as you have less income, particularly under recently tightened lending guidelines. Planning ahead and setting up what you need before you hit retirement can make it a smoother process and save you stress and money down the road. If you have a mortgage, you could lower payments to accommodate your lower retirement income. Or, if you do not have a mortgage, you could be setting up a flexible way to access your equity in the future. Refinancing To Lower Your Payments People often think of refinancing as a solution to reducing their interest costs and consolidating debts. While this is one reason people consider refinancing (breaking your current mortgage and setting up a new one with new terms), lowering payments is another top reason to restructure your mortgage. If your income in retirement is going to drop significantly, it may make sense to push out your mortgage and drop the mortgage payments to accommodate it. I often do this for people who have the investments to actually pay off their mortgage completely. When they look at the tax ramifications to withdraw and the loss of interest on those investments, they choose to keep their mortgage because it costs them less than cashing out. Example: You have a $150,000 mortgage currently at a 5-year amortization. Your monthly payment at 4% is $2,760. If you refinance to push this out to a 15-year amortization, your monthly payment at 4% is $1,107. Your monthly cost drops by $1,653! Mortgage Free? Set Up Easy Future Access To Home Equity It is often those who have been mortgage free for some time who do not prepare ahead with an easy way to access their equity. It is usually because they have been financially strong enough that they have never had difficulty getting loans or financing. With homes at such high values and so much of your net worth tied up in one, I highly recommend setting up an easy way to access the equity should you need it in the future and before it becomes more difficult to qualify on a fixed income. The easiest way to do this is to set up a significant Home Equity Line of Credit (HELOC). It can provide many great benefits in the future: Bridge financing on future purchases - If you choose to downsize and want the flexibility to buy before you sell, this provides a built-in way to pull out the funds you need to buy. It allows you to avoid the stress of moving twice and of course avoid you needing to be approved for a mortgage while on a lower, fixed income. Home repairs and maintenance - Once on a fixed income, you may find it difficult to manage an unexpected bill for a large home maintenance item such as a furnace or roof replacement. Supports to age in place - If drawing on your equity allows you to afford the supports you need to stay in your home longer (ex. nursing and other home care supports, lawn care, snow removal, cleaning services), it can be far cheaper than being forced to move into an assisted living facility at a significantly higher monthly rent amount. Already Retired? There Are Still Options If this newsletter comes a bit too late and you are already into retirement, there are still options that can help you. Your pension income can be used to qualify for a mortgage (although it may be less of a mortgage), so you may still qualify for traditional lending, whether for a downsize purchase, restructuring to lower payments, or for a HELOC. If you do not qualify for traditional mortgage lending, there are other options you can consider. One of these is a reverse mortgage. These have a bad reputation because products by the same name sold in the United States have all sorts of terrifying terms and conditions. The reverse mortgages available in Canada are only offered by two lenders, both banks, both highly regulated, and with the safeguards to make them a reasonable and safe option for seniors who own their home but find themselves short on the funds to stay in it. Reverse mortgages do have higher interest costs than a standard mortgage or HELOC, but they also do not require payments, which can be a huge factor on those with a fixed income. And again, when comparing those costs to the cost of being forced to move into a higher-cost living situation, a reverse mortgage can make a lot of sense. Ill talk more about this product in a separate newsletter. Before you hit retirement contact me to discuss whether there are any mortgage changes you should consider. If you are already retired and want to discuss mortgage options that can help meet your needs, I can help with that as well.READ MORE
Interest Rates Are Moving Up - What Will Your Payments Be At Your Next Renewal
This blog is specifically for those in a fixed rate mortgage. When you take a fixed rate mortgage, you lock in your rate for the term of that mortgage. When your term runs out, we call that your renewal or maturity date, at which point you negotiate the next term. Rates have recently been on the move up from their historic lows. If you have a fixed mortgage, you are very likely going to be renewing into a rate higher than your previous mortgage term. There has been lots of news about interest rates being on the rise. And while 5-year fixed rates have moved up from their historic lows last year of around 2.5%, they are still very low at just under 3.5% (insured mortgage rates). Even as recently as 2007, the rate on a 5-year term was around 6%. If the trajectory of rates continues, you should understand how your rate will impact the carrying costs on your home. EXAMPLE A $350,000 mortgage amortized over 25 years currently at 2.5% has a monthly payment of $1,568. While we cannot know what rates will be over the next couple of years, here are monthly payments on the same mortgage at various rates so you can get a sense of what the impact would be on monthly payments if you end up renewing into a higher rate over the coming years: 3% = $1,656 4% = $1,841 5% = $2,035 6% = $2,239 Worried? Here Are Things You Can Do You cant control the mortgage market, but you can do some things to better prepare and handle your costs in a higher interest rate environment: Bump payments up now - this will reduce the impact of the higher rates later because it will be on a lower balance and gets you used to paying a bit more. Eliminate or reduce other debts - if you focus on reducing debt, particularly high-interest debt like credit cards, it will leave you with more cash flow each month to better handle higher mortgage payments. Refinance to re-amortize - you may have the option of refinancing your mortgage to push out your amortization and therefore lower your payments. This will increase how long you have the mortgage and the overall interest you pay, but it is an option to consider if you are struggling to maintain payments. Downsize - if it is a possibility for you, you could choose to downsize to a smaller property to reduce your monthly housing costs. Get in early on renewals and pre-approvals - rates can be held for 4 months so being on top of things to get rate holds can save some big bucks in an increasing rate environment. Contact me early on if you have a renewal coming up or if you are concerned about handling the increasing payments on your mortgage. We can discuss your options to see if you would benefit from restructuring your mortgage. Have a plan and feel prepared.READ MORE
Your Mortgage Is Not A Life Sentence - How To Knock Years Off Your Mortgage
At the start of your mortgage, your balance can seem like a huge number to tackle. But if you make use of your pre-payment options you can have a big impact on how long you have a mortgage. Pre-payments go straight to your principal so those extra payments immediately reduce how much interest you will pay and how long you will have the mortgage. Lets look at an example of how these work: Example Initial Mortgage You purchase a $400,000 home with a 5% down payment. At 3.34% amortized over 25 years, your monthly payment is $1,940. Total interest paid: $186,766* Mortgage freedom: 25 years Making Pre-payments You decide to make use of your pre-payment options and increase your monthly payment by $200 and make an annual lump sum pre-payment of $2000 each year: Total interest paid: $140,176 for an interest savings of $46,590* Mortgage freedom: 19 years 7 months You decide you can even be more aggressive and increase your monthly payment by $300 and make an annual lump sum pre-payment of $3000 each year: Total interest paid: $124,684 for an interest savings of $62,082* Mortgage freedom: 17 years 9 months TIPS Small amounts more frequently save you more interest than the same amount paid in one lump sum each year. Lenders differ on the pre-payments they allow how much and how frequently (ex. Once per year vs. any payment date). Make sure you get the right mortgage and lender that will give you the pre-payment features you need to be mortgage free faster. You can set these up to happen automatically, which will help you keep on track with your mortgage freedom goals. Mortgage payment frequency has very little impact on the interest you pay. Bi-weekly payments are often accelerated which means they actually increase the payment to build in two extra payments a year. Pick the frequency that works best for you and then increase it. Payments do not need to be bi-weekly or weekly, it just needs to be increased. If you get an increase in income, immediately increase your payment. You will not feel the impact on your lifestyle. Tax refunds are a great opportunity to do a lump sum payment. Paying off your mortgage can give you financial freedom, but there is no sense focusing on this while you pay other debts at a much higher interest rate. Focus on high interest debt first, then you can tackle your mortgage. Im a big believer in setting goals and then implementing the steps needed to get there. It you have a mortgage and have a goal for mortgage freedom, give me a call and Im happy to help you get there. And yes, I expect an invitation to the mortgage burning party! *Assumes interest rate stays at 3.34%. If rates increase over time, interest costs and interest savings are even greater.READ MORE
Renewal vs. Refinance - What's The Difference?
Renewals and refinances are both very useful tools to homeowners who want to change the terms of their mortgage. Lets look at the differences between the two. What Is A Renewal? When you start your mortgage you choose a term (the length of time you are committed to a particular rate). It may be fixed or variable, but the length of term is what determines your renewal date, also known as your mortgage maturity date. If you choose a 4-year fixed then your renewal will be 4 years later. A renewal is simply a renegotiation of your mortgage term when your prior term ends. You can choose to select a product and term that your current lender is offering, or you can choose to move to another lender with more competitive rates or products that are a better fit. If you move your mortgage to another lender, this is often referred to as a switch or transfer. You will need to re-qualify to move your mortgage. If you stay with your current mortgage lender, they generally do not re-qualify you. But dont let that prevent you from looking at options - your current lender is counting on that! They want you to take their offer, which can make them more money as they often offer rates above the current market offerings. You continue on your same amortization as you were on before, so for a standard transfer or switch the registration to your land title does not need to be removed. The new lender can simply revise the registration to show their name instead of your old lender. If you had a 25-year amortization to start, you now have a 21-year amortization. If you made extra payments to your mortgage, this may have been shortened. The cost to switch to another lender is generally free, unless your current lender has registered your mortgage collaterally or in the unlikely event an appraisal is required. There are some mortgages being sold that are simply not transferable (such as BMO Smart mortgages; their low rate offering) and require a bona fide sale to leave the lender. These are not switchable. You actually cant leave these lenders without selling your home and they even put restrictions on that, not allowing it to be a private sale. What Is A Refinance? A refinance is where you change the structure of your mortgage. This can be extending out the amortization to lower your monthly payment, changing to a better term or rate, increasing your mortgage amount to consolidate debt or pull out money, or it can be to remove or add people to the mortgage contract. You do need to qualify for a refinance, so you can expect to provide updated information on your income, the property, etc. You must have at least a 20% equity position to be able to qualify for a refinance. Or, said another way, your maximum mortgage amount on a refinance is 80% of the current value of the property. If you change the terms and structure of your mortgage, the current registration to your land title needs to be removed and a new one added, increasing the costs of the transaction. These include legal fees, and possibly appraisal costs and breakage penalties, depending on the situation. A refinance can be done with your current lender or, once again, your options with other lenders may be more attractive. There are lenders who have mortgages that do not allow you to refinance with other lenders. They may allow you to refinance with them, but only at whatever rates they offer you, and only if you qualify under their policies (and they know you are stuck with them!). Why These Terms Are Used Together The reason people think about refinancing and renewing as the same thing is because doing them at the same time can save you money. When your mortgage is renewing, you are able to refinance without any breakage penalties so it is the lowest cost time to look at a refinance. That said, penalties can be small depending on the type of mortgage you have, so even if you are not renewing it still may make sense. If your renewal is coming up or you want to understand if refinancing would work for you, contact me to talk through your options.READ MORE
A New Year Will Bring New Mortgage Changes - How They Impact You
On October 17th, the Office of the Superintendent of Financial Institutions (OSFI) announced new mortgage rule changes for conventional mortgages that must be implemented by January 1, 2018. These are mortgages with 20% or more down payment. This includes not just buyers, but also refinances. If you need to refinance, doing so before the deadline may make or break your ability to qualify. If you are a buyer with less than 20% down, these rules do not apply. I will break out what the announcement was and how it will impact you. Announced Changes 3 Key Changes Highlighted: Conventional Stress Test - Instead of qualifying at the interest rate you actually get, the minimum qualifying rate for uninsured mortgages (those with 20% down payment / equity) will be the GREATER of the five-year benchmark rate published by the Bank of Canada (currently 4.99%) or the contractual mortgage rate +2% (ex. 3.39% + 2% = 5.39%). Risk-Based LTV Limits - OSFI is requiring lenders to make down payment requirements adaptable to risk, so they can be increased if higher economic or housing market risks appear. No Bundled Mortgages - Some federally regulated lenders were offering combination products, generally a first mortgage with them up to 80% loan-to-value (LTV) and pairing it with a private second mortgage at a higher interest rate to get it to 85% or 90% LTV. These can no longer be presented to a consumer as a combined product and interest rate, nor can they be processed at the same time. Of the above, the stress test has the most immediate impact to the largest number of consumers so that will be the focus of this newsletter. Stress Test - Who It Impacts These changes are challenging to communicate because they hit the strongest buyers and those least likely to be concerned about them. More than ever, regardless of how strong you think your purchase position is, a thorough pre-approval can save you from unpleasant surprises. Find out where you stand and if these rules will impact you personally if you are: A buyer with 20% or more down payment Refinancing a primary residence or rental property Renewing your mortgage on your property that you purchased with more than 20% down and want the ability to switch to a lender offering better rates Conventional Stress Test - How It Works Lenders determine their policies on maximum lending based on two affordability ratios. One calculation determines what percentage of your gross income is required to meet your housing costs (mortgage payment, condo fee, property taxes and heating). Most lenders allow this to be a maximum of 39%. The second calculation determines the percentage of your gross income required to meet your housing costs and your other monthly debt commitments. Most lenders allow this to be a maximum of 44%. While these are the most common maximums for these ratios, lenders determine their own policies and some do offer exceptions for conventional buyers. Instead of using the interest rate you are actually getting to calculate the mortgage payment in these ratios, lenders will now have to use the Bank of Canada Qualifying Rate or the contract rate plus 2%, whichever is greater. This increases these calculations so you reach the lenders maximum affordability ratios at a lower mortgage amount than you do now. This rule change drops your buying power. Example Mark and Nicole have salaries of $65,000/year each. They are buying with 20% down payment. For debt they each have a $650/month car loan, Nicole has a line of credit with a calculated payment of $500/month, and Mark has a $400/month student loan payment. Assumptions: property taxes $4000, no condo fee, $125/month heating, 5-year fixed contract rate of 3.39%, 25-year amortization, standard insurer affordability ratios. Maximum Purchase Old Rules - $530,000 Maximum Purchase New Rules - $435,000 = 18% drop in buying power Commonly Asked Question On These Changes Do Pre-Approvals Protect You? It is up to lenders how they will roll out the Jan. 1st change, including how they will manage pre-approvals. So far, the majority who have announced their implementation specifics are not honouring pre-approvals issued before the 1st. That said, some may still choose to honour them. Will This Impact My Renewal? If you stay with your current lender you do not need to requalify at these tougher guidelines. If you choose to move lenders you will need to requalify. Unfortunately, lenders will know this and it will give them more reason to offer higher interest rates at renewal, knowing some will have no choice but to stay put. Before you sign those renewal papers, give me a call to discuss your options. Are Credit Unions Impacted? Credit Unions are not governed by OSFI and are provincially regulated, so they are not required to follow these guidelines. Most credit unions lend conservatively and many already use the Bank of Canada Qualifying Rate, it is up to individual credit unions to determine their lending policies and if they are choosing to follow these same guidelines. Do I Have Until Jan 1st To Write An Offer? No, not necessarily. It is up to lenders to choose how they will implement the deadline. Some lenders are choosing to process any offer accepted prior to midnight on Dec. 31st under the old guidelines. Others are choosing earlier deadlines for submissions, as early as Dec. 15th. What If I Am Approved But My Possession Is After Dec. 31st? You can confirm with your lender, but so far all lenders who have announced their implementation plans are grandfathering mortgages that have already been approved but are waiting to close, even if possession is after the rule change deadline. If you would like to discuss how these rule changes impact your purchase or refinance, contact me to do the math on your pre-rule change and post-rule change numbers.READ MORE
Buying Again? How Much Down Payment Do You Need?
I still get a lot of questions about how much down payment is required for different types of property purchases. Lets look at how property use and type determines how much down payment will be required: Primary Residence Whether it is your first or fourth purchase of a home, the minimum required down payment for a primary residence worth less than $1 million is only 5%. You do not need to be a first-time buyer. You can also currently own a home, not sell it, and still go purchase another property with 5% down payment (assuming you qualify for the mortgage!). The only exception to this is for properties over $500,000. For any amount above $500,000 you will be required to make a minimum down payment of 10%. If you are purchasing with less than 20% down, you are required to pay mortgage default insurance premiums. There are 3 mortgage default insurers in Canada: Canada Mortgage and Housing Corp. (CMHC), Genworth, and Canada Guaranty. CMHC changed their policy in the last few years to only allow one property to be insured with them. This created a misconception that you needed 20% down if you were buying your second home. This is not the case, as the other two insurers will insure more than one property for a borrower. They just limit their overall exposure by putting a limit of $1 million allowed for one borrower in total. For example, you could buy an insured home with a $500,000 mortgage, a cabin for $300,000, and still buy a condo for your university student at $150,000 with 5% down. Second Home The minimum required down payment for a second home is 5%. A second home describes any property that is meant for you or a family member to live in without requiring rent. This could be a vacation property, a home for an aging parent, or even a property that your children will live in while attending post-secondary. The property itself must meet insurer requirements. Vacation properties may require more down payment if features of the home deem it less marketable. For example, if it is not winterized or not accessible year-round by road, you may be required to have a 10% down payment. Investment Property Whether you are planning to rent it out, flip the property, or just hold on to it, when purchasing a property for investment purposes, the minimum required down payment is 20%. This requirement was put in place to strengthen the Canadian housing market and reduce speculation. If a person runs into financial difficulties, they will work harder to keep the roof over their head versus a property they own but do not live in. Investment purchases are riskier mortgages and therefore require a higher down payment to purchase. I often get asked if there is any way around this. The simple answer is no. If you misrepresent a purchase as being a primary residence that is actually a rental in order to buy with less than 20% down payment, you are committing mortgage fraud. You are asking an insurer to insure the mortgage under false pretenses. They agree to the mortgage without understanding their actual risk level. This could come to bite you down the road on another purchase if insurers are no longer willing to insure your purchases. If you plan early on, there is a way to build a rental portfolio that allows you to own several properties without needing the 20% down payment. You do this by purchasing primary residences that are easily converted to rental properties later, after you have lived in them. I will dive into this in a separate newsletter, but if you do see yourself building a rental portfolio, it pays to work with an experienced mortgage professional early in the process. Property Type and Buyer Risk Can Impact Down Payment Requirements The above required down payments are the general guidelines. When purchasing with less than 20% down, you are subject to insurer approval. A pre-approval from a lender does not mean the insurer has approved your purchase. The insurer does not review your application until you write an accepted offer and your lender submits it to an insurer. If your purchase is deemed riskier for some reason, whether it is the quality of the property, your credit history, or even your job or income history, an insurer can choose to require more down payment or decline it altogether. Speaking to an experienced mortgage professional can help you understand the down payment requirements specific to your situation. This is also why you ALWAYS protect yourself and your deposit by writing a purchase offer with a condition that it is subject to financing approval. What About 0 Down? This is another major misconception in the market. Can you buy with zero down payment? No. You need to have at least 5% down to purchase in Canada, but that can be from a borrowed source (ex. Line of credit). Borrowed down payment is only available if you are a very strong buyer and can qualify for the purchase while carrying that debt payment. If you would like to discuss your purchase plans and how best to structure your mortgage, please do not hesitate to contact me.READ MORE
The RRSP Home Buyers' Plan - What It Is And Some Facts That May Surprise You
The Home Buyers Plan (HBP) is a program that allows you to withdraw some of your Registered Retirement Savings Plan (RRSP) tax-free to use towards the purchase of a home. Even if you are aware of the program, there may be some things about it that you do not know. Home Buyers Plan - How It Works The program allows you to pull out up to $25,000 of RRSPs per person to be used towards a primary residence purchase. If you are a couple and you both qualify to use it, your max would be $50,000 if you each have $25,000 invested. As long as you meet the program guidelines for eligibility and withdrawals, you can do this without being taxed on the money you pull out. And, of course, the investment you have your RRSP in must also be cashable. It is possible one person in a couple will qualify to use the program and the other will not. You then pay the amount you pull out back 1/15 per year over 15 years. If you ever miss a repayment, that payment is considered income in that year and Canada Revenue Agency (CRA) will require you to pay taxes on it. Surprising Facts Moving In With Someone Could Take Away Your Eligibility To Use The HBP - The elibility guidelines state that you are considered a first-time home buyer and can use the program if, in the four-year period (defined specifically by CRA; see their definition to determine your exact timeline), you did not occupy a home that you or your current spouse or common law partner owned. In other words, if you move in with your girlfriend or boyfriend into a property they own and live with them for a year, this could prevent you from using the program until you are outside the four-year period, which is actually 4 - 5 years depending on the timing. You Can Use the HBP If You Previously Owned Or If You Have Only Owned An Investment Property - If you previously used the program, that does not prevent you from using it again. Your previous account has to be paid to zero in January of the year you plan to withdraw again. You must also meet the same first-time home buyer requirement of not having lived in a property you or your spouse or common law partner owned for the CRA definition of the four-year period prior to your purchase. You can also use the program for the first time even though you previously purchased an investment property, as long as you meet these same requirements now. It Can Be Used For Things Other Than Down Payment - The program states that the funds go towards the purchase or build of an eligible property. But, it can be used for things other than down payment related to a home purchase. For example, you can use it to help pay legal fees or closing costs on a purchase. It is the individual withdrawing their RRSP funds who is responsible for confirming their eligibility to use the program, so you should not rely upon anyone except CRA regarding your eligibility. You can click here to review the rules and guidelines carefully: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans/what-home-buyers-plan.html You can also call CRA to clarify or ask questions. If you do not meet the guidelines and pull that money out, you could face an unexpected tax bill when you file your taxes. If you would like to discuss how you can use the HBP RRSP program, please do not hesitate to contact me.READ MORE
Your Maximum Purchase Price Is Now A Moving Target
Pre-Approvals Hold Rate But Not Maximum Purchase Price This is a heads up to buyers and the Realtors who assist them! A couple of weeks ago we got to see an unintended consequence of the mortgage rule changes that now require a stress test on insured mortgages. Buyers with less than 20% down need to qualify at the Bank of Canada Benchmark Rate, not the lower contract rate they are actually getting. The stress test has been in effect since last October. But, two weeks ago the Bank of Canada Benchmark Rate moved up for the first time since these new rules rolled out, increasing from 4.64% to 4.84%. It left banks and other mortgage lenders scrambling as they realized that any pre-approved clients immediately had a drop in their maximum purchase price. It was a small change but for those shopping at their maximum it can be the difference between a lender approval or a decline. Your Rate Can Be Held, the Bank Of Canada Benchmark Rate Cannot The requirement for buyers to qualify at the Bank of Canada Benchmark Rate is triggered when a mortgage is submitted to the insurer for approval once they have an offer on a property. A buyer can hold their contract rate by doing a pre-approval with a lender, but this does not protect them if the Bank of Canada Benchmark Rate moves up. They will still have to qualify at the current Bank of Canada Benchmark Rate when they actually write an offer. If the Bank of Canada Benchmark Rate moves up while a pre-approved client is out shopping, their maximum mortgage amount will drop. So How Do We Pre-Approve People Now? Pre-approvals were never guaranteed. The have always been subject to lender and insurer approval when an offer was actually written. This just adds another variable that can impact that final mortgage approval. My approach to pre-approvals is educating buyers on how a maximum purchase price is calculated and providing them with the assumptions that go into their maximum purchase calculation. When I pre-approve clients, they will be given a list of the variables or assumptions that go into their maximum purchase calculation. These include condo fees, property tax amount, the current Bank of Canada Benchmark Rate, and heating costs. These assumptions should be shared with the buyers Realtor. If any of these variables change while they are out shopping, it is important for them to revisit their maximum purchase, particularly for those buying near their maximum. What Should Buyers Do? Buyers can prevent failed financing attempts by working with a mortgage broker or lender who will help you understand how mortgage qualification works and the variables that go into their approval. Once pre-approved and out shopping, remain in contact and if properties you are looking at no longer line up with the parameters when you first did your pre-approval, it is time to call your lender and confirm that you still meet qualification guidelines. Buyers should also protect themselves by writing any offer on a property subject to satisfactory financing so you can confirm a lender and insurer will approve your mortgage before your deposit is on the line. Where Does The Bank Of Canada Benchmark Rate Come From? The Bank of Canada Benchmark Rate has become key in lending, but where does it come from? It is currently 4.84%. Each week the Bank of Canada polls the big banks in Canada on their current 5 year fixed posted mortgage rate. The Bank of Canada Qualifying Rate is the average of those numbers. As mortgage rates move up, so will the Bank of Canada Qualifying Rate. It is identified as the Conventional mortgage - 5-year on the Bank of Canadas Daily Digest: Bank of Canada Daily Digest August 11 If you would like your pre-approval revisited or have a client that needs a second look given these changes, please do not hesitate to contact me.READ MORE
Do I Lock It In? Variable Mortgage Holders' #1 Question
Im sure you have heard for the first time in 7 years the Bank of Canada has increased their prime lending rate, which in turn is passed along by lenders to those consumers with loans and lines of credit connected to prime rate. My phone was ringing off the hook as those with variable rate mortgages are faced with a payment increase, many for the first time. Lets take a look at what we know and how you should decide what is the best fit for you. Historically Variable Mortgages Have Saved Borrowers Money We know that historically Canadian borrowers have saved money in a variable rate versus fixed rate over the life of their mortgage. The last part is the key. Over one term they may not, but over time they typically do. The foremost research on this topic was done by York Universitys Dr. Moshe Milevsky in 2001 and updated again in this article in 2008: http://www.advisor.ca/images/other/ae/ae_0208_mortgages.pdf Based on data from 1950 to 2007, he concluded the average Canadian could expect to save interest 90.1% of the time by choosing a variable rate mortgage instead of a fixed. That said, even with these results he did not see a variable rate mortgage as a fit for everyone. Will It Continue to Rise? A month ago the answer to this was different. The majority of analysts were predicting a rate increase later this year. Now, there is a growing chorus of those that expect yet more increases this year, and more to come next year. It wont happen over night, but the trend on rates has changed. The challenge is, no one really knows when they will increase or how they will go until we get there. The Bank of Canada makes these decisions 8 times a year based on a number of economic indicators, and those change continuously. So will they continue to rise? The expectation is they will gradually rise as long as our economy continues to show the same strength. Who Should Lock In? Here is my take on those who should lock in: Payment Sensitive - If you feel a fluctuation in payment would put you into a financially uncomfortable position, then the predictability of payment with a fixed mortgage is probably a better fit for you. The Worrier - If your stomach is in knots 8 times a year leading up to the Bank of Canada announcement dates, you troll papers daily on signals of what is coming, or lose sleep over a higher mortgage payment, get out of your variable. There is an aspect of risk to a variable and if you do not have the stomach for it, life is much too short to worry about it. Those With Deep Roots - One of the benefits of a variable is the lower penalty to exit versus a fixed rate mortgage. It is an important quality to remember if there is a chance you could move, refinance, sell, or downsize within your mortgage term. Rate savings are important, but breakage penalties can be hefty and are also a big consideration. Big Mortgage With No Fallback - The higher the mortgage balance, the more impact interest changes will have. If you have a large mortgage now with few investments outside of your mortgage, you are more vulnerable to a swing in interest rates. How Do I Lock In? If you are in a variable rate mortgage, most lenders will allow you to switch to a fixed rate at least as long as the time you have left in your current term. Get your lender to confirm that they will allow this and have them quote you on what the rate would be. Then call me. The breakage penalty on a variable is quite low, so if you have decided to lock in, you may actually save money by paying the penalty and going elsewhere if your current lender is not offering a competitive rate. You could also choose to take a longer term if you want payment predictability for longer. There is no one answer for everyone on this topic. If you are in a variable and concerned about how increasing rates may impact you, please reach out today.READ MORE
Is Your Rental Draining Your Wallet? A Mortgage Fix To Make It An Investment Again
Is Your Rental Draining Your Wallet? A Mortgage Fix To Make It An Investment Again It is so important to do the math to find out if your investment property positive cash flows. It is the difference between your rental working for you, or working against you. With some landlords seeing rental income drop over the last two years, it is a good time to revisit your rental property math. I will show you how to calculate cash flow and a possible fix if you do find you are feeding your rental instead of it feeding you! Rental Cash Flow Calculation To determine if and how profitable your rental properties are, do the following math: monthly mortgage payment + any monthly utilities covered by you + home/fire insurance premiums / 12 + condo fee (if applicable) + repairs and maintenance costs + annual property taxes / 12 = TOTAL MONTHLY EXPENSES TOTAL MONTHLY RENT - TOTAL MONTHLY EXPENSES = CASH FLOW SURPLUS OR DEFICIT Some investors factor in the vacancy rate and property management cost as well, but the above absolutely should be covered by your rent. Where do you stand? Are you making money or losing money each month? If you are losing money, consider a possible mortgage fix. Refinancing To Regain A Positive Cash Flow Many people think refinancing is only done to pull equity out or pay off debts, but the ability to reset the structure is another key benefit. By stretching out the amortization again, you can drop the payment to bring down monthly expenses. Example: You currently own a rental valued at $400,000 with a $280,000 balance and 15-year amortization at 2.79%. Your monthly payment is $1903. If you refinance (even at the same 2.79% rate) and push it back out to a 25-year amortization, it now has a monthly payment of $1295. That increases your rental income by $608/month. And What If It Still Negative Cash Flows? So what if you do not have the equity position to refinance, or even after pushing out amortization you are still not positive cash flowing? It might be time to rethink holding the investment property. If you have a negative cash flowing rental property, please call me to explore your mortgage fix options.READ MORE
Maximize Your Buying Power - How to Prepare For Your Home Purchase
Maximize Your Buying Power Recent mortgage rule changes have had a significant impact on a purchasers buying power. More than ever, planning ahead for your purchase can impact your mortgage qualification. Knowing what mortgage lenders look for can help you to maximize your purchasing power. Understanding Your Maximum Purchase Calculation (GDS/TDS) All mortgage lenders and insurers look at affordability ratios when reviewing your mortgage application. There is some flexibility on conventional mortgages (20% or more down payment), but insured mortgages must meet specific maximum affordability ratios. First, your Gross Debt Service (GDS) or the amount of your gross monthly income spent on your monthly housing costs, must be less than 39%. Housing costs include your mortgage payment (calculated at Bank of Canada qualifying rate; currently 4.64%), heating cost (varies by lender but $100/month is common), property taxes, and 50% of condo fees. Secondly, your Total Debt Service (TDS) must be less than 44%. Your TDS is the amount of your gross income or the amount of your gross monthly income spent on your monthly housing costs plus your debt and other financial commitments. This would include car payments, student loans, credit cards, lines of credit, and the carrying costs of other properties you own. Preparing for Your Purchase Pay Down Debt - Not only is carrying debt into home ownership difficult for future pay off, but it can also reduce your buying power. If adding your debts to your monthly housing costs tips you over 44% of your income, it lowers how much house you can purchase. Buy Less Vehicle - Vehicle payments are often the biggest barrier to buying a home simply because they can eat up such a significant amount of your monthly income. These payments factor into your TDS, so the higher your vehicle loan payment, the more likely it is to drag down your maximum purchase price. Build and Maintain Healthy Credit - An underwriter once told me that they would rather see a spotty credit history than no history. When I asked why that was, he told me, I dont like playing the lottery. With a good credit score and an established credit history, you qualify for the highest allowed GDS/TDS ratios and are most likely to get a lender on board when buying at your maximum. More Down Payment - Whether saved or gifted, increasing your down payment allows you to qualify for a higher purchase price. If you are able to hit 20% down payment, it has even more impact as lenders have more flexibility once they do not need to follow insurer requirements. You can qualify using your contract rate (the actual mortgage rate you get) instead of the Bank of Canada Qualifying Rate, as well as a 30-year versus 25-year amortization. I often meet with buyers 6 to 12 months ahead of when they actually plan to purchase. It gives you time to get prepared and maximize your buying power. Call me early for a pre-approval so we can come up with a mortgage plan that is the best fit for you.READ MORE
New Changes - Impact on Buying Power
Everyone in the real estate industry is discussing the impact of the changes rolled out Monday by the Minister of Finance. Impacts on property values is purely speculative at this point, but we are getting a better understanding of the impact on buyer purchasing power. Effective Oct. 17th buyers with less than 20% down payment will be qualifying at 4.64% instead of the 5 year fixed rate you actually receive. If I simplify calculations and look at buyers with great credit, no debts and buying with 5% down and no condo fee, the changes to purchasing power are significant; even more than I initially calculated. Assuming $100/month heating cost and $200/month property taxes, a buyer with a $50,000 income could buy to a maximum of approximately $300,000 at 2.44% and $235,000 at 4.64%. They lose $55,000 of purchasing power. Assuming $125/month heating cost and $300/month property taxes, a buyer with a $90,000 income could buy to a maximum of approximately $570,000 at 2.44% and $450,000 at 4.64%. They lose $120,000 of purchasing power. If you were previously pre-approved or selling to re-purchase at a higher price, you should speak to a mortgage professional about how these changes will impact you given your specific situation.READ MORE
Separating And Want To Keep Your Home? You Can Do It With 5% Equity
Separating And Want To Keep Your Home? You Can Do It With 5% Equity One major decision in separations is what to do with the matrimonial home. There is an option available to separating spouses that is often overlooked or not offered by some mortgage lenders. In addition to selling or refinancing, there is a Spousal Buyout option. In Canada, you can refinance your home up to 80% of its value. This is a great option for those with significant equity in their home. If you more recently purchased and have less equity, refinancing may not be enough to buy-out the other spouse, pay off joint debts, and keep the minimum 20% equity required in the home. Spousal Buyout is another option available to you. If you are going through a separation or divorce, both parties are currently on title, and you have a legal separation agreement, you can purchase the property from your spouse using 5% of your equity as down payment. This allows you to unlock 15% more equity than a refinance if you need it to pay out the other spouse or pay off matrimonial debts. It is a program offered by mortgage default insurers, but not by all banks and lenders. (NOTE: A version of this option known as a Dissolution of Relationship is also available for siblings, friends, or other forms of joint ownership) Steps In A Spousal Buyout 1. SEPARATION AGREEMENT: It is important to speak with a mortgage professional early on in this process so your separation agreement addresses the items necessary for this program to be used. (For example -car loans or lines of credit may need to be noted as jointmarital debt to be paid out). 2. PRE-QUALIFICATION: The person staying in the home will need to qualify for the full purchase on their own based on income, credit, etc. Again, speak to a mortgage professional early on to confirm you qualify for the new mortgage amount on your own, taking into consideration any new child and spousal support commitments. Since you will be paying out your previous mortgage and setting up a new one, you can do this using a different lender than your current mortgage lender. 3. DOCUMENTS: This is basically a new purchase so a lender will need all the standard documents to confirm your income, employment, and proof of additional funds to cover closing costs. Also, an Offer to Purchase selling the home from both parties to the one spouse must be drafted, signed, and provided to the lender. 4. APPRAISAL: All lenders will request a full appraisal to use this program. It will confirm the new purchase price is less than or equal to the current value of the property. 5. CLOSING COSTS: Similar to a refinance, the down payment for this option comes from existing equity. But you should also be prepared for additional transaction costs including legal fees, appraisal cost, any applicable prepayment penalties charged by the original mortgage lender, and mortgage default insurance premiums (ie. CMHC). If you previously paid these premiums when you initially purchased, we may be able to save you some money by topping up your premium versus paying the entire premium again. If you are going through a separation, please call me to discuss the mortgage options available. And if you know someone who may benefit from this information, please share it. There are major banks in Canada who do not offer this program and so they may not hear about it from their bank or any other avenue.READ MORE
What Is Your Home Worth? It Depends Who You Ask..
What Is Your Home Worth? It Depends Who You Ask... When it comes to the valueof your home, there can be a lot of numbers tossed around during a sale, purchase, or refinance process. Understanding the differences between the valuations of your home can help you understand your homes worth. Property Tax Assessed Value A municipality or city uses an assessed value to determine how much property tax you are billed each year. This value is an estimated value on July 1 of the previous year. In volatile market conditions, tax assessed values may be significantly lower or higher than current market conditions. These assessments also use a technique that values groups of properties instead of individual homes. They use property sales data, land title records and municipal building permit and construction information to determine assessed value. It is not site specific. Mass appraisal valuations do not include a walk around your home and property, so the overall condition is not a consideration in the value. Appraised Value Appraised values are determined by a professional appraiser and provide value on a particular day. It includes an inspection of the property and will take into account property location, size, type of construction, condition, and features and finishings. To determine a value, they will generally look at comparable properties sold in the area in the last 3 months and adjust the values for any differences between the comparable sale and the property they are inspecting (plus or minus). The data is much more current than a property tax assessed value. It also is quickly outdated. Appraisals capture a snapshot in time, so even after a month has passed they may not be accurate as newer comparable sales have occurred in the area. Appraisal reports cost roughly $250 to $500 depending on the size or travel time to a property. Realtor EstimatedMarket Value When considering a sale of your property through a realtor, they will start by doing a current market evaluation. You may have seen what homes in your neighborhood are listed for, but not necessarily the sale prices. List price and sale price can be very different, so a realtor going through that data with you can be very helpful. Realtors usually suggest a price range looking at pending sales, recent sales, and expired or withdrawn listings of comparable properties in your area. They will look at the style and size of home, lot size, age, proximity to amenities, curb appeal, interior finishes and overall marketability of your property when looking for comparable properties. A professional realtor will also consider market trends and the amount of supply and demand for similar homes in your area. These market evaluations are typically free of charge and can be a good starting point in determining the current market value of your home. What Does This All Mean For Mortgages? When faced with these differing values, lenders rely upon your purchase price or the appraised value, whichever is LOWER.READ MORE
Your Credit Score Just Got An Upgrade - How It Impacts You
Your Credit Score Just Got An Upgrade - How It Impacts You Equifax, one of two credit reporting agencies in Canada, creates the formulas that calculate your credit score. They create new formulas to adjust to changing consumer behaviour. The mortgage broker industry previously used a formula called Beacon 4.0. As of June 1st, we are now using Beacon 9.0. This new formula recognizes that a lot has changed in the last 20 years in how much debt consumers have and the popularity of certain types of credit (eg. lines of credit). By looking at more recent consumer data and incorporating it into the formula, the resulting credit scores are a better predictor of future consumer defaults. The new Beacon 9.0 formula may help or hurt you depending on your credit report. Heres what has changed with this new credit score calculation: Mortgages Are Now Included Previously, mortgages were not included on credit reports. They were recently added, but payment did not factor into your score. Now mortgages not only report, but are also included in your score calculation. This is great if you have very little or only newer credit but pay your mortgage on time. Alternatively, this is not great if you have missed payments. It will now hurt your score, and any future mortgage holder will see it. Cell Phone Payments Report AND Count Cell phone data used to report but unless it went to collections, did not get factored into your score. That has changed. That payment data now counts and is considered to have predictive power on your future behavior. This is great for young people who are just starting out and may only have a cell phone and one credit card. BUT it is only a good thing if you pay on time. If you have been spotty with your payments, it will now negatively impact your score. Line of Credits Treated Differently Than Credit Cards The old formula treated all revolving credit the same, with high utilization (using an amount close to your limit) hurting your score. The new formula recognizes that lines of credit are often at low interest rates and used to finance cars and homes and treats high usage on them differently than on credit cards. High credit card utilization is still treated as high risk behavior. Hard Credit Pulls Treated More Reasonably For mortgage and auto loan inquiries, any number of inquiries or credit pulls done within a 45-day period for a particular type of loan are counted as 1 credit pull. The formula now recognizes that people who are shopping for auto or home financing will likely have their credit pulled by more than one lender throughout the process. And inquiries in general only impact your score for a 12-month period. This is great for New Canadians or someone who moves to a new city. They often have a large number of inquiries when they first move as they get set up with a rental, vehicles, utilities and cell phones. A year later their scores will have recovered from all those frequent pulls. Your Pattern of Behavior Matters Consumers tend to have more trade lines than 20 years ago (ex. Cell phone, line of credit, credit card, loans, etc.) so the formula was adjusted to look for patterns of payment on credit products. This means if you have one trade line with a negative history but the rest are all good, that one trade line has less weight. Alternatively, if you have spotty history on many trade lines, a history of good payments on one or two accounts may carry less weight. Tips To Keep Your Score Up! -Do not miss a mortgage payment! Always call your lender well before your payment date if you think you may be unable to pay. Not only will a late payment impact your credit score, it will also impact your ability to get a mortgage for the 7 years it appears on your credit bureau. -Set your cell phone payment up with auto-pay so you never miss a payment. -Keep credit card balances below 50% of your limit (even lower if you are rebuilding credit). Even if they are paid off in full each month, the balance on your statement is what gets reported to your credit report as your current balance. -If you are trying to improve your credit score and have high balances on a line of credit AND credit cards, bring down the credit card balances first. I work with my clients to help them understand their credit and take the steps needed to build it for mortgage qualification. If you have questions about how the Beacon 9.0 impacts you specifically, please do not hesitate to reach out.READ MORE
What Is The Best Rate? That Depends...
What Is The Best Rate? That Depends... One of the first questions I am often asked is, What is the best rate you can get me? The answer is not that simple. More and more lenders are offering different rates for different scenarios. I am often not able to quote exact rate until I learn more about you and your purchase. Here are some of the things that can determine your rate: Time Your possession date can determine which rates are available to you. The standard rate commitment in mortgage lending is 120 days. But a lender may be willing to offer a lower rate for a shorter period of time, recognizing there is more rate certainty in the near future than several months away. Often, there are rate promotions available for mortgage applications that need a rate commitment for a shorter period of time (example 30, 45, 60 or 90 days). Your Credit Most clients with average to excellent credit will receive the same interest rate on their mortgage as long as they can meet standard guidelines. But, we are seeing a few mortgage lenders offer quick close rate specials that also have a requirement for a higher credit score. Down Payment Amount Many lenders distinguish between high ratio orinsured mortgages (less than 20% down payment) and conventional mortgages (20% or more down payment) when offering mortgage rates. An insured mortgage is much safer for a lender. It means there is a 3rd party insurer who will pay out the mortgage if the buyer defaults and goes into foreclosure. It is a bit counter-intuitive but someone who has less down payment can actually be more attractive than someone with more down payment. An uninsured mortgage is riskier,particularly for those who JUST make the 20% down payment requirement to avoid mortgage default insurance premiums. Rental vs. Owner Occupied More and more we are seeing interest rate differences between rental rates and owner occupied rates, or lenders who limit or have pulled back on financing any rentals. Research shows people are more likely to default on an investment property than they are on their own home. Lenders are factoring that risk into their rates and lending policies. Flexibility You can now find banks and other lenders offering lower rates, but you lose mortgage features. You may not beable to to port your mortgage to avoid breakage penaltiesshould you sell and buy before your term is complete. You may lose or see a decrease insome of your pre-payment options. There are even mortgages available where in exchange for your lower rate, you are not able to refinance or change your mortgage in any way during your term due to a sale onlyclause (meaning the only way to break your mortgage is to sell your house). Some of these sale onlymortgages may allow for a refinance into a similar product with the same lender, but they do not need to be at competitive rates. Cost To Break It With so many people shopping for mortgages solely based on interest rates, lenders are creating more and more restrictive mortgages in order to offer them at a lower rate. One thing they are changing is how much it costs to break the mortgage. There are already big differences between lenders in the standard penalty calculation on fixed rate mortgages, called the Interest Rate Differential (IRD). If that was not already complex, there are now mortgage lenders charging a whopping 2.75% breakage penalty instead of the standard IRD or 3-months interest calculation. These are a big deal. It can eat up a chunk of your equity if you sell before you mortgage matures, or may even prevent you from moving. Lender mortgage rates are becoming more and more complex. More than ever, it is helpful to work with a mortgage professional who can help you understand your options.READ MORE
Edmonton Real Estate - The Sky Is Not Falling
Edmonton Real Estate The Sky Is Not Falling Lately, media has talked a lot about the Alberta real estate marketand has presented it in a negative light. In reality, real estate markets are much more local than that. Not only will it vary by city within the province, but even within a city by property type, purchase price, and neighborhood. While we have seen economic pressures take a toll on some real estate markets around the province, Edmontons market remains stable overall. To help separate myth from reality I wanted to highlight some recent trends in Edmonton Real Estate Boards April real estate statistics for the Edmonton Census Metropolitan Area: Increase In Listings There was an 18%year over year increase in inventory last month, from 6,784 in April 2015 to 8,033 in April 2016. That is a significant jump and certainly shows that buyers now have more selection. It also indicates that sellers need to price right and prepare their home to stand out in a more competitive market. In spite of this, the average all-residential price of $377,283 for April 2016 is down less than 1%from the month prior and up less than 1%from April 2016. Single Detached Homes Going Strong At $439,982, the average single family home in Edmonton has actually increased marginally from March 2016 ($439,815) and April 2015 ($438,641). The starter home is still moving. First time buyers who want a detached home may be surprised when they still see multiple offer scenarios and attractive properties moving very quickly. Condominiums Are Struggling Of all the property types, condominiums are the most difficult to sell right now. They have a 38% sales-to-listing ratio (down 6% from a year ago) versus the single detached and duplex/row houses which had a 51% sales-to-listing ratio. Fewer Transactions We have seen an increase in transactions from March, but a drop in the number of sales year-over-year with every property type except row houses/town homes. There were 938 single family detached homes reported sold, a 9% percent increase month-over-month, and down 6% from the same time last year. 396 condos sold in April, up 18% over March and down 8% over April 2015. 148 duplex/row houses sold in April, up 3% from March and up 7% from April 2015. Is Your Dollar Going Further? The answer is it depends. It depends on neighborhood, property type, and price range. Looking at average price only tells one story. You will have to dig much deeper to understand what that average price will now buy you. This is where a strong Realtor can give sellers and buyers a big edge in understanding your specific target market. For example, understanding price per square foot trends at various price ranges and the number of sales in particular price ranges will draw a more complete picture. We will continue to watch how the spring and summer market unfolds. For now, we have a healthy real estate market. Before you make a decision about buying or selling, contact a Realtor so you are working with information that is specific to you.READ MORE
Checking Out Showhomes? Understand How Financing A New Build Is Different
Checking Out Showhomes? Understand How Financing A New Build Is Different Securing a mortgage on a new build is much different than financing an existing or pre-owned home. It is important to understand how the extended timelines, process and options in financing may impact you, especially at a time where there is more job uncertainty. There are two ways to finance a new build through a builder: Completion Mortgage A completion mortgage means that you have purchased a home but do not take possession until the house is complete and all mortgage funds are paid on possession. You write an offer to purchase for a conditional period (usually 2 weeks) so you can secure financing. Once you have done that you usually pay an additional deposit totaling 5%. Once the house is complete and ready for occupancy, you will require the remainder of your down payment and the funds from a mortgage to pay the builder the balance. Progress Draw Mortgage A progress draw mortgage is where funds are advanced in stages (otherwise known as draws) during construction. Each stage has to pass inspection confirming percentage complete before the next payment is granted. There are usually three draws, but it can vary depending on the build and lender. With a draw mortgage you process your financing up front the same as with a completion. Builders prefer this structure because it provides them with cash flow throughout a build, allowing them to carry more builds at one time. Usually you will be required to make interest only payments on the amount the lender has advanced throughout the build. Some builders will offer to pay your interest payments until completion. Once completed, the mortgage will be converted into a standard mortgage. Lenders differ on their policies for your mortgage options at completion. Extended Possession Re-Qualification Lendersstandard mortgage rates are a 120-day commitment. For most purchases of pre-owned homes, possession dates will fall within that time period. If a new build is a spec home with fast possession, you may also fall into that time frame. A typical build can take anywhere from 6 to 12 months (or more). In this case, you either secure a longer term interest rate commitment at a higher rate or you reset your rate every 120-days. Either way, once you receive your possession letter (30 -45 days prior to possession), your lender will generally confirm your mortgage qualification. A lot can happen in a year and lenders want to make sure you can still afford your mortgage. It is common for them to request an updated credit report, pay stubs or other confirmation of your employment and income. They can also confirm the value of the property has remained the same. This is particularly true for pre-sale condos or very lengthy builds of 18 months or more. If value has dropped significantly, they can reduce your mortgage accordingly and require you to pay the difference to the builder. If you are currently looking to buy a home and are worried for your job or even thinking of making a significant career change, building a new home may not be the best fit. Even if you are initially approved at the beginning of the build, a lender retains the right to cancel the financing on the property due to change in your employment or credit. This could result in losing your down payment and possibly being sued for not fulfilling the contract. Therefore, if employment stability is a concern, you may want to consider a completed new build or a spec new build that can be completed within a short period of time. TIPS FOR BUYING A NEW BUILD: Confirm value. A Realtor can still help you on your builder purchase, as long as you involve them from the start. This is so important as they can help you understand the sale price of existing homes that compare to the one you want to build. Confirm you are paying a fair market price. Think resale even when building. It can be hard to visualize when you are looking at a pile of dirt, but the same things that impact resale on existing homes will impact resale on your completed home. Get pre-approved. Even when buying a new build, talking to a Mortgage Advisor early on will help you understand your options and purchasing budget. Budget for additional new build costs. Landscaping, fences, decks, and window coverings are just a few of the costly items that are generally not included. GST is also charged on new construction homes. Keep these in mind when comparing to existing home prices. Take time to research the builder. Does the builder have all the qualifications to meet your needs and expectations? Check out their show homes, talk to other clients about the builders work, ask your Realtor about their reputation, look them up at the Better Business Bureau, and run a quick Google search for some reviews. If you or someone you know is considering purchasing a new build, please contact me to discuss available financing options.READ MORE
Are You Self-Employed? How To Prepare Under Tighter Mortgage Requirements
Are You Self-Employed? How To Prepare Under Tighter Mortgage Requirements Self-employed buyers have been impacted the most in lending requirement changes over the last few years. If you are a new buyer or if it has been more than 4 years since you last purchased, you will feel that impact when you buy again or look to refinance your current property. What Changed? In 2012, new underwriting requirements came out from OSFI, the body that governs banks in Canada. These changes eliminated true stated incomeproducts for self-employed buyers. Prior to this change, a self-employed person could state a reasonable income and qualify based on that income. Lenders are now required to support that income with back-up documentation, such as business financial statements, T1 Generals, and Notice of Assessments. This makes it far more challenging for self-employed buyers to qualify for a mortgage with the large banks at best available interest rates, particularly those with high write-offs or those who choose to draw less income from their company to reduce income taxes. Mortgage Brokerage Options That Help Fortunately, in the broker world, we have monoline lenders (non-bank) who allow us to gross-up self-employed income or add back certain expense write-offs, recognizing income is often minimized for tax purposes. In addition, we still have access to alternative lending options for self-employed buyers who have a minimum of 15-20% available for down payment. These alternative lenders will look at 6 months of business bank statements to prove income levels. Interest rates are a bit higher with these alternative lenders, but they are still far more competitive than private lending options. How You Can Prepare: Here are some of the items a self-employed buyer should have in place: -Stay current with your taxes and have proof that you have no balance owing to Canada Revenue Agency -Copies of the last two years of tax documents including Notice of Assessments, T4s, T5s and full T1 Generals -2 years of accountant prepared financial statements if you are incorporated -Be prepared to answer questions about the nature of your business, number of employees, or unusual items in your financial statements. -Maintain strong credit (always important, but even more so for self-employed buyers) -Bank statements that show the income you receive -Certificate of incorporation or other proof that you are self-employed and confirmation of your ownership position/percentage -Copy of your business license This seems like quite an extensive list and you will not necessarily need all of these items. The point is the more you do have up front, the smoother and easier your approval will be. Self-employed borrowers have seen requirements for mortgage approval change drastically. More than ever, working with a broker who has more lender options available can determine whether you are successful in becoming a homeowner. And the earlier in the buying process you speak to me, the better!READ MORE
Buying Again? Here's What's Changed Since Last Time
Buying Again? Heres Whats Changed Since Last Time Depending on when you last locked into a mortgage or got pre-approved for a maximum purchase price, a lot may have changed. The changes are not necessarily bad. In fact, the changes have been implemented to ensure stability in our market and to prevent a Canadian version of the U.S. housing crash. That being said, heres a quick recap of some of the major changes over the last 6 years: 1. QUALIFYING FOR VARIABLE RATES OR FIXED TERMS UNDER 5 YEARS: In order to obtain a variable rate or a 1 to 4 year fixed mortgage, you need to qualify at the posted 5-year Benchmark Rate (currently 4.64%). This change was made to ensure that you can afford any future increases in rate if the Prime Rate increases, or once your shorter than 5 year fixed rate mortgage comes up for renewal. Example: Assuming a mortgage of $350,000 amortized over 25 years with 5% down payment at current rates: 5-year variable rate at 2.35% = Payments of $1,542/month 2-year fixed rate at 2.24% = Payments of $1,523/month Benchmark Qualifying Rate at 4.64% = Payments of $1,964/month 5-year fixed rate at 2.79% = Payments of $1,619/month To qualify for a variable or a fixed interest rate term that is less than 5 years, you must be able to debt service monthly payments of $1,964 even if your monthly payments are less than the 5 year fixed rate payment of $1,619.In other words, instead of needing $61,000 of annual income to qualify to purchase this home, you would now need $72,500. 2. AMORTIZATION REDUCED: The maximum amortization allowed for insured mortgages was brought down to 25 years from the previously allowed 40 years. Shortening the lifetime of your loan increases monthly mortgage payments amounts, decreasing the maximum amount of mortgage for which you can qualify. 3. NO MORE INTERST ONLY PAYMENTS ON CREDIT: When calculating your debt coverage we now have to use 3% of your outstanding balance for a monthly payment. And with the majority of lenders, this includes any student loans that may not yet be in repayment (if they show up on your bureau). So that $15,000 unsecured line of credit with $75/month interest only payments? Now we need to calculate that debt in at $450/month. For a typical borrower with a yearly income of $50,000, at an interest rate of 2.79%, purchasing with 5% down, that decreases the purchase price you qualify for by about $55,000! 4. BUSINESS FOR SELF (STATED INCOME) MORTGAGES: Stated income has been impacted more than any other mortgage product. It used to allow self-employed individuals to state a reasonable income instead of the total income reported on their tax return. This recognized that many write down their income or hold income in their companies instead of drawing it to avoid higher taxes. Well cover this change in more detail in a future newsletter, but there is significantly more documentation now required for those who are self-employed. What Does This All Mean? Tightening mortgage qualification rules make mortgage planning and thorough pre-approvals even more important. If you have purchased in the past, your purchasing power may have changed significantly. With stricter lender policies, having access to a variety of different lenders through a broker also becomes more important. You may not fit one lenders policies, but can be approved under another lenders guidelines. Long before you go shopping, contact a mortgage professional to determine your options. Pre-approvals are not just for first time home buyers. If you are considering another purchase call me early to determine your options.READ MORE
How To Save Money In The Renewal Process
Mortgage Renewal In 2016? How To Save Money In The Renewal Process If you have a mortgage renewal coming up this year you can save money by taking a few simple steps. Renewals are an opportunity that do not come up very often, so it pays to take advantage. Here are the things you can do at renewal to save money over the life of your mortgage. Start The Process Early Many people who inquire about their renewal do it right before their renewal date; often 2-3 weeks before. You can still switch lenders at that time, but you will be at the mercy of current interest rates. We can hold a rate for 4 months. If rates have been increasing, you may be holding an interest rate significantly lower than what is available near your renewal date. Call me 5 months before your renewal date so we can gather what you need to take full advantage of a rate hold period. It can save you if rates increase! If you already have your mortgage through me, I will contact you as your renewal approaches. If you dont, let me know your renewal date and I will set you up with a reminder. Call Me! You should be checking with a mortgage professional who has access to a variety of mortgage lenders to understand if what you are being offered is market rate, and more importantly, if the product and term will meet your needs. According to CMHCs 2015 Mortgage Consumer Survey, only 49% of mortgage renewal clients negotiated terms different than those offered in their renewal letter. Many renewal offers have inflated mortgage rates, knowing that most people just sign it and send it back. Early renewal offers are becoming very popular as a way to keep mortgage clients. That is great for you if the rate is competitive, but not if it is inflated. Pick With A Plan One of the biggest mistakes is agreeing to a new term without thinking about the future. I had a 5 year fixed before so I just chose that again is something I hear a lot. If you sell a year later you will pay a big penalty for that decision. Time brings change. How long do you see yourself in your home? Would you prefer a variable now that you have more income and equity? Often what you had before is not what you need now. Picking the right term and product can save you more than just getting the best rate. This is also your one opportunity to refinance without a penalty so you want to make sure you have your mortgage set up the way you want. Are you worried about cash flow and want to re-amortize to reduce your payments? Do you need funds to develop your basement? Would you like to set up a home equity line of credit you can use to pull out funds for down payment when you downsize? For most mortgages, you can switch to another lender for little or no cost. Looking to see what there is being offered by other lenders at your renewal can save you big bucks over the life of your mortgage.READ MORE
Changes To Down Payment Requirements - Will It Impact You?
This weekthe Government of Canada announced changes to required down payment on higher priced homes,effective February 15, 2016. Loan applications submitted prior to Feb.15, 2016 will remain the same, as long as possession date is prior to July 1, 2016. This was done to cool the hot real estate markets in Vancouver and Toronto, while trying to create the least amount of impact on real estate markets that are less strong or even weakening. Current Down Payment Requirements The current rules require a 5% down payment on properties up to $999,999. For properties over $1 Million, you must have a minimum 20% down payment. New Down Payment Requirements Starting February 15th, purchase up to$500,000 still only require a 5% down payment, but any amount above that will require 10% down payment on the amount above $500,000. For properties over $1 Million, you will still need to have a minimum 20% down payment. Heres an example: A $650,000 purchase requires a 5% down payment on $500,000 and a 10% down payment on the additional $150,000. Starting on Feb. 15th the down payment required will be $40,000. The down payment required right now is 5% of $650,000, or $32,500. You will need $7,500 more down payment to purchase a $650,000 home. Any mortgage insurance application received between December 11, 2015 and February 15, 2016 that does not conform to the new requirementsmust have a mortgage in place by July 1, 2016. Will This Impact You? Not likely... Our team has discussed this and had conversations with other real estate professionals. We all agree this will not have a significant impact on the Edmonton and area market. Here are some reasons why: Our average residential purchase price in Edmonton was $369,559 last month*. The average selling price for a single family dwelling was $432,862*. The median selling price for a single family dwelling was $401,611*. These new requirements will not impact the majority of buyers in Edmonton. Those purchasing in the $500,000 to $650,000 range will need more down payment, but because of the structure where the first $500,000 still only requires 5%, the higher down payment it is incremental. It is not double. The biggest impact is for those purchasing between $750,000 and $1,000,000. In Edmonton, there are very few transactions at that price point and the buyers in that price range already tend to have a down payment of 10% or more. If You Want To Read More: Department of Finance Canada - Official News Release: http://www.fin.gc.ca/n15/15-088-eng.asp Q and A supplied from the Department of Finance Canada: http://www.fin.gc.ca/afc/faq/hdpmeh-mfperpc-eng.asp If you have any questions or concerns about how these changes impact you, please contact me. *REALTORSAssociation of Edmonton for all-residential sales in Edmonton Census Metropolitan Area (Edmonton and municipalities in the four surrounding counties) in November 2015.READ MORE
Reaching for 10% Down - What Will It Really Save You?
I understand that for many people, reaching the minimum 5% down payment is already very tough. But if you are in a position to put down more, the structure of mortgage default insurance premiums definitely gives you a reason to do it. If you have less than 20% down payment when you purchase a home you will need to pay a mortgage default insurance premium. This protects your mortgage lender if you default on your mortgage. In June of this year, mortgage default insurance premiums were increased for 5% down payment mortgages from 3.15% to 3.6%. The increase was meant to better align costs of premiums to risk level; if you have more down payment you are less likely to default. The impact of this increase is that those with 5% down payment have significantly higher transaction costs, providing more incentive to reach 10% down payment. The Difference in Premiums for 5% Down Payment vs. 10% Down Payment On a $400,000 purchase, here is how the fees differ: 5% Down Payment: $400,000 mortgage - $20,000 down payment = $380,000 mortgage $380,000 x 3.6% premium = $13,680 premium Total loan amount is $393,680. 10% Down Payment: $400,000 mortgage - $40,000 down payment = $360,000 mortgage $360,000 x 2.4% premium = $8,640 premium Total loan amount is $368,640. 25% Return! These premiums are rolled into your mortgage so it is easy to overlook the significance of these transaction costs. In our example above, if you come up with $20,000 more down payment it saves you $5,040 in insurance premiums. That kind of return on your funds would be pretty hard to beat if those funds were invested instead. Other Benefits of More Down Payment -Better equity position to weather value changes - You will also benefit from having a higher equity position in your home should the values of homes decrease. With 5% down payment, you have roughly a 1.6% equity position the day you move in. With a 10% down payment you have roughly an 8% equity position the day you move in. -Lowers your interest costs-You have a smaller mortgage loan, lowering the interest you will pay over the life of your mortgage. -Lower mortgage payments-By decreasing your loan amount your monthly mortgage payments will also drop. Managing your transaction costs is another important part of looking at the overall cost of your mortgage. I am happy to work with you to create a structure for your mortgage that controls your interest costs over the life of your mortgage.READ MORE
Is It A Good Time To Buy? Yes!!...
Is It A Good Time To Buy? Yes!!... ...if you are ready and can afford it. The answer was the same a year ago, is the same now, 6 months from now, and 2 years from now. I get asked a version of this question all the time. Do I buy now while interest rates are low? Should I wait because house prices might drop? Have I missed the best time to buy? Is now the best time to buy? You could drive yourself mad trying to time your purchase with interest rates and property prices. By buying a property that you love and can comfortably afford and stay in, you wont be sensitive to fluctuations in either value or interest rates. Are You Ready to Buy? Do you plan to stay in the property for 5 or more years? Buying and selling comes with transaction costs (ex. realtor fees, mortgage insurance premiums) so short term purchase horizons can cost you a lot.You want to enter into a purchase with plans to stay put for a while. Do you have extra saved? In addition to down payment, you should have additional money to protect you from unexpected costs. You do not want to be late on your mortgage payments!Even one late payment could leave you hunting for a new mortgage lender at renewal, and two or three can put you on the path to a foreclosure.Call it what you will, but an emergency fund or just additional savings or investments can protect you from unexpected homeowner expenses or life events such as job loss or income reduction. Do you have breathing room? One way to protect yourself and your family is by buying less than your maximum qualification amount.This gives you extra room to save for retirement, pay down your mortgage faster, and still manage if your income is reduced or interest rates increase. Is your debt under control? You want to go into your purchase with the right foot forward.Purchase once you have any high interest debt (ex. credit cards) paid off and make sure you can easily manage any remaining loan payments. Have you done a budget? All lenders determine your maximum purchase price based on what percentage of your income is being used to carry your mortgage and other housing costs, and what percentage of your income is being used to carry housing costs and any debt or other property costs.Mortgage lenders do not factor in your family visits overseas or your childcare costs.The only way to figure out if you can afford your mortgage with your lifestyle is to do your own budget. Heres a link to one: Budget Worksheet Is your work stable? You want to have been at your job for a while and expect your income to remain the same.If talk around the water cooler suggests cutbacks are coming, hold off.And dont buy a house based on future income. Finding the right time to purchase a home is a lot less about what is happening in the market and a lot more about what is happening with you. Speak to me early to come up with a purchase plan and decide for yourself when YOU are ready to become a homeowner.READ MORE
Mortgage Prepayment Penalties - Why Are The Big Banks' Penalties So Much Higher?
Mortgage Prepayment Penalties Why Are The Big Banks Penalties So Much Higher? If youve gotten a mortgage through me youve probably heard me say rate is important, but the terms of your mortgage are the most important. Prepayment penalties wouldnt matter if they were small and no one ever paid off mortgages early. But they can be huge! Depending on your mortgage size and how early youre paying it off, the penalty can amount to tens of thousands of dollars. You may think you have no intention of paying off your mortgage early, but things can change. You may inherit money or get a big raise. You may be forced to sell due to a growing family, divorce, or death in the family. Or you may simply want to refinance to get a lower rate. Any of these things can result in you paying a prepayment penalty. Most closed fixed-rate mortgages have a prepayment penalty of 3 months interest or the Interest Rate Differential (IRD), whichever is HIGHER. To calculate the IRD, the bank subtracts the mortgage rate you originally agreed to pay from the rate it can charge today, and then multiplies that by the amount you are prepaying. So Why are the Big Banks Higher? An IRD was intended to ensure return on investment for those that provide funds for mortgages. If you break your mortgage early, it pays the investor any interest theyve lost. That makes sense. But the big banks have turned it into another way to overcharge clients. To inflate the IRD, when a bank calculates your original interest rate they determine your discount from the posted rate on that term. If you break your mortgage they then apply that same discount to your penalty formula. Big Bank vs. Monoline Mortgage Lenders Monoline lenders dont have a bricks and mortar building and only sell through brokers. There are a lot of reasons I am a fan of monolines. One of the biggest reasons is how they calculate prepayment penalties when you break your fixed mortgage term. Most monolines have MUCH lower posted rates so the discounts that inflate the prepenalties at the big banks dont apply. Example: If you got a 5-year fixed mortgage in February of 2012 for $350,000 at 2.99%. Now you want to break it and the current balance is $325,000 with 2 years remaining. RBC has a posted rate on their 2-year term of 3.14%. First National has a 2-year term posted rate of 2.59%. Heres how those two lenders, one big bank and one monoline, would calculate your penalty: RBC: 2.99 + 1.95 (the original discount you received off the posted rate) = 4.94% (4.94% - 3.14%)/12 = 0.0015 Monthly IRD Factor .0015 x $325,000 x 24 months remaining = $11,700* First National Financial: (2.99% -2.59%) / 12 = .00033 Monthly IRD Factor .0003333 x $325,000 x 24 months remaining = $2,600* Thats right. a $9,100 difference! * approximate calculations. I have conservatively assumed the posted rate for a 5 year term in Feb. 2012 at RBC was 4.94%. It is currently 4.74% No, I Dont Hate The Banks It might sound like Im beating up on the banks. I definitely dont like the way they calculate prepayments because of how complicated and vague it is to consumers. But, they have their place. I still regularly sell big bank mortgages. Some people just prefer having a building they can walk into to speak to their lender. They also lend on products or properties that monolines will not. Both types of lenders are important to my clients. That said, if you can get approved for both, the flexible terms on a monoline give you a cheaper mortgage over time. As your mortgage broker, my job is not just to get you the best rate, but help you understand the other terms of your mortgage that can impact your overall mortgage costs. If you have a renewal coming up with a big bank, this is a great time to try out a monoline lender and protect yourself from high IRD charges in the future.READ MORE