How to Cancel a Credit Card Without Hurting Your Credit Score

It’s not as simple as just closing the card.

The act of canceling a credit card is easy. You just call your credit card company, ignore its pleas for your continued business, and tell it you don’t want its card anymore. But if things were really that simple, I wouldn’t need to write an article about it. Closing credit cards can have a significant impact on your credit score, so you need to know how to cancel your credit card in the right way. 

Sometimes the best decision is not to close the credit card at all, even if you’re not using it, while other times, you’re better off canceling it, though it may adversely affect your score. It’s an individual decision for every person with each credit card. Here’s what you need to know in order to make the right choice.Woman Cutting Credit Card

Image source: Getty Images

Does canceling a credit card hurt your credit score?

Let’s get this question out of the way upfront. Canceling a credit card will likely hurt your credit score, but how much depends on a few factors, like what your credit limit is, how much you charge to the card, and how long you’ve had it. You probably won’t be able to stop your score from taking a hit if you’re determined to cancel the card, but if you plan carefully, you can minimize how much it drops.

What happens when you cancel a credit card

Canceling a credit card raises your credit utilization ratio and it could also lower your average account age, both of which can hurt your credit score. Your credit utilization ratio is the ratio between the amount of credit you are using and the amount you have available to you. So for example, if you have a $1,000 limit and you carry a $200 balance one month, your credit utilization ratio is 20% on that card ($200/$1,000 x 100 = 20%). 

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Your credit utilization ratio across all of your cards matters too. So if you have two cards with a $1,000 limit and one card with a $5,000 limit and you cancel the card with the $5,000 limit, you’ll be bringing your total down credit limit from $7,000 to $2,000, which could have a big impact on your credit utilization.

Credit scoring models like to see a credit utilization ratio under 30% and the lower, the better, as long as it’s above zero. This indicates that you’re living comfortably within your means while a higher credit utilization ratio suggests you need a lot of credit to sustain your lifestyle and that you might be at a higher risk of default. When you cancel a credit card, you’re reducing your available credit, which will automatically drive your credit utilization ratio higher. It’s a pretty big deal because your credit utilization ratio makes up 30% of your credit score

Average account age is another factor in your credit score. It’s the average age of all the credit accounts, including loans and credit cards, in your name. Lenders like to see an older average account age because it indicates that you have more experience dealing with credit and it enables them to better predict how you’ll manage new credit. Canceling a credit card you only opened a few months ago may not have much of an impact on your average account age, but if you cancel the first credit card you ever got, your average account age will probably drop quite a bit and your credit score will drop accordingly.

Canceling a credit card does not absolve you of your responsibility to pay any outstanding debt and it doesn’t mean that any negative marks associated with that account, like late payments, just disappear. Derogatory marks like these stay on your credit report for seven years, even if you’ve closed the account.

What to know before you cancel a credit card

Canceling a credit card doesn’t always make sense because of the negative impacts the move can have on your credit. Here are a few factors you should look at to decide if it’s the right move for you:

  • Credit limit: Closing a card with a higher credit limit will have a more significant impact on your credit utilization ratio than canceling a card with a lower credit limit. 
  • Effect on credit utilization ratio: Look at your average spending across all of your credit cards for the last few months and compare this to your combined credit limits. Calculate your credit utilization ratio and then estimate how it’ll be impacted if you cancel a credit card. If canceling the card would push your credit utilization ratio over 30%, you might want to rethink the decision or plan to charge less to your credit cards going forward to keep your ratio within a desirable range. You could also open a new credit card to bring your credit utilization ratio back down again.
  • Account age: Canceling newer credit cards is safer than canceling older cards because it’ll have a smaller impact on your average account age.
  • Annual fee: It might still make sense to cancel your card if it charges an annual fee that you’re not recouping in rewards each year, even though doing so might temporarily hurt your credit score.
  • Rewards: You usually lose your rewards points once you cancel a credit card, so use any that you’ve accumulated before you close the account for good.
  • Balance: Canceling a card without a balance makes things a lot simpler, but you can still cancel most cards if you’re carrying a balance. You’ll have to decide if you want to continue making monthly payments to your issuer or transfer the balance elsewhere.
  • Your own attitude toward credit: If you’re someone who is easily tempted to spend more money than you have, canceling a credit card might still be the right play, despite the hit to your credit score. With less credit at your disposal, you’ll have a harder time running up costly debts you can’t pay back.

You should also know that some issuers will try to keep your business when you call to cancel by offering you better reward terms, a lower interest rate, or waived fees. Decide beforehand if any of these offers would convince you to stick with the card. If not, don’t let yourself be swayed by your card issuer’s pleas.

Should you cancel a credit card?

It’s usually best to leave your credit card accounts open even if you’re not using them. They’re there if you need them to make a purchase and they’ll help your credit utilization ratio and your average account age, which will, in turn, boost your credit score.


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You can take the card out of your wallet, but you shouldn’t lose track of it entirely. Keep it somewhere where others do not have easy access to it and continue to monitor your account at least once per month to ensure that someone isn’t running up fraudulent charges on it. A bill for a card you’re not using might also raise your suspicions. Your card issuer might decide to close your account for you after a period of inactivity. You can try contacting the company and asking them to keep your account open, but it doesn’t have to comply if you’re not using the card. Consider making a few small purchases with the card here and there if you want to keep your account active. You could also set up autopay with your credit card for a small bill and then pay your credit card bill automatically from your bank account every month.

Closing a credit card might make sense if it has an annual fee and it’s costing you money. But if you don’t want to do this, you might be able to call your card issuer and negotiate the annual fee. If you’re willing to downgrade your account, you might be able to get rid of it entirely. Canceling your card might also make sense if you’re trying to limit your access to credit to reduce the temptation to overspend. If either of these scenarios apply to you, you’ll just have to make peace with a slight drop in your credit score for the time being.

Whatever you do, don’t close multiple cards at once because this will have a much bigger impact on your score. Limit yourself to one credit card cancellation every six months at most. This will give you time to gradually adjust your spending so that you can keep your credit utilization ratio within a good range and it’ll give your remaining credit accounts time to age a little more, improving your score. 

You should also limit how often you apply for new credit or request credit limit increases. While not as severe as canceling a credit card, these requests result in hard inquiries on your credit report, which drop your score by a few points every time. 

How to cancel a credit card without hurting your score

The steps you’ll follow for closing your credit card depend on whether or not you have an outstanding balance.

With no balance

If you don’t have a credit card balance, canceling your card is pretty straightforward. Just do the following:

  1. Use up any rewards you’ve accumulated. 
  2. Switch any automatic payments currently set up under the card you intend to cancel over to a different credit card to avoid accidental late payments after the account has closed.
  3. Contact your credit card company and tell it you want to cancel your card. Some companies may allow you to cancel your card online, but you may need to call the company or send a letter. Your credit issuer’s website should provide you with instructions. Your card issuer should send you a written confirmation in the mail. Follow up if you don’t get one within a week or two of your cancellation request.
  4. Destroy the credit card. Even though the account is canceled, it’s better to be safe than sorry. Cut the card up or use a shredder. For metal cards, try contacting the card issuer to see if they offer disposal or recycling services.
  5. Monitor your credit account. It’s unlikely, but if your card issuer partially refunds your annual fee or you recently returned an item, a credit could show up on your account after you’ve closed the card. If this happens, contact the credit card company and request that they send you a check for the credited amount.
  6. Monitor your credit report. Check your report to make sure that the account is correctly reported as closed. You may want to wait a few weeks to check this because the card issuer may not report it to the credit bureaus immediately. You can check your credit reports once per year with each bureau for free through
  7. Adjust your spending. Make sure you’re not using more than 30% of your new, lower credit utilization ratio. If you are, try charging less to your remaining credit cards or consider requesting a credit limit increase on some of your other cards to lower your credit utilization ratio again. Note that if you do this, it may cause your score to drop by another few points because of the hard inquiry your card issuer will do on your credit report. But this won’t matter if you’re approved because your new, lower credit utilization ratio will have a larger impact on your score.

With a balance

The steps for closing a credit card with a balance are essentially the same as closing a card without a balance except you also have to figure out how you’re going to pay back your debt. Some issuers might enable you to continue making monthly payments to them just as you have been. You’ll keep your same interest rate and when your balance is finally gone, you and the card issuer will part ways for good.

Some people prefer to wash their hands of the credit card all at once. In that case, you’ll need to transfer your balance to another card or take out personal loans for debt consolidation and use these funds to pay off your debt before closing the card. 

You can apply for a new balance transfer card so your balance will temporarily stop growing, and you’ll have a chance to pay it back interest-free during the 0% APR intro period. But be aware that there are often fees associated with a balance transfer, so you may still end up paying back a larger amount. Personal loans give you a predictable monthly payment, but their interest rates can also be high, particularly for those with poor to fair credit.

Waiting to close your card is also an option if you have only a small balance. Evaluate all your choices before deciding which is right for you. If you decide to continue paying your card issuer for now, you can always decide to take out a personal loan later to get rid of your obligation to the credit card company.

Canceling a credit card is a simple activity, but it requires a lot of careful thought in order to minimize its impact on your credit score. Go through the information above to decide if it’s the correct decision for you, and if it is, follow the recommended steps to close your card with minimum impact to your score

Source: – April 24, 2020

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Raymond C. McMillan, BA., Mortgage and Real Estate Advisor – May 25, 2020

One of the biggest challenges facing young families and buyers looking to purchase their first home is finding the funds for the down payment and closing costs. Many will meet the credit and income requirements, but not many have sufficient savings or “wealthy” parents who are able to give them the required funds needed. However, with a plan and a goal, it is possible to get to your destination of homeownership. Here are just some of the sources of funds that can be used towards your down payment.

  1. Personal Savings and Investments
  2. Retirement Accounts – 401K/IRA (Individual Retirement Account) funds
  3. Income Tax Refund
  4. Gift from Family Member
  5. Lender Credit
  6. Vendor Concessions
  7. Down Payment Assistance Program
  8. Deposit to Builder

PERSONAL SAVINGS and INVESTMENTS is the perhaps the ideal path for those who are disciplined and focused in the quest to owning their first home. If your home buying goal is short-term, less than three years into the future, then you want to save or invest in financial products that are easily accessible, don’t fluctuate too much in value, and protect all of your original capital. These vehicles can be a high yield saving account, a term deposit, a money market account or a dividend mutual fund. So, if you are thinking about buying a home and haven’t started your savings plan yet, start now.

RETIREMENT ACCOUNTS which include your 401K and IRA are also a source of funds that can be used toward your first home purchase. You can borrow up to 60% of the value of your retirement account to put towards the purchase of your first home. There may be tax implications if these funds aren’t paid back within the specified period, so please consult with an accountant or tax professional to find out how this will affect you in the future.

INCOME TAX REFUND is an often-overlooked source of funds by many homebuyers. Instead of using the refund for a vacation, use it instead to build your legacy by owning real estate. Depending on the price of homes in your market and if you are purchasing by yourself or with a partner or spouse, your income tax refund may get you to homeownership faster than you could imagine.

GIFT from a FAMILY MEMBER is another source of funds for buying your first home. It is not uncommon for some parents to help adult kids with their home purchase. But not only parents are able to gift funds to the potential homebuyer. Funds can be gifted by siblings, grandparents, uncles, aunts and even godparents. Check with your lender to confirm what the guidelines are for gifted funds as each lender may have their own criteria.

LENDER CREDIT is another acceptable source of funds for your down payment and closing costs. This credit is usually a percentage of the amount of your approved loan and can range from 1-5% of the mortgage amount. It is important to note that the lender credit is usually given in lieu of a lower interest rate, so your cost of borrowing will be higher.

VENDOR CONCESSIONS are another often overlooked source of funds for homebuyers. These are the funds given to the home buyer by the vendor or seller of the property to facilitate the home purchase. Depending on the type of loan you qualify for, the vendor concession cannot exceed 6% of the mortgage amount.

DOWN PAYMENT ASSISTANCE PROGRAMS are another way to easily get into homeownership.Often overlooked by many potential home buyers, there are a multitude of first-time homebuyer grants available through federal, state, county and municipal governments. In our next blog, we will explore these in more detail. Some of the sates with the most attractive Down Payment Assistance Programs include; California, New York, Pennsylvania, Texas and Florida among others. If you visit the website of your county or city, it will usually show a list of available first-time home buyer grants.

DEPOSIT to BUILDER is an easy way to accumulate the required down payment when purchasing a pre-construction home from a builder. Most new homes can take as long as a year to two years to be completed, and for condominiums, it can take up to 5 years until your unit is ready for occupancy. There are two advantages to this process. Firstly, the purchase agreement may have an extended period over which the deposits must be given to the builder and it may include a series of small deposits over a period as long as 12 to 18 months. Secondly, because of the extended time it takes to occupy your new home, the value may be higher at closing than when you originally purchased it. So you would have by default accumulated equity in your new home before you even owned it.

The writer: Raymond McMillan is a mortgage broker and real estate consultant who has been in the banking, mortgage and real estate industry since 1994. He has been licensed as a mortgage broker since 1999 and has helped many people purchase their homes and invest in real estate. You can reach him at 1-866-883-0885 or visit




Raymond C. McMillan, BA., Mortgage and Real Estate Advisor – May 17, 2020

In our previous blog we briefly touched on the importance of your credit profile and debt, and how it affects you in the mortgage application process. Your credit profile or credit report gives the lender a snapshot at the way you manage your finances, so they can determine if you are a good or bad credit risk when it comes to lending you money. So how is your credit profile or credit score determined? There are five categories that impact the calculation of your credit score. They are:

  1. Types of Credit
  2. New Credit
  3. Length of Credit History
  4. Amounts Owed
  5. Payment History.

Each category has a weight that is used in your credit score calculation and impacts your credit rating.

TYPES OF CREDIT used by you will have an impact on your credit rating. What do we mean by type of credit? Here we are referring to the types of lenders that currently hold any loan you have outstanding. Someone who has finance company credit products and department store credit cards will usually have a lower credit score than someone who uses the financial products of major banks, credit unions and trust companies. Similarly, financing your automobile through the manufacturers finance division or your financial institution will also more positively impact your credit score than using a secondary automotive finance company.

NEW CREDIT also has an impact on your credit score calculation. A high amount of new credit accounts will usually have a lender asking questions. You may wonder why? Usually it is because it is usually an indication of two things, the person has had credit issues in the past and are currently rebuilding their credit rating or they are a credit seeker trying to get access to as much credit as they can in a short space of time. The former is not a major issue for most lenders, providing there is a reasonable explanation, but the latter could be a red flag for some lenders.

LENGTH OF CREDIT HISTORY has a relatively significant impact on your credit score. The longer you have had credit products, the more comfortable the lender will be with you as it displays financial maturity and responsibility. So, it is important to keep that first credit card you ever got with a five hundred dollar credit limit when you sixteen or seventeen years old. While most lenders will want to see a credit profile that is one to two years old, a recent credit profile with a 800 credit score may not be as impressive as a 680 credit score that has reported for more than ten years. Mortagge lenders want to see more than just a high credit score, they want to see how you have managed your debt and credit repayment over an extended period.


AMOUNTS OWED on your credit cards has the second highest impact on calculating your credit score. When applying for a mortgage, lenders are more reluctant to loan money to potential homebuyers who have high amounts of consumer debt – either revolving or instalment. If the amounts owing on your credit cards are at or near the limit for most of the credit reporting cycles, this will significantly lower your credit score. However, of all the variables that impact your credit score, this is perhaps the easiest to remedy. If you have an established credit profile with no payment delinquencies but have credit cards that are all at the limits, paying them off or down to less than half of the credit limit can see your credit score increase by several points in a month to two months.

PAYMENT HISTORY is our final and perhaps most important variable in computing your credit score. The approach here is quite simple – pay your bills on time to maintain a decent credit rating. I always say, “bad things sometimes happen to good people” and these bad things could be anything from job loss to illness to divorce, could significantly affect your ability to pay your bills on time. If you find yourself in any of these situations my advice is to contact your credit grantor and let them know your circumstances so they can work with you and protect your credit rating. It is important to make your payments on time both on your credit cards and instalment loans and avoid late payments and delinquencies. Most mortgage lenders will look at your payment history over the last year or two when reviewing your application to make a lending decision.

Keep in mind a poor credit score is not a life sentence and can be fixed with a few steps. In the case of delinquent debt that has been transferred to a collection company, settling that debt and repairing your credit is a quite simple process.

As a consumer, it is important to check your credit profile periodically to ensure there are no inaccuracies. To check your credit score, you can contact one of the three major credit reporting agencies: Equifax Phone: 800-685-1111, Experian Phone: 888- 397-3742 and TransUnion Phone: 800-909-8872.


The writer: Raymond McMillan is a mortgage broker and real estate consultant and principal of The McMillan Group who has been in the banking, mortgage and real estate industry since 1994. He has been licensed as a mortgage broker since 1999 and has helped many people purchase their homes and invest in real estate. You can reach him at 1-866-883-0885 or visit

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How Much Toronto Condo Apartment Prices Dropped Since COVID-19 Measures: 35 Neighbourhoods in Review

In February 2020, Toronto real estate was gearing up for what may have been a record-breaking spring season, with home sales up a staggering 45 per cent year-over-year (y-o-y), and home prices forecasted to grow 10 per cent in 2020.

Fast-forward to April 2020, at which point COVID-19 public health and safety measures had been in effect for a full month and a number of home buyers and sellers opted to remain on the sidelines. Home sale activity slowed considerably, with double digit sales declines in the City of Toronto in April. For the condo apartment segment in particular, the dip in y-o-y sales in April was a steep 70 per cent.

To understand how COVID-19 measures impacted real estate market dynamics, particularly condo apartment prices in the City of Toronto, Zoocasa used data from the Toronto Regional Real Estate Board (TRREB) to compare how median prices changed between February and April 2020 for 35 city neighbourhoods. For neighbourhoods with at least 10 condo apartment sales in April, Zoocasa calculated the dollar and percentage change in the median sold price to get a snapshot of how the market evolved one month after COVID-19 measures were introduced.

The median condo apartment price is defined as the price at which half the condo apartments in an area sold at a higher price than the median, and the other half sold at a price lower than the median price.

City of Toronto Median Condo Price Fell by $65,000 Since February 2020

For the City of Toronto as a whole, the median condo apartment price declined a steep $65,000 (-10 per cent) between February and April 2020 to $574,000. In a true reflection of economic and healthcare measures in place for COVID-19, condo apartment sales dropped 64 per cent since February, with just 482 transactions taking place across the city in April compared to 1,335 in February.

A closer look at all 35 City of Toronto neighbourhoods revealed that 21 city neighbourhoods had fewer than 10 sales during the month of April, which is three times the number of neighbourhoods with a low sales volume in February. In the 14 neighbourhoods with at least 10 sales, the median condo price rose in just one neighbourhood, and fell in all the others. More specifically, the median condo apartment price:

  • Dropped more than $100,000 in two neighbourhoods
  • Fell between $50,000 – $100,000 in four neighbourhoods
  • Declined between $1 – $50,000 in seven neighbourhoods
  • Rose $34,000 in one neighbourhood to $506,500

Toronto Centre Neighbourhoods Saw Largest Price Declines 

Condo apartment prices were significantly impacted in Toronto Centre, with the top five neighbourhoods with the greatest price declines (and at least 10 sales) located in this part of the city. C10 (Mount Pleasant East) topped the list with the median condo apartment price declining $131,500 (-18 per cent) to $617,500.

This was followed by C08 (Regent ParkSt. James Town, and Corktown), where the median price dropped $103,400 (-14 per cent) to $611,600. In C14 (Newtonbrooke East, Willowdale East), the median condo apartment price declined 12 per cent to $597,950, marking an $85,050 drop since February. C07 (Willowdale West, Lansing-Wesrgate) and C01 (Downtown, CityPlace, Trinity-Bellwoods, and Harbord Village) rounded out the top five neighbourhoods with price declines of $70,000 and $60,500 respectively.

Emma Pace, a Zoocasa agent in the City of Toronto, noted that new market conditions since COVID-19 have created opportunities for buyers who may have previously remained on the sidelines. Pace said, “due to the competitive nature of the market subsiding, qualified buyers who may have otherwise forgone an attempt at a home search even four to eight weeks ago are now reviewing how they can participate and starting to enter the market.”

Median Condo Apartment Price Rose in One Toronto East Neighbourhood; Prices Fell in Two

When considering neighbourhoods with at least 10 condo apartment sales in April, Toronto East neighbourhoods fall in the middle of the pack when it comes to price declines. The median condo apartment price in E09 (Morningside, Woburn, Bendale) declined exactly $50,000 (-10 per cent) since February to $465,000, and dropped $47,750 (-10 per cent) in E04 (Dorset Park, Kennedy Park).

In E07 (Milliken, Agincourt North) on the other hand, the median price rose by $34,500 (+7 per cent) to $506,000. Of all City of Toronto neighbourhoods with at least 10 condo apartment sales in April, this was the only area that experienced a median price increase. Here, condo apartment sales were down 49 per cent compared to February, representing a less severe sales drop when compared to the City of Toronto’s overall sales decline of 64 per cent for condo apartments.

According to Jelani Smith, a Toronto Zoocasa agent with experience working in Scarborough, showings began to pick up toward the end of April as more buyers started to return to the market. “Properties that were sitting on the market for almost a month started to get sold relatively faster, since showings started to pick up. In some cases, I’ve been involved in bidding wars similar to what we saw before COVID-19,” said Smith.

Median Condo Apartment Prices in Toronto West Neighbourhoods Declined Between $15,000-$45,000 

In Toronto West, median condo apartment prices dropped between four per cent and 10 percent since February 2020 in the following neighborhoods with at least 10 sales:

  • W10 (Rexdale-Kipling, West Humber-Claireville) prices declined $44,500 (-10 per cent) to $418,000
  • W06 (Mimico, Alderwood) prices dropped $35,500 (-6 per cent) to $577,500
  • W08 (Islington-City Centre West, Eringate-Centennial-West Deane) prices fell by $25,500 (-4 per cent) to $570,000
  • W04 (Yorkdale-Glen Park, Weston) prices declined $18,450 (-4 per cent) to $479,000
  • W05 (Black Creek, York University Heights) prices fell $15,451 (-4 per cent) to $409,999

Carlos Moniz, a Zoocasa agent with Etobicoke and Toronto West expertise noted that when COVID-19 hit, many buyers in the very early stages of their home searches took a step back and slowed down their searches to get a better sense of the impact on the market. According to Moniz, buyers who were further along in their home search recognized this as an opportunity to regain some negotiating power in these new market conditions where there were fewer buyers and less competition.

Here’s a snapshot of how median condo apartment prices changed in Toronto’s 35 neighbourhoods between February and April 2020, including a list of the neighbourhoods with the largest declines. Note: the percentage change in median price is only calculated for neighbourhoods with at least 10 condo apartment sales.

COVID-19 and Toronto condo prices, April vs. Feb 2020

Toronto Neighbourhoods with the Largest Declines in Median Condo Apartment Prices

Based on neighbourhoods with at least 10 condo apartment sales in April 2020.

1. C10 – Mount Pleasant East

  • Condo apt median price, Apr 2020: $617,500
  • Condo apt median price change from Feb 2020: -$131,500 (-18%)
  • Condo apt sales, Apr vs. Feb 2020: 16 vs. 37 (-57%)

2. C08 – Regent Park, St. James Town, Corktown

  • Condo apt median price, Apr 2020: $611,600
  • Condo apt median price change from Feb 2020: -$103,400 (-14%)
  • Condo apt sales, Apr vs. Feb 2020: 74 vs. 127 (-42%)

3. C14 – Newtonbrooke East, Willowdale East

  • Condo apt median price, Apr 2020: $597,950
  • Condo apt median price change from Feb 2020: -$85,050 (-12%)
  • Condo apt sales, Apr vs. Feb 2020: 28 vs. 70 (-60%)

4. C07 – Willowdale West, Lansing-Westgate

  • Condo apt median price, Apr 2020: $580,000
  • Condo apt median price change from Feb 2020: -$70,000 (-11%)
  • Condo apt sales, Apr vs. Feb 2020: 11 vs. 57 (-81%)

5. C01 – Downtown, Entertainment District, CityPlace, Trinity-Bellwoods

  • Condo apt median price, Apr 2020: $677,500
  • Condo apt median price change from Feb 2020: -$60,500 (-8%)
  • Condo apt sales, Apr vs. Feb 2020: 106 vs. 330 (-68%)


Median condo apartment prices and sales for April 2020 and February 2020 were sourced from the Toronto Regional Real Estate Board.

The median price is the price at which half the homes in an area were sold at a higher price and half the homes were sold at a lower price.

The percentage change in median price is only calculated for areas with 10 or more condo apartment sales.


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Thinking about deferring your mortgage?

Payment due

News that Canadian financial institutions were offering some mortgage deferrals sent investors running to the banks in early April, asking for a stay on their payments as personal incomes and investment portfolios were being wiped out by the coronavirus pandemic. Those deferrals seem like a lifeline for investors facing a liquidity crisis, but one leading mortgage broker thinks the impacts of a deferral need to be considered closely.

Dalia Barsoum, president and principal broker at Streetwise Mortgages, says that investors should consider alternatives to mortgage deferrals. She explained that these deferrals aren’t gifts or grants, as they come with a cost, a likely increase to future payments, an impact on future financing availability and a wider implication for an investor’s credit. Barsoum says despite the pain investors are feeling, they shouldn’t just take mortgage deferment as their first line of support.

“We look at mortgage deferrals as a last resort tool for investors to utilize to help ease financial destress,” Barsoum says.

Barsoum outlined what some of those sources of financial distress are. The primary pressure on real estate investors stems from unemployment, both the loss of their own job or, if they own a rental property, the loss of a tenant’s income. The temporary collapse of Airbnb, too, has resulted in an increase to rental stock in some Canadian markets, putting downward pressure on rents. Further, softening property valuations in some markets, have made it more challenging to extract equity when it is needed most. Even committed deals, not yet closed, might be torpedoed by a borrower’s inability to get a mortgage. The financial pressures on a real estate investor are widespread, perhaps enough to make mortgage deferral seem like the right option. Barsoum says investors need to look at the long-term implications of that short-term fix.

Her first concern is cost, explaining that interest will accrue on the deferred amount for the duration of the period. Each lender, too, applies its only methodology of repayment for the accrued amount after the deferral period. Investors need to know what that post-deferral arrangement will look like before they sign off on anything.

That methodology could also result in an increase to future monthly payments. That increase will vary based on the mortgage size, interest, and duration of the deferral. An increase in the debt load will, as well, likely impact an investor’s ability to qualify for future financing, especially if their new  payments are higher across several properties within the portfolio.

Though a deferral is different from a default, and should not have any negative impact on credit, that requires an adjustment to lenders’ systems allowing them to report deferrals in the right way. Barsoum thinks that the sheer volume of deferral requests has increased the risk of reporting errors.

“If you are considering a deferral and can wait on it another month, then please do so to allow time for the first round of deferrals to go through the systems and see how that turns out,” Barsoum says. “Further, if you have chosen to defer by now, then please monitor your credit report for the next 3 months.”

Current financing arrangements, too, could prove challenging to obtain for investors with an active deferred payment. The logic, as Barsoum sees it, is that in taking a deferment an investor has told the lender whether they “can or can’t” afford the payment. In such a binary situation, taking the deferment puts you in the “can’t pay” camp, which carried long-term implications.

“My suggestion is to first examine your finances, challenges and plans with your current mortgage advisor,” Barsoum says. “Come up with an action plan before jumping on mortgage deferrals as the first line of support because of panic, fear of the unknown, or fear of missing out on this support tool.”

Source: Canadian Real Estate News – by David Kitai 06 May 2020


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Trapped: Helping separated clients manage unwanted cohabitation during COVID-19

Trapped: Helping separated clients manage unwanted cohabitation during COVID-19

There’s a certain level of connectedness that comes from dealing closely with clients’ finances, their families and their dreams for the future. Because of the proximity to a client’s life and everything that makes it unique and worth securing, it’s only natural for brokers to concern themselves with more than just the bottom line.

When COVID-19 came barrelling toward Canada in March and strict social distancing and stay-at-home orders were put in place, one of the many unforeseen disruptions involved couples in the midst of divorces or separations being forced to shelter in place together.

“Pre-COVID-19, couples that were at crossroads in their relationships, someone would just pick up and go. They could easily find accommodations,” says Nathalie Boutet of Boutet Family Law and Mediation in Toronto. “Right now, with COVID-19, it’s very difficult for people to move out quickly. They don’t know where to go, they don’t know what’s available and you can’t see suites in person.”

The inability to separate has put many couples into complex, sometimes violent situations. In those involving domestic abuse, many victims simply have nowhere else to go. Government shelters are full and most short-term solutions, like Airbnb’s, have been taken off the market.

“People are nervous, and they’re accessing mediation services to try and sort out rules and regulations around their current properties,” Boutet says.

For owners bent on selling, one of the ongoing problems is access to a comprehensive appraisal, which is critical in ensuring the separated parties receive a fair share of the proceeds. Realtors can still access data on comparable properties to determine a home’s value, but few would trust the comps established over the last four weeks. Certified home evaluators can provide a more thorough look at a property’s structure – if they can get inside.

Faced with the prospect of selling into an unpredictable market, the advice most mortgage professionals would give would be “Don’t sell!” But Boutet says there may be more at stake than achieving an above-asking sale price.

“It’s really important to figure out what’s going on in the house. Is there a lot of pressure? Is someone really, really unhappy and you can see it?” she says. “If there are children and it’s really, really tense, there should be ways to put the house up for sale.”

That might involve moving more quickly than most mortgage brokers and real estate agents would prefer. Boutet suggests patch-ups over renovations and says sellers could potentially reach out to staging companies for advice rather than waiting for an in-home consultation that can’t legally occur.

Selling rather than waiting out the pandemic may also help alleviate some of the stress involved with selling a home, which will be particularly high in separated households also reeling from COVID-19 layoffs.

“It’s not just a commercial issue right now,” Boutet says. “It’s also an emotional issue, and an energy issue.”

Mortgage brokers don’t have a legal obligation to step in and try to improve a client’s domestic situation, but Boutet urges them to be observant and sensitive and be willing to refer clients to services they may be in need of, whether it’s moderate mediation or full-on therapy.

“Mortgage people are people persons. They have instincts and they’re super good at picking things up,” she says. “Don’t hesitate to refer out to professionals because there are a lot of services that are running efficiently, even under COVID-19.


Source: Mortgage Broker News – by Clayton Jarvis 08 May 2020

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Rates Are Historically Low, But It’s Extremely Hard to Get a Loan—Here’s Why (& What to Do About It)

Real estate, like all other asset classes, goes through market cycles. As the market goes up, property values increase, and the ability to get a loan generally becomes easier. As the market goes down, property values decrease, and the ability to get a loan generally becomes harder.

When the loans get harder to obtain, you may begin to ask yourself:

  • Why has it become so much more difficult to get a loan today, when two months ago it seemed easy?
  • And most importantly, how am I going to fund my next deal?

Do I have your attention yet? Good.

Read on, and be sure to watch the video below for further information.

Now, in order to answer the above questions, we need to take a step back and see how lending has evolved in real estate.

Recent History of Lending

I started investing in real estate when I purchased my first duplex in 2004 outside Philadelphia. I used a $30,000 private loan. Since that first deal, I have seen four different lending markets.

From 2005- 2008, real estate went through its infamous “no-doc” period, which basically meant giving out loans with no required documentation. As you can imagine, this did not end well—it caused a collapse in asset prices not seen since the Great Depression.

From 2007-2010, the pendulum swung the complete opposite way, and getting a loan became extremely cumbersome. This period was famous for the ample amount of deals to buy—but no capital to buy with.

For the last nine years, the process of getting money for a deal can be summarized in one word: easy. When I talk about getting money, I’m referring to the debt of the deal.

For example, say an apartment building costs $1 million. For simplicity purposes, I have to raise 25% (or $250K) for the deal from my investing partners, leaving the remaining 75% (or $750K) to be funded by a debt provider, such as a bank, agency, or private lender.

Obtaining that 75% debt has been “easy” up until COVID-19 hit. Now we enter what I call the “corona crazy” environment.

To put it simply, the world has changed—in almost every way—in the last two months. These changes have drastically affected an investor’s ability to get loans on deals.

Where Can You Get Money for Your Next Deal?

Your Network

The first place to look to get money for your next deal is your own network. I talk about the different ways to cultivate your network in order to raise capital in my BiggerPockets book Raising Private Capital.

But even if you could raise all the funds needed for a deal, you probably wouldn’t. Why? Because real estate’s greatest asset is leverage.

The ability to put down a 20- 25% down payment in order to obtain a large leveraged asset is a great wealth creator. (A word of caution here: the opposite is also true—too much leverage is a great wealth destroyer.) So after you raised your initial funds—usually consisting of your down payment, closing costs, capital expenditures, and operating expenses—you turn your attention to the debt market.

While it may be difficult to get a loan, the investor’s reward is that debt is currently experiencing historically low interest rates. As I write this article, the rates are between 2.5- 4%. Those are impossible to beat!


Certain Banks

Not all banks are lending these days. In fact, most aren’t. To understand which are, you need to know where the banks get their money.

Balance sheet lenders use the money that’s been deposited with them to fund loans. They lend it out and earn interest on the loan. Since the funds are staying on the balance sheets of the bank, the bank can hold onto the loan for as long as it chooses. These balance sheet lenders are typically smaller, regional banks.

The alternative to a balance sheet lender is a warehouse lender, where an enormous bank or a large institution like Fannie or Freddie provides, in essence, a line of credit for small intermediaries to originate loans. The main goal for a warehouse line is to originate loans and package them up to sell in order to pay back the warehouse line of credit and then repeat the process.

Mortgage loan agreement application with house shaped keyring

So, how do you know which banks to go to?

It’s simple, ask them if they’re a balance sheet lender. (You’re speaking their language now!) Again, if you’re unfamiliar with the term, it just means that the bank is loaning their own money and does not plan on collateralizing or selling the loan.

If they are a balance sheet lender, you will have a better chance of them funding your deal. If they’re not, then there’s a very good chance they are not lending at this time.

And if they are lending, you may have another problem…

Why Is It Much More Difficult to Get a Loan Right Now?

Two months ago, it seemed so easy to secure a loan. But because of COVID-19, these warehouse lines have dried up. Some of it is due to the fact that Wall Street funds were backing these lines of credit, but the main reason is the unpredictability of today’s environment. Large institutions are taking a pause and shutting off the spigot.

The second major reason is that when the debt providers underwrite your deal, they look at the income available to pay down the loan. This is commonly known as the debt service coverage ratio (DSCR).

Up until the corona craziness, residential real estate has been fairly stable from an income perspective. When people decide which bills to pay, rent is usually given the highest priority in the hierarchy of expenses. Because of this factor, banks were always able to make certain assumptions on income projections—which in turn made underwriting easier for the banks.


However, in the tumultuousness we’re currently living in, underwriters have no way of projecting what the future income for a property will be. Compounding this issue, the numbers are looking worse and not better in the near future, as unemployment approaches Great Depression levels.

With this bleak outlook, a lender’s best chance to underwrite your deal is if the current month’s rent collection is strong. This can be a saving grace for current loan applicants or a death blow if the collections weren’t so hot.

Related: 12 Influential Investors Weigh in on How to Survive the Coronavirus Crisis

The Gorilla in the Room

And now it’s time to talk about the big gorilla in the room: Fannie and Freddie, who collectively are commonly referred to as agency debt. Agency debt is insured by the federal government and provides lenders the funds needed to loan on everything from a single-family all the way up to hundreds of units.

Given the vacuum created by the warehouse lenders stopping their loans, Fannie and Freddie have changed their terms. Fannie and Freddie are now requiring anywhere from six to 18 months of operating expenses. While they do give back the funds if your deal performs, it requires the investor to raise an enormous amount of escrow just to close a deal.


So, how are YOU going to fund your next deal?

In short, this article is a snapshot of today’s lending environment. You need to be aware of who you should go to for the best chance of securing a loan.

There are two main options in funding a deal right now: a balance sheet bank lender and agency debt. Without strong income in the current month, a balance sheet lender most likely won’t lend you the money, and without strong reserves, agency debt won’t lend you the money.

But then again, getting into a deal without strong income and reserves may not be the best thing for you anyway.

As mentioned, if you want to hear the full discussion on this, be sure to watch the video here.


Source: – Matt Faircloth

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