Category Archives: mortgages

Latest in Mortgage News: Six-Month Deferrals Could Cost You Up to $12,000

Nearly 600,000 Canadians have so far taken advantage of some form of mortgage deferral assistance due to the COVID-19 crisis, according to the Canadian Bankers Association (CBC).

With the average mortgage payment amounting to $1,326, this has freed up roughly $778 million per month, according to the Canada Mortgage and Housing Corporation.

“This keeps money in the pockets of people who need it now,” the CBA noted. “Banks have publicly reported that more than 90% of those seeking a deferral are approved.”

But, of course, taking advantage of mortgage payment deferrals naturally comes at a cost. And that has been calculated at up to $12,000 in extra interest costs for those taking the full six-month deferrals, according to math from Integrated Mortgage Planners Inc. mortgage broker Dave Larock, published recently in the Globe and Mail.

Mortgage deferral costs for someone with a mortgage rate of 3% and amortized over 25 years (and assuming they just bought a house and immediately deferred payments) would amount to $2,082 in additional interest for a one-month deferral, $6,217 for six months and $12,346 for a six-month deferral, when added back into the life of the mortgage and assuming no extra repayments.

House Sales Down 14% in March

lenders provide covid-19 updateHome sales were down 14% nationally in March on the heels of the COVID-19 pandemic, according to the Canadian Real Estate Association (CREA).

The declines in sales volumes varied by region, with drops of up to 24.9% in Hamilton-Burlington, 20.8% in the Greater Toronto Area, 26.3% in Calgary and 7.9% in Ottawa.

“March 2020 will be remembered around the planet for a long time,” said Jason Stephen, president of CREA. “Canadian home sales and listings were increasing heading into what was expected to be a busy spring [but] after Friday the 13th, everything went sideways.”

Average prices came in at $540,000, unchanged from February and up 12.5% from last year. Excluding the higher priced markets of the Greater Toronto and Vancouver Areas, the average price comes in at $410,000.

Looking ahead to April, CREA senior economist Shawn Cathcart said this: “Preliminary data from the first week of April suggest both sales and new listings were only about half of what would be normal for that time of year.”

Mortgage Rates Falling

After a recent rise in fixed mortgage rates, they have since started to fall back down, with a number of big lenders cutting rates between 5 and 20 bps.

Rates are declining due to falling bond yields (which lead fixed mortgages), as well as a decline in risk premium costs for borrowers, according to a recent post on RateSpy.com.

“…the trend implies we could see conventional 5-year fixed rates dip at least 20 more basis points (under 2.50%), if funding costs don’t shoot much higher,” the rate-comparison site noted. “Few would have expected that a month ago. At the time, spooked investors were forcing banks to pay far more for their funding. Since then, the Bank of Canada, Finance Department and CMHC have committed to buying hundreds of billions in money market instruments, bonds and mortgage securities, putting a lid on rates.”

HELOC Borrowing Down

HELOC borrowing growthHome Equity Line of Credit (HELOC) borrowing growth continued to decelerate in February, falling to a rate of 1.6% year-over-year, according to data from OSFI.

That’s down from an annual rate of more than 7% in 2018.

“Despite the overall stabilization of home prices in recent years, HELOC borrowing has been persistently slowing since the start of 2019, noted a recent Scotiabank report. “It is unclear if borrowing has been actively declining due to a change of consumer preferences or due to limited ease of accessing these funds.”

Overall mortgage growth remained strong in February, although that will certainly decline as data post-COVID-19 starts to roll in.

“Recent economic turmoil will likely lead to weaker mortgage credit growth in the months ahead,” Scotiabank noted. “In March, the Canadian labour market lost over 1 million jobs and home sales rapidly declined in the month. Mortgage credit growth is expected to stall in the coming months as the Canadian economy remains impacted by the pandemic.”

Source: Canadian Mortgage Trends – Mortgage Broker New

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New report envisions a path for longer-term mortgages

New report envisions a path for longer-term mortgages

Increasing the length of mortgage terms isn’t just about allowing consumers greater choice; it could have the added benefit of enhancing financial stability, writes Michael K. Feldman in the latest report from the C.D. Howe Institute, an independent not-for-profit research organization.

The idea of longer-term amortizations got a lot of attention in the lead-up to last fall’s federal election. PC Candidate Andrew Scheer was particularly vocal about his intent to raise amortizations for first-time homebuyers, along with various real estate boards. Lengthening mortgage terms would also have a big impact on consumers as well as the overall economy.

Feldman first waded into the conversation regarding longer-term mortgages in 2018. He has since been joined by Bank of Canada Governor Stephen Poloz, whose remarks to the Canadian Credit Union Association in 2019 noted three ways that more variety in mortgage durations would contribute to a safer financial system: if more borrowers had longer-term mortgages, they wouldn’t face the risk of having to renew at higher interest rates as often; homeowners would have the potential to build more equity within a single term, giving them more options upon renewal; and fewer borrowers would be renewing their mortgages in any given year.

Feldman adds that longer-term mortgages act as a protection in the event of systemic instability.

“A significant downturn in the real estate market could result in the insolvency of some mortgage lenders, particularly unregulated lenders. If this were to happen, borrowers from these lenders may not be able to renew their mortgages if their lenders were being liquidated and may not be able to refinance their mortgages due to the downturn in the real estate market,” Feldman writes. “This would lead to additional defaulted mortgages, which could further depress the real estate market. This risk decreases with more longer-term mortgages because there will be fewer renewals throughout the amortization term.”

There are, however, some regulatory obstacles that stand in the way of longer mortgage terms becoming commonplace in Canada, and one of those is demand.

The government would have to provide incentives to both borrowers and lenders to jump-start this demand, and/or make some regulatory changes. Feldman writes that these changes could include revising the stress-test for longer-term mortgages.

“Since the main purpose of the stress test is to predict the ability of borrowers to continue to service their mortgages if they must renew at maturity at a higher interest rate, it would be logical to loosen the stress test for borrowers willing to fix their rates for terms longer than five years. For example, if the stress test for a 10-year mortgage was set at the contract rate plus one percent (or zero percent) without any reference to a “Bank of Canada 10-year mortgage rate” (in recognition of the added refinancing flexibility after 10 years compared to five years), then borrowers could qualify for larger mortgages by opting for 10-year mortgages. This would encourage them to seek out longer-term mortgages and require lenders to offer competitive rates to retain market share.”

Other changes include amending the Interest Act to reduce the pricing premium that a lender would have to charge for its reinvestment risk on mortgages up to 10 years and reducing that risk in general by giving borrowers a short-term redemption period; increasing covered bond limits, and developing a private residential mortgage-backed securities market.

Limiting mortgages to five-year terms is thought to have grown out of a 19th-century statute that allowed the borrower to pay off the mortgage with a set penalty of no more than three months’ interest any time after five years following the initial date of the mortgage. The practice then evolved to where borrowers could renew their mortgage for another five years after the initial five-year period, with that renewal date becoming the new date of the mortgage. As long as the lender provided borrowers the opportunity to “redeem” the mortgage once every five years, they could prevent borrowers from prepaying the mortgage in full during the rest of the term without penalty.

As a result of this evolution, lenders can avoid reinvestment risks associated with prepayments by offering mortgages and renewals with terms no longer than five years, Feldman writes. From a borrower perspective, however, if there were increased desire for 10-year mortgages and increased competition from lenders to meet the demand, the cost of prepayment penalties would be reduced.

The majority of regulated financial institutions in Canada fund most of their uninsured residential mortgages by accepting deposits, including GICs that are insured by the CDIC. The CDIC, however, may only insure deposits having a term of five years or less. This limit posts a challenge for issuing longer-term mortgages from institutions that rely on these deposits.

This hurdle, however, may soon be removed. The federal government amended the CDIC Act to eliminate the five-year term limit on insured deposits, which comes into effect on April 3rd, 2020. This, Feldman believes, should make it easier for federally regulated financial institutions to fund longer-term mortgages—in theory.

“This will depend upon the retail demand for longer-term deposits,” he writes. “In a flat yield curve environment, as we have now, one would expect that most retail demand would be for shorter-term deposits; however, once the yield curve reverts to a more common rising curve, a demand for longer-term deposits may develop.”

Ultimately, Feldman writes, the current five-year term is “too well-entrenched to be overcome organically” and that the federal government will have to modify certain rules and create policies and programs in order to change the status quo.

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THIS Is Hands Down the Best Way to Buy Property

house key in woman hand and green leaves background

Did you know that I start every single conversation with a seller with the exact same question? Probably not. I mean, how would you know?

Well, I do, and it is one of my favorite parts about real estate investing. The question I ask every seller is: “Will you do owner financing?”

Owner financing is the crown jewel of real estate (in my opinion). It affords you the ability to get into a deal a heck of a lot easier and much faster.

What Is Owner Financing?

Put simply, owner financing is when the owner of a property sells it to a buyer but acts as the lender and holds a “note” against it. Instead of paying a normal bank every month, the buyer pays the original seller every month. Going into the agreement, the seller and buyer have an agreed upon payment amount and term length, just like a buyer would with a regular bank.

Owner financing terms are normally much shorter than your standard 15- or 30-year bank mortgage. Before the agreed upon term expires, the buyer must pay off the seller with a lump sum payment, which is typically obtained through a refinance with a regular bank.

 

business colleagues meeting in boardroom going over paperwork

The Benefits of Owner Financing

Less Scrutiny

Well, what is probably the worst thing about real estate investing? I would say it is the process of acquiring a mortgage from a regular bank lender. They want your left leg and your first-born child. Or, put dryly, they want 90 days of bank statements for all your accounts, your last two years of tax returns, a personal financial statement, and your credit score. Throughout the process of gather all of this, they’ll send 43 emails, leave 31 voicemails, and ask you to sign 27 or so different forms.

With owner financing, you effectively avoid almost all of this. Mr. or Mrs. Seller, more than likely, will not run your credit and pour over your personal and financial affairs. In my experience, the most a seller is looking for is that you are a trustworthy person and do, in fact, have the ability to pull money out of your own account or get it from someone or something else in order to provide the down payment (if required) and the monthly payments.

Please do note that while Mr. or Mrs. Seller may be more relaxed with the underwriting, you do absolutely want to be sure that you can pull this off. It does not do anyone any good to tie up a seller and then not be able to execute. The seller will normally have the power to foreclose on you just like a bank would if you start missing payments (via the governing agreement for the transaction).

Quick Closing

You can close the deal quickly. Once you have agreed on a price and terms and the governing contract has been looked over by your attorney, you are effectively a brand new owner of a property.

No or Low Down Payment

Ah yes, the dreaded down payment. Mr. or Mrs. Seller, in most cases, will not hold you to the normal 20 or 25 percent down that most banks want. Most likely, he or she will not be calculating your debt-to-income ratio as it relates to your down payment and the effect it has on your monthly obligations.

Is this not what most people struggle with when buying with traditional financing? Instead, with owner financing, all of the terms are up to the buyer and the seller. You determine what is required to be handed over up front, if anything. Maybe the seller really wants a used Prius, so they require $10,000 down. Maybe he or she has $7,800 in credit card debt that they’re looking to get rid of.

With owner financing, it is important to figure out the seller’s motivation. From there, you can start to craft the terms of the deal.

close up of two men shaking hands one light skinned one dark skinned laptop in background

What Buyers Should Know About Down Payments

Here is some bonus information about down payments: If you want to borrow the down payment, go for it. Can you do with a bank? Maybe. But when I have tried in the past, I was shut down. When I did it with an owner-financed deal, nobody even blinked.

What Buyers Should Know About Interest

In addition, you have complete free range to negotiate the interest rate. On one of my first deals, I had a 10 percent interest rate—not my best negotiation. But for my second owner-financed deal, I was at 5 percent. Getting better!

Example of Owner Financing

I found an off-market deal in Connecticut. The market was smoking hot in this particular area and I knew the town like the back of my hand. I knew he was asking about $50,000 too little. I jumped on it.

Come to find out, he did have a personal loan or two that were really bothering him. The total of those loans was about $22,500. That amount ended up being the down payment. The agreed upon purchase price was $170,000. That is 13.2 percent down a far cry from the 25 percent down banks want.

It took 30 days to close. That did run a little bit long. It was due to our attorneys going back and forth with all the legalese. But I suppose it is important to make sure the contract is done right and is fair to both parties.

If you are looking for another way to get into the game without losing the shirt on your back or the girth of your wallet, take a close look at this strategy. Ask the same first questions of sellers that I ask. What is the worst that can happen?

Source: BiggerPockets.com By Ryan Deasy Aug 10, 2019

 

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These Homeowners Need a Private Mortgage

 

But that is totally not true. More often than not, they are needed when bad things happen to good people.

And private mortgages and B-lender mortgages are the fastest-growing segment of the Canadian mortgage industry.

One reason is because it’s much harder to qualify for an A-lender mortgage now than at any time in recent memory. High home prices, in major cities particularly, result in large mortgage requirements, and the mortgage stress test can put qualification out of reach for homeowners who previously had no such concerns.

In addition, there are several situations people find themselves in which are not attractive to regular mortgage lenders. These problems require solutions, but a different type of lender needs to step forward and help the homeowner get on track. Let’s look at three such situations.

#1) This homeowner has too many debts, and his credit score is low. Notwithstanding lots of equity in his home, the banks have said no.

#2) These homeowners are in the middle of a consumer proposal. The doors to the banks are firmly closed, yet they need to finance a car purchase, and they would like to improve their monthly cashflow.

#3) This homeowner has large CRA debt. Banks and other A-lenders do not like refinancing to pay off CRA debt.

#1) Too Much Debt And Credit Score Too Low

How to use home equity to pay overdue taxesThis fellow has been living proud and mortgage-free for several years, but meanwhile has racked up credit card debt that just won’t go away. At first, people believe they can manage it down, but the crippling high interest rates of 19.99% or more make it really hard.

And when the cycle starts, they next tap into other available credit to pay off the credit cards that are giving them a problem.

When he approached us, he had a nice town home in the west end of Toronto, $115,000 of unsecured debt, and a credit score of 557. And he had no mortgage.

The minimum monthly payment on the credit card debt was not much less than his take home pay from his job!

The Solution

We could see his credit score would zoom upwards once all the debts were cleared and no remaining balances. So, we found a private lender who was happy to lend a new first mortgage on very favourable terms. An annual mortgage interest rate of 5.99%, and a mortgage fully open after three months. This means as soon as he is ready, he can refinance to an A-lender without penalty.

And when that happens, all the ugly credit card debt will be scrunched up into a mortgage at roughly 3% interest, with a monthly payment of around $500. This is a game-changer compared to the $3,000 per month or so he was paying before.

#2) In A Consumer Proposal

measures of financial distress in canadaThese homeowners both have decent jobs and more than $200,000 equity in their detached B.C. home. Three years ago they both had to file a consumer proposal after a new business venture failed and left them with lots of consumer debt.

They reached out to us for three reasons:

1) Their bank, which holds their first mortgage, has told them they will not offer a renewal in late 2020.

2) Their car lease is expiring in January 2020, and they want to exercise the buy-out option. They are being quoted crazy high interest rates on a car loan.

3) They are finding it tough, paying $1,300 each month towards the proposals, on top of their car payment, and also their mortgage, taxes and utilities.

The Solution

The solution here is a one-year, private second mortgage for around $60,000. Interest-only payments at a rate of 12%, and the monthly payment is only $600, which is half of what they are paying now on their consumer proposal.

This small new mortgage will pay off their proposal completely, and also allow them to buy the car when it comes off lease.

And after their proposal is paid off, we will coach them on rebuilding their personal credit histories. And we will send an investigation package to Equifax Canada requesting they clean up all the reporting errors. (Sadly, there are ALWAYS reporting errors in the credit report after filing a consumer proposal.)

And in late 2020, when their first mortgage matures, they won’t have to worry about the renewal. We will refinance both mortgages into one new mortgage with a different lender. They will be ready.

#3) CRA Debt Problem

Owing taxes to the Canada Revenue AgencySeveral months ago, we met a Mississauga homeowner who only owed $70,000 on his first mortgage, but he had neglected filing corporate taxes for a few years, and owed CRA significant money. There was a judgment against him for $49,000, which had been registered as a lien against the family home. And another one looming for $133,000. And he had also accumulated a large amount of unsecured debt.

If you are self-employed and owe a lot of money to CRA, your borrowing options are very slim in the world of conventional mortgage lenders. We talked about this in a previous article. Occasionally we encounter homeowners whose tax debt is so large it cannot be readily paid. The end result is a debt that can’t be negotiated away, with a creditor you can’t afford to ignore.

The Solution

The solution for our clients was either going to be a very large, disproportionate private second mortgage at a high interest rate (close to 12%) or to refinance the small first mortgage to a new private first mortgage at only 6.99%.

For a lengthier discussion about the costs associated with a private mortgage, you can read this article.

We took the first mortgage approach; paid off the CRA liens and all other personal debts. As a bonus, the lender allowed us to partially prepay the mortgage payments in advance, so that the monthly payment for the new mortgage would be roughly what it will be when they refinance down the road – avoiding payment shock!

Then we contacted Equifax Canada to confirm the tax liens had been cleared and waited for the client’s credit score to rocket upwards, unencumbered by a high debt load.

Sure enough, it all came to pass, and now we are refinancing the private mortgage into an A-lender, only six months later.

The Wrap

pay down debt using home equityIn our first two cases, we also gave consideration to B lender solutions. They were a legitimate option, but here the private mortgage made more “dollars and sense.”

There are many other reasons why you might one day need a private mortgage. This article told the story of three fairly common situations.

You can find a more in-depth look at why you might need a private mortgage here. If a private mortgage is in your future, you should tread carefully and satisfy yourself you are dealing with reputable people who will treat you fairly.

Source: Canadian Mortgage Trends – ROSS TAYLOR 

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Canadians Need Guidance With Their Mortgages

That’s the takeaway from a national survey released this week by Rates.ca, which found half of Canadians aren’t aware of the mortgage options available to them.

Not only that, but Canadians are lacking in some other basic mortgage trivia, with an astounding 9 out of 10 respondents not knowing that mortgage interest is charged semi-annually:

  • 28% think interest is compounded monthly;
  • 17% think it’s bi-weekly;
  • 17% think it’s annually;
  • 28% just have no idea.

Should we be concerned?

confused mortgage consumerDustan Woodhouse, President of Mortgage Architects, and a former active broker who has written multiple educational mortgage books, thinks so.

“Sounds about right. We know about what we pay attention to, i.e., The Kardashians,” he wrote to CMT. “The material concern in this is how easy it makes it for the government to over-regulate the industry, with clients blaming the banksrather than the appropriate parties. This disconnect is deeply concerning.”

Perhaps even more concerning is the fact that only four out of 10 Canadians (39%) know they can avoid paying default insurance on their mortgage if they make a down payment of 20% or more.

With default insurance running anywhere from 45.85% of the mortgage value, we’re talking some serious dinero being spentpotentially unknowingly and unnecessarily.

So, what can be done? Woodhouse admits there are no simple answers, but says making mortgages more tangible to borrowers would be a good place to start.

“The root issue is making mortgages interesting and relevant to clients more often than when they need one,” he said. “It needs to be all about housing, not simply mortgages.”

Paul Taylor, President and CEO of Mortgage Professionals Canada, agrees.

“Unless you deal in mortgages, you only talk about them, generally, once every five years,” he said. “I’m sure at the time of signing, the borrowers understood what their payment obligations were and the schedule; after that, the rest of the information provided was likely filed under ‘nice to know but not relevant enough to me to retain.’”

Making the Case for Mortgage Brokers

With a growing trend towards “do-it-yourself” online mortgage shopping, we wondered if these survey results reinforce the need for mortgage brokers in guiding uninformed borrowers about their mortgage options.

mortgage broker helping clients“Big time…more than ever brokers are required,” Woodhouse said.

Taylor added that the stats “clearly demonstrate the need for professional and impartial advice at the time of purchase/renewal/refinance. And while some may suggest they are comfortable purchasing online without counsel, I think we can see that is inadvisable in almost all cases.”

Taylor pointed to the UK as an example. Following the crash of 2008, he noted the country adopted several policies by 2014, including disallowing borrowers to be able to self-declare income, and requiring mortgage consumers to be provided mandatory advice on mortgage products.

“The last point, I think, would likely begin to receive international discussion/attention if online sales begin to increase too quickly given the data this survey demonstrates,” Taylor said. “Given the size of these loans, the personal liability and the potential interest-cost difference for as little as a quarter-point in interest, I expect there may be some scrutiny on consumer outcomes for these self-serve options.”

Additional Survey Tidbits

The Rates.ca survey revealed some additional interesting findings about Canadians’ knowledge gap when it comes to financial products, including:

  • Nearly 7 out of 10 Canadians (68%) aren’t aware that interest on credit cards is calculated daily.
  • 30% admitted they are unlikely or somewhat unlikely to make the minimum monthly payments on their credit cards.
  • 40% of respondents admitted to not knowing their credit score.
  • 43% said they felt comfortable negotiating their mortgage over the internet.
  • And 94% believe schools should place greater emphasis on teaching financial literacy.
Source: Canadian Mortgage Trends – Steve Huebl 
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How to protect homes in the event of divorce

As the cost of living soars, more couples are cohabitating, even getting married sooner. But, as Statistics Canada showed, there were 2.64 million divorced people living in Canada last year, and when you throw a family gift into the mix, things get hairy.

“Family gifts are a very complicated area of the law and there are two different ways of looking at it,” said Nathalie Boutet of Boutet Family Law & Mediation. “A gift received before marriage is treated as a pre-marriage asset. There’s a huge exception if that gift is the matrimonial home.”

In other words, pre-marital exclusions don’t apply to matrimonial homes—the reason for which is to rectify a historical transgression that saw women spend most of their time in the matrimonial home but have their name excluded from title, effectively leaving them no recourse upon divorce.

“Parents who want to give money to their child need to understand before marriage that if it goes into a matrimonial home, they end up sharing that with their spouse if there’s a separation,” said Boutet. “If the parents have a condo and they give it to their child who gets married, that becomes equal sharing with the spouse. A parent should understand that first and have a conversation with their child. Sometimes when a person owns a house, they ask the person to sign a marriage agreement as a way to get themselves out of that mess should it ever occur.”

Boutet recommends that in-laws-to-be have the dreaded conversation about signing an agreement that will protect them from relinquishing their asset in the even their child gets divorced.

“I often get called in when parents still own a home and let someone go live in it,” said Boutet. “Sometimes, for planning, have them sign a prenup, or a cohabitation agreement if they’re not going to get married. At the time they begin living together, sign the agreement in case they separate.”

Another interesting scenario divorced couples and their in-laws sometimes find themselves in pertains to cottage ownership. What happens if the couple is married for a period of time during which the cottage was renovated with contributions from the outgoing spouse?

“I have a case right now where the parents own a cottage and the family has been using it for upwards of 30 years, but their child is getting divorced and his wife wants to know what her rights are to recoup renovations,” said Boutet. “The husband’s parents had been very well-advised by their own lawyers and, because they paid for all the materials, the wife could not pinpoint any specific expense she paid out of her own pocket. It was determined that she had done a little here and there, and it offsets the cost of free accommodations she’s had over all the years—she didn’t pay for the land, heating, repairs, things of that nature. So she was entitled to nothing.”

Source: Real Estate Professional – by Neil Sharma 18 Sep 2019

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How divorces affect mortgages


How divorces affect mortgagesThey say about half of all marriages end in divorce—whatever the figure, complications arise when it comes to dividing assets like homes, and determining who keeps making mortgage payments.

“It’s a commercial transaction irrelevant to marital status,” said Nathalie Boutet of Boutet Family Law & Mediation. “If one person moves out and the other stays in the house, they still have an obligation to pay the mortgage to the bank, so the sooner the separating spouses make an arrangement the better because it could impact credit rating.”

According to Statistics Canada, there were roughly 2.64 million divorced people living in Canada last year—a figure brokers may not find surprising. While divorcing couples often fight over their marital home as an asset, the gamut of considerations is in fact more onerous.

“With the stress test, it’s a lot harder,” said Nick Kyprianou, president and CEO of RiverRock Mortgage Investment Corporation. “The challenge is qualifying again with a single salary. The stress test adds a whole other level of complexity to the servicing.”

Additional complexities include a new appraisal, application, and discharge fees.

“If you have a five-year mortgage and you’re only two years into it, there will be some penalties,” said Kyprianou. “Then there’s a situation of whether or not the person will qualify as a single person for a new mortgage.”

As an equity lender, RiverRock has welcomed into the fold its fair share of borrowers whose previous institutional lender wouldn’t allow one of the spouses to come off title because they were qualified together.

If one spouse is the mortgage holder and the other is not, Boutet explains how the law would mediate.

“Let’s say she owns the house and he moves in and pays her something she would put towards the mortgage but it’s still below market rent, she’s effectively giving him a break,” she said. “Would part of his rent go towards a little equity in the house because he helps pay the mortgage? Or is he ahead of the game because he pays less than he would to rent an apartment? What they have decided in this case is that a percentage of his payment will be given back to him as compensation for helping her out with her mortgage and he will never go on title.”

Boutet recommends that cohabitating couples, one of whom being a mortgage holder, should have frank discussions at the outset about where the rent payments go.

“Sometimes the person who pays rent has a false understanding of paying the mortgage. They have a misunderstanding of what that money is going towards.”

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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  

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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 –  

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Braving the Wilds as a Self-Employed Borrower

 

Self-employed – The fastest growing group of alternative borrowers, business for self-clients sometimes struggle to provide income verification that meets the conditions required by prime lenders. With 1 in 5 working Canadians now in business for themselves, this is an important segment that deserves extra consideration for your marketing efforts.

Amy De La Hunt, a writer and editor in St. Louis, gathered mountains of documentation last year to apply for a mortgage as a self-employed borrower.

She had several years of tax filings and contracts to establish a track record for her income. Then, midway through the process of buying a home in suburban Crestwood, she started a full-time job.

“Once I had only one pay stub from my full-time employer, then everything was like magic,” De La Hunt said. “It opened my eyes to how much easier it is.”

For all the benefits that being self-employed imparts, getting a mortgage is not among them.

Self-employed borrowers receive six loan quotes for every 10 received by people pulling down W-2s, according to a Zillow Mortgages analysis.

Lower credit scores are one of the primary factors, according to the analysis, which used a database that logs nearly 2 million loan requests a month.

Among self-employed workers, 47 percent have self-reported credit scores below 720, compared with 23 percent among those who are not self-employed. That’s despite the fact that self-employed borrowers report household incomes that are 81 percent higher and make larger down payments than those who are not self-employed.

Business vs. personal debt

The lower credit scores might not always be a reflection of a self-employed borrower’s ability to pay, said Staci Titsworth, regional mortgage sales manager for PNC Mortgage in Pittsburgh.

Some business owners take out car loans and open credit card accounts in their own names, even though these are strictly for company use. That boosts the business owners’ debt volume, which can count against their credit score, Titsworth said.

Lenders can sort through situations like this, but it takes paperwork — on top of copious filings already required of self-employed borrowers (two years of personal tax returns with all schedules attached, plus two years of business tax returns for each business).

Loyal customers with a solid history of making loan payments are often incredulous at how much paperwork is required — and how inflexible the rules are, Titsworth said.

“It can be overwhelming for someone who’s successfully self-employed, who owns all these businesses and is a loyal bank customer, to hear us say we’re missing this one schedule from 2013. They’re like, ‘Are you kidding me?’” she said.

Some people will respond, “You can see I have enough cash to pay for this house; isn’t that good enough? And we have to say, ‘No, we need that paperwork,’” she added.

Keep calm & gather documents

The good news is that, at the other end, it’s entirely possible for many people who are self-employed to qualify for a mortgage.

“A lot of people think artists can’t ever buy homes, or that if you’re self-employed, you can’t buy a home — but we’re here and we each have our own studio and a weekend house,” said Linda Hesh, an artist in Hollin Hills, VA, who lives in a mid-century modern home with her husband, hand engraver Eric Margry.

They’ve been through the home financing and refinancing process many times. They found at the start that lenders wanted a larger down payment from them than from people who weren’t self-employed.

And then there’s the paperwork.

“You just have to do it; it’s going to be a lot of pages,” Hesh said.

She recommends finding a real estate agent who’s comfortable working with self-employed borrowers, because “they can be really helpful.”

So can staying calm, she said.

Source: Zillow.com – BY ON 19 DEC 2014

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