What You Should Know About Collateral Charge Mortgages

 

I recently had clients who were refinancing their mortgage completely reject a very attractive offering from one of the big chartered banks.

Their reasoning? All of this bank’s mortgages are registered as collateral charges, and all of their online research into this topic spooked them completely.

Over the years, dozens of articles have been written on the topic of collateral mortgages, often tending to a negative bias. But as Rob McLister once said, and I agree with him, “collateral mortgages shouldn’t be portrayed as a supreme evil of the mortgage universe, when in fact they offer advantages to some.”

One can present persuasive arguments in favour or against collateral mortgages. But this client’s response compelled me to revisit the topic with fresh eyes and offer an updated perspective.

Mortgage loans are typically registered as a standard-charge mortgage or a collateral charge mortgage. So, let’s explore both types…

What Is a Standard Charge Mortgage?

A standard charge only secures the mortgage loan that is detailed in the document. It does not secure any other loan products you may have with your lender. The charge is registered for the actual amount of your mortgage.

If you want to borrow more money in the future, you’ll need to apply and re-qualify for additional money and register a new charge. There may then be costs, such as legal, administrative, discharge and registration fees.

If you want to switch your mortgage loan to a different lender at the end of your term, you may be able to do so by simply assigning your mortgage to a new lender at no cost to you.

Monoline lenders such as MCAP, First National Financial, CMLS and others default to standard-charge mortgages, unless offering a product such as MCAP Fusion (which has a re-advanceable HELOC component)

What Is a Collateral Charge Mortgage?

A collateral charge is basically a method of securing a mortgage or loan against your property. As explained here previously, “unlike a standard mortgage, a collateral charge is re-advanceable. That means the lender can lend you more money after closing without you needing to refinance and pay a lawyer.”

You can keep re-using this charge, and a new charge will only be required if you want to borrow more than the amount that was originally registered.

Most chartered banks offer both types of mortgages. A couple (TD Bank and Tangerine)  only register their mortgages as collateral charges.

Most chartered banks also offer a type of combination home financing, which consists of a mortgage component and a line of credit component. (Actually there could be several components.) For example, the Scotia Total Equity Plan (STEP) mortgage.

If you have a Home Equity Line of Credit, you have a collateral charge mortgage.

A collateral charge can be used to secure multiple loans with your lender. This means credit cards, car loans, overdraft protection and personal lines of credit could also be included.

Arguments people make in favour of collateral charge mortgages

1) If you wish to borrow more money during the term of your mortgage, you can tap into your home equity without the expense of a mortgage refinance. You can save legal fees. (This is assuming of course, your personal credit and income are sufficient to qualify for more money.)

2) If you have a mortgage and a Home Equity Line of Credit (HELOC), it may be structured such that every time you make a mortgage payment, the amount you pay towards your principal balance is added to your HELOC limit. Large available credit, used wisely, is usually a good thing.

3) Collateral charges are often best suited to strong borrowers with lots of equity. They might readily access contingency funds at no cost down the road. This could be by increasing their mortgage loan amount or adding a home equity line of credit to the mix.

Ironically, our same clients who objected strenuously to the collateral charge actually fit this profile. After refinancing their current mortgage, they will still have $500,000 in equity left in their home. Who knows, down the road they may want a Home Equity Line of Credit or to increase their mortgage. If they register their mortgage today for more than its face value, they could avoid all refinancing costs at that time.

Arguments people make against collateral charge mortgages

1) Some people trash the collateral charge because there is often a cost to switching lenders at renewal. I think that’s overstated and no longer factual.

It’s so competitive out there, if you’re still considered strong borrowers, chances are someone is willing to eat the costs to move you.

Also, some lenders are now offering no-cost switch programs for collateral charge mortgages. That was not the case a few years ago, and the list of such lenders is growing.

And keep in mind the moment you wish to change any material aspect of your mortgage (for example, the amortization period or the loan amount), it is no longer considered a switch, but rather a refinance—so legal and appraisal costs are in play anyway.

2) Others argue you could be offered less competitive interest rates from your current lender at renewal than you will be from a new lender. Again, if you are a strong borrower, someone is going to offer you low rates, and your current lender, under pressure, will often match or beat competitive offers. For that reason I view this as less of a concern.

3) Some lenders register a collateral charge for more than the loan amount—to as much as 125% of the appraised value of your home. Some just do this by default and others may ask you to choose the dollar amount to be registered. The rationale being you will retain the benefits of your collateral charge, even as your home increases in value.

This is where you might pause to reflect.

If, down the road, your personal finances take a U-turn, or you no longer qualify for additional financing with your current lender, then you might find a high collateral charge impairs your ability to seek secondary financing elsewhere.

For example, we are presently working with two Ontario-based clients who need a private second mortgage, but the collateral charge registered against their home is roughly the same as the value of their home. Even if their current mortgage balance is very low, unless a private mortgage lender’s lawyer can cap the collateral charge at that lower balance, these homeowners will find alternate lender sources are unlikely to lend new money.

4) A collateral charge mortgage is not only a charge on your home, but can include other credit you have with that same lender. These lenders have a “right of offset,” meaning they can collect from the equity in your home on any financial products you have (or co-signed for) that are now in default.

There is also the potential that when asked to pay out the mortgage at the time you leave your collateral charge mortgage lender, they can also add in overdraft, credit card and line of credit balances. Resulting in less funds to you than you expected and may need.

That said, it is unclear how often this happens, if ever, to borrowers with spotless records.

Industry insider Dustan Woodhouse points out, “(Even) co-signing a credit card or car loan for somebody (who then stops making payments) carries a risk of a foreclosure action against your property as a remedy for what was perceived to be an unrelated debt.”

The Wrap

Collateral charge mortgages are here to stay. More lenders are adopting them and you should have a good understanding of what type of mortgage you are being offered. Most of the time, it probably will not matter much to you how your mortgage is registered.

For all the arguments about extra costs if you wish leave your lender at renewal, as long as your borrower profile is strong you should be able to avoid any incremental out-of-pocket costs.

But if you want to take a conservative approach, consider the following:

Choose a standard charge mortgage if it really bothers you, and if you have a choice of lenders.

Or, when given the option, just register the collateral charge mortgage for the actual face amount of the mortgage, rather than a much larger amount.

In closing, Woodhouse has some sage advice: “It is perhaps a key consideration that one should in fact not have all their banking, credit cards and small loans with the same institution as their mortgage…mortgage with Lender A, consumer debt/trade lines with Lender B, and perhaps any business accounts with Lender C.”

Source: Canadian Mortgage Trends – ROSS TAYLOR  

Advertisements
Tagged , , , ,

5 tips for insuring your first home

Photo: James Bombales

Before you take ownership of the property, your mortgage provider will likely want to see proof that the home is insured. This protects their interest in the building in case of damage or loss. Here are 5 tips for insuring your first home:

1. Be honest during your application

Buying insurance is not like buying a candy bar. It’s a contract with requirements from both parties. The most important thing to remember when purchasing insurance for your first home is to answer the application questions with as much openness and honesty as possible. This will help to ensure that the policy you purchase will be valid in the event you need to make a claim.

It’s worth doing some research on your home at this stage so that you’re prepared to answer any questions that may arise during a quote. For example, you may need to know about your home’s construction or the age of key systems, like the roof or furnace. Also, be clear about who’s living at the property and in what capacity. Any tenants occupying rental suites should be disclosed upfront.

Photo: James Bombales

2. Consider if you’d like to make renovations

Similarly, if you’re thinking about making changes to your home, be sure to let your insurance provider know before you start renovating. For most renovations, Square One will simply update your policy to cover the renovations, and follow up every now and then to check on your progress. There’s typically no need to buy a new policy to ensure your home remains protected. Just be sure to update the value of your home to include the renovations. That way, you won’t be forced to pay for them twice in the event of a total loss.

3. Check for lender-specific requirements

Most mortgage providers require confirmation of insurance before they’re willing to release the funds for your purchase. The terms of requirements differ with each lender, so be sure to identify what’s needed before you sign the dotted line.

For example, your mortgage providers will need to be listed as a “mortgagee” on your policy. This means you can’t simply cancel the coverage without the mortgage provider finding out. Most will also require an appraisal of the home’s value. Some mortgage providers will require a home inspection, or might have specific coverage requirements, such as Guaranteed Building Replacement coverage. This coverage guarantees that your home will be rebuilt in the event of a total loss, even if the cost to do so exceeds the limit of your coverage.

Photo: James Bombales

4. Pay attention to your home’s systems

Your home inspector should identify the type, age and condition of your home’s systems. If your home contains older or less reliable systems such knob + tube wiring or Kitec plumbing, you may want to consider upgrading to a more modern alternative. Not only will this provide some leverage for you to re-negotiate the purchase price, but upgrading to copper wire and pipes (considered the gold-standard) could help safeguard your home. Many providers, including Square One, offer a reduction in your home insurance premium if you’re willing to upgrade your home’s systems. (However, not all providers do – so if this is part of your decision-making process, check with your provider to be sure.)

5. Qualify for discounts to your premium

Homeowners with a history of continuous, claims-free coverage will often qualify for discounts on their premium– even if they’ve only previously held a policy for tenant’s insurance. Your insurance provider wants to see that you’re responsible and proactive about managing the risks associated with your home. And, because tenant insurance policies are typically cheaper than homeowner’s policies, the discount that’s applied to your future homeowner’s insurance premium may help to offset the cost of your tenant insurance today.

Source: Livabl.com – SPONSORED 

Tagged , , , , , ,

A first-time homebuyer’s guide to getting pre-approved for a mortgage

Many Canadians might want to start their homebuying journey by contacting a realtor and scoping out open houses, but their first step should actually start in a lender’s office. The mission: To get a mortgage pre-approval. In this process, a potential mortgage lender looks at your finances to figure out the maximum amount they can lend you and what interest rates are available to you.

Lisa Okun, a Toronto-based mortgage broker, recommends getting a pre-approval right out of the gates. “You need to understand the financing piece before you start shopping. Through the process of getting a pre-approval letter, you will also get your ducks in a row,” says Okun.

Make yourself house proud.

The key benefits to getting a pre-approval are that you’ll have a ballpark figure for the maximum mortgage you can qualify for and your lender can estimate your monthly mortgage payments. You’ll also be able to lock in an interest rate for up to 120 days. This means if interest rates go up in the months following your pre-approval, most lenders will honour the lower rate that they initially qualified you for.

That said, pre-approvals have some limitations. Okun breaks it all down here.

Photo: James Bombales

Let’s start with the basics. Where do you get a pre-approval?

Mortgages are available from several types of lenders like banks, mortgage companies and credit unions. If you’re getting a traditional mortgage, you can get pre-approved by one of Canada’s major banks or through a mortgage broker or agent. A bank will only be able to offer you mortgage products under their umbrella. Mortgage brokers and agents don’t actually lend the money directly to you. Instead, they arrange the transactions by finding a lender for you and then get a commission from the sale. Unlike a bank, brokers and agents have access to dozens of mortgage products.
Not all mortgage brokers have access to the same products, so it’s important to shop around, do your research, and compare interest rates and products before you settle on ‘the one’. Even half a percentage point can make a massive difference in the size of your monthly payments and the total interest you’ll pay over the life of your mortgage.

Photo: James Bombales 

Your pre-approval is not a guarantee.

With a pre-approval, your lender is approving you. With a final approval, they will be approving the property you intend to buy, along with ensuring your finances haven’t changed since you were initially given the green light.

“A lender is always going to reserve the right to approve you on a live transaction,” says Okun. “Let’s say someone’s credit score dropped in the six months that they were shopping. That could change things. Now, I may have to assess you at a lower debt servicing ratio.”

In addition to the possibility of your financial snapshot changing, the lender may not like the property you want to buy (remember, as the primary investor, it’s their house too). “If they believe they would have trouble unloading that property in the event of a default, they may not go for it,” says Okun. “For condos, many have minimum square footage requirements. If there’s an environmental issue, they may have concerns about that. Or if they decide that you overpaid for it, they might only be willing to finance the property to a certain amount. Then it’s up to the client to decide if they want to come up with the difference, or if they want to walk away from that property.”

Photo: Helloquence on Unsplash

What do lenders require for a pre-approval?

Whether you go to a bank,mortgage broker or agent, you will need to provide documentation that shows your current assets (whether it’s a car, a cottage, stocks, etc.), your income and employment status, and what percentage of your income will go towards paying your total debts.

Proof of employment

Your lender or broker may ask you to provide a current pay stub or letter from your employer stating your title, salary, whether you’re a full-time or part-time employee, and how long you’ve been with the organization.

If you’re self-employed, your lender will need to see your taxes from the last two years (Notices of Assessment from the Canada Revenue Agency). “Ideally, it’s going to show two years of working at the same business,” says Okun. “If you had one venture and then you abandoned it and you started something new, that’s not going to show as well as if you’ve had the business for three years and your income has steadily increased.”

If you are currently employed, this is not the best time to switch up your resume. “If someone is full-time employed and they just started in a new job, I can still use a job letter and paystub,” says Okun. “But ideally, I want it to say they’re not on probation. Not to say that would kill it but it’s a bit easier if they aren’t.”

If you’ve recently switched jobs, your lender may ask to see your tax returns from previous years to confirm that you’ve had continuous employment and have stayed within a relative income bracket.

Photo: James Bombales

Proof of downpayment

Your lender will want to have an understanding of how liquid your downpayment is. “I usually don’t ask for a history of the funds when we’re discussing pre-approval, but I will ask a lot of questions about where the funds are and how accessible they are,” says Okun. This could include details on whether you’re waiting for an inheritance or gifted funds, selling stocks or other investments, or corralling funds spread across multiple accounts.

Your lender should also have a conversation with you about closing costs, moving costs and ongoing maintenance costs to ensure you’re prepared for the total cost of owning the house you’re approved for.

Credit score

Before you meet with a lender to get a pre-approval, order a copy of your credit report and review it for any errors.

If you don’t have a good credit score, the mortgage lender may refuse to approve your mortgage, decide to approve it for a lower amount or at a higher interest rate, only consider your application if you have a large downpayment, or require that someone co-sign with you on the mortgage.

Your credit score will also have an impact on how much mortgage you qualify for. Lenders figure this out by looking at what percentage of your income will go towards your housing costs and total debts (including housing). If your credit score is higher, you are allocated the maximum percentage allowance, which means you get more house for your money. “If your credit score is above 680, the limit for your gross debt service ratio (GDS) is 39 percent and total debt service ratio (TDS) is 44 percent,” says Okun. More on that below.

Photo: James Bombales

Calculating your total monthly housing costs and total debt load.

Your gross debt service (GDS) ratio encompasses your monthly mortgage payments, property tax, heating and 50 percent of condo fees (if applicable). This is sometimes referred to as PITH (Principal, Interest, Taxes and Heating).

Your lender will also do a calculation called total debt service ratio (TDS) that determines what percentage of your income is going towards servicing your total debts (including the housing debts you’ll be taking on).

To calculate your TDS, add up PITH and every other debt you have including car loans, credit cards, lines of credit, student loans, etc. Then see how that stacks up against your income.

The guidelines state your GDS should be no more than 32 percent and your TDS should be no more than 40 percent. However, as mentioned above, if you have a fabulous credit score you can stretch this maximum to 39 percent for GDS and 44 percent for TDS.

You might be wondering how your lender can calculate your property taxes when there isn’t a property in question. To do this they set aside one percent of the forecasted purchase price. On a $600,000 property, this amount would work out to $6,000 a year. “It’s not going to be that much but that’s the calculation your lender will use,” says Okun. That’s why it’s a good idea to run the numbers with your lenders every time you find a property of interest so they reflect your actual affordability.

Photo: James Bombales

Levers you can pull if you aren’t pre-approved for the amount you want.

Maybe your affordability isn’t reaching as high as you’d like. In this case, there are a few levers you can pull. One option is to go with a “B lender” — an institution that offers a lower barrier to entry to qualify for their products. The only problem is that this can often be offset with higher interest rates and fees.

“There are B lenders that would have different debt servicing ratios, and will let us push those numbers a little bit further,” says Okun. “But you’re going to pay a higher interest rate and there’s going to be a one percent fee to do your deal with them.” Say your mortgage is $800,000. Prepare to be dinged at least $8,000. And it’s not just a one-time fee — if you have to renew, they’ll ding you again.

“There’s always a solution, but you have to ask yourself, ‘Is it worth it and how much is it going to cost?’” says Okun.

Another suggestion Okun shares is to add a cosigner. With an extra income, you’ll have access to a higher purchasing price. “You’re also going to be taking that person’s liabilities onto the application now, so they have to be a good applicant in terms of their debt,” she says.

You could also contribute more to your downpayment to ensure you’re putting down at least 20 percent. This will give you access to a 30-year amortization, instead of a 25-year (this is the amount of time you’re given to pay your mortgage back in full). “This stretches your loan over 30 years instead of 25 which changes the payment significantly,” says Okun. “That allows you to essentially afford more.” Another strategy is to pay off significant debts so they aren’t tipping your debt servicing ratios over the edge.

Where there’s a will (and a patient lender), there is often a way.

 

Source: Livabl.com –  

Tagged , , , ,

Home renovations are costly, prone to errors

Jennifer Skingley and her partner—the former an erstwhile project manager and the latter an executive manager—are meticulous planners, so no detail was spared when they planned a home renovation. However, no amount of planning could have prepared them for the aggravations they would subsequently endure.

“We got the keys to our home in February 2018 and before we even took possession of it we had teed up people to do the work. We really researched and organized our renovation,” said Skingley. “There were several false starts trying to get people who were available to commit to doing the work. We interviewed a ton of contractors, got multiple estimates and did as much of the leg work ourselves as humanly possible without actually being construction experts. We tried to hand everything over on a silver platter, but for the work to actually start was like pulling teeth.”

And that was only the beginning, added Skingley.

The basement level needed external waterproofing, upgraded plumbing and a new bathroom was fitted in, while the kitchen and upstairs bathroom also received significant work.

However, because of last minute cancellations by contractors and a seeming deluge of errors, the home renovation took much longer than originally anticipated and cost over $80,000.

“Management was the issue,” said Skingley. “There were some blatant oversights and lossages with the team of people we picked, so we definitely ended up spending more money than we had allocated, even though we budgeted quite thoroughly from the outset, because we know when you tear things apart you find ugly surprises, but we there were things like having to tear floors out a second time because they forgot to get a permit. Silly little things like that took us way over and above. Even sourcing material was challenging.”

Unfortunately, Skingley and her partner’s nightmare renovation is extremely common, and given the exorbitant cost of the work, most homeowners can afford nary a thing to go wrong, says Casper Wong, co-founder and COO of Financeit, a consumer financing platform.

“When most Canadians renovate their homes, they aren’t offered flexible payment plans by their merchants, and while there are more traditional ways of paying, like with cash or using HELOCs [home equity lines of credit], not every Canadian can afford to make cash payments up front,” he said.

“Not everybody has access to HELOCs. Only three million Canadians have access to them, and on average Canadians owe $65,000, and 25% of Canadians with HELOCs just make interest-only payments.”

Financeit, a digital platform, works with thousands of contractors to homeowners make those large renovations in low-installation payments.

“We use our technology—and we own the entire stack, which allows us to manage credit, underwriting, servicing, and we work with multiple lenders and have a mobile app,” said Wong. “Not every Canadian can afford to make cash payments up front and usually when they do, they’re more reliant on credit, but credit cards have high interest.”

Source: Canadian Real Estate Magazine – Neil Sharma 12 Aug 2019

 

Tagged , , , ,

First-Time Home-buyer Lessons

 

My husband and I bought our first home three years ago, and I’ll admit we made some mistakes along the way.

Here are 5 hard lessons we learned as first-time homebuyers.

1. We bought a very old house. Before we bought the home, we had it inspected by a reputable home inspector. In his report, he suggested that we have the house’s foundation assessed by an engineer. But we didn’t do that. Why? We were in too much of a rush to buy the house.

Lesson? Pay attention to the inspection report. After living in the home for about a year and a half, I called an engineer who told us a foundation wall had to be replaced–and soon. It wasn’t cheap.

2. Our agent told us that upping our offer by a few thousand dollars would only mean an extra $40, $50 or $60 a month on our mortgage. It doesn’t sound like much, but if interest rates go up spending thousands more on our home will hurt.

Lesson? Once you figure out your maximum price, stick to it. This is one thing we actually did well. In the end our offer was accepted at the price we were willing to pay, but upping our bid could’ve made paying the mortgage a lot tougher.

3. When you’ve been a renter for most of your life, it’s a shock to suddenly find yourself responsible for repairs. We hired a roofer who did a really bad job, and we had to pay another roofer to do the work a second time. Then I had to go to small claims court to try getting my money back from the first one.

Lesson? Shop around before hiring a contractor. I should have paid more attention to a couple of negative online reviews. You can also look up court decisions online to see if other customers have had problems.

4. We were able to put a 20% down payment on our home and had about $10,000 set aside for closing costs, taxes, home insurance and other expenses. It wasn’t enough.

Lesson? Set money aside, then set some more aside. You also need to budget for the unexpected. In the first year, we spent several hundred dollars on a new sump pump after our crawl space flooded. Last year, we spent a few hundred dollars on an exterminator for mice.

5. This past winter, while our foundation wall was being dug up and replaced, I called a real estate agent to talk about possibly putting our house up for sale. I was pretty fed up with the seemingly unending problems and stress. The good news was that our home had gone up in value and we could make a profit. Though we’ll stay put for now, at least we have an exit plan–as long as the housing market stays strong.

Lesson? Have an exit plan. Hopefully these hard-earned lessons can help you become homeowners. Or maybe decide to remain renters. Good luck!

 

Source: Tangerine.ca – by Dominique Jarry Shore Wednesday, July 3rd, 2019

Tagged , , , , , ,

8 HOME INSPECTION RED FLAGS

8 HOME INSPECTION RED FLAGS:

Our gallery of home inspection nightmares (below) is good for a laugh, but a home inspection is serious business. It’s the buyer’s opportunity to make sure that the house they’re about to purchase doesn’t hold any expensive surprises.

A typical home inspection includes a check of a house’s structural and mechanical condition, from the roof to the foundation, as well as tests for the presence of radon gas and the detection of wood-destroying insects. Depending on the seriousness of what the inspection uncovers, the buyer can walk away from the deal (most contracts include an inspection contingency in the event of major flaws) or negotiate with the seller for the necessary repairs.

These are the red flags that should send a buyer back to the negotiating table, according to home improvement expert Tom Kraeutler of The Money Pit.

1. Termites and other live-in pests: The home you’ve fallen in love with may also be adored by the local termite population. The sooner termites are detected, the better. The same goes for other wood-devouring pests like powder-post beetles. Keep in mind that getting rid of the intruders is just the first step. Once the problem has been addressed, have a pest control expert advise you on what needs to be done in order to prevent their return.

2. Drainage issues: Poor drainage can lead to wood rot, wet basements, perennially wet crawlspaces and major mold growth. Problems are usually caused by missing or damaged gutters and downspouts, or improper grading at ground level. Correcting grading and replacing gutters is a lot less costly than undoing damage caused by the accumulation of moisture.

3. Pervasive mold: Where moisture collects, so grows mold, a threat to human health as well as to a home’s structure. Improper ventilation can be the culprit in smaller, more contained spaces, such as bathrooms. But think twice about buying a property where mold is pervasive — that’s a sign of long-term moisture issues.

4. Faulty foundation: A cracked or crumbling foundation calls for attention and repair, with costs ranging from moderate to astronomically expensive. The topper of foundation expenses is the foundation that needs to be replaced altogether — a possibility if you insist on shopping “historic” properties. Be aware that their beautiful details and old-fashioned charms may come with epic underlying expenses.

6. Worn-out roofing: Enter any sale agreement with an awareness of your own cost tolerance for roof repair versus replacement. The age and type of roofing material will figure into your home inspector’s findings, as well as the price tag of repair or replacement. An older home still sheltered by asbestos roofing material, for example, requires costly disposal processes to prevent release of and exposure to its dangerous contents.

7. Toxic materials: Asbestos may be elsewhere in a home’s finishes, calling for your consideration of containment and replacement costs. Other expensive finish issues include lead paint and, more recently, Chinese drywall, which found its way into homes built during the boom years of 2004 and 2005. This product’s sulfur off-gassing leads to illness as well as damage to home systems, so you’ll need to have it completely removed and replaced if it’s found in the home that you’re hoping to buy.

8. Outdated wiring: Home inspectors will typically open and inspect the main electrical panel, looking for overloaded circuits, proper grounding and the presence of any trouble spots like aluminum branch circuit wiring, a serious fire hazard.

The McMillan Group/Centum Supreme Mortgages Ltd.

Tagged , , , , , , , ,

10 Signs to Watch out for to Avoid Renovating a Money Pit

Tagged , , , , , ,