Tag Archives: mortgage qualification

Growing Trend: Buying Real Estate with Family and Friends

 

Source: Canadian Mortgage Trends – Alan Harder 

While it’s fairly common for those in tight rental markets to have a roommate to help split the rent, an emerging trend is buying real estate with a family member or friend.

Faced with high home prices in big cities and tougher mortgage rules, including a new stress test on uninsured mortgages, it’s becoming increasingly difficult for first-time homebuyers to get their foot in the door of the real estate market. As such, prospective buyers are finding more creative ways to be able to enter the real estate market, and buying with a family member or friend is one of them.

When considering co-ownership, it doesn’t have to be with a spouse or romantic partner. It can be your brother, sister, aunt, uncle, cousin, friend or even co-worker. When you’re buying with a partner, make sure it’s someone you can trust. You’ll both be on the title and responsible for paying the mortgage on time and in full. If either you or your partner run into financial difficulties and are unable to pay your respective share of the mortgage, it could adversely affect your credit score if the other party is unable to come up with the extra money.

For that reason, I recommend treating co-ownership like a business arrangement by having a lawyer draft up an agreement. Also, this living arrangement likely isn’t permanent. You’ll want this agreement in place when you or your partner wants to sell. The last thing you’d want is for the sale of your property to hurt your relationship.

Qualifying for a Mortgage is Easier with a Partner

Buying with a partner helps you in several ways. The first is mortgage qualification. Two of the factors that lenders consider when qualifying you for a mortgage is your down payment and income.

Saving a sizable down payment is tough, especially for those living in cities like Toronto or Vancouver with sky-high rents and home prices.

Not to mention it’s also more challenging to qualify for a mortgage on a single income. Even being able to afford to a starter home, such as a condo in Vancouver, on a single income can be tough. That’s where buying with a partner comes in handy.

When buying with a partner, both of your down payments and incomes are taken into account. This makes qualifying for a mortgage a lot easier. In many cases it means qualifying for a home you otherwise wouldn’t be able to afford on your own.

For example, instead of only being able to afford a cramped condo, you might be able to afford a more spacious townhouse or semi-detached house. In essence, buying with a partner helps you move up the property ladder faster.

If you don’t know anyone who’s in the financial position to purchase a property with you, you’re not necessarily out of luck. The sharing economy is throwing homebuyers a lifeline. There are real estate matchmaking services like C-Harmony that will pair you with fellow homebuyers.

Some lenders like Meridian Credit Union are making buying with family and friends easier than ever by offering mortgages specifically for this living arrangement. With the Family and Friends Mortgage, up to four people can obtain a mortgage at a low rate.

Ready to Buy with a Partner?

The first step is to find a reliable partner who would be willing to purchase a property with you. After that, you’ll want to get pre-approved for a mortgage. With your housing budget in mind, you can buy a property together that will be a good long-term investment for both of you.

Once you purchase a property, don’t forget to have an agreement drafted up by a lawyer so there aren’t any surprises when one partner eventually wants out of the deal.

This will make for a happy, and hopefully long-term, real estate partnership.

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Ownership: Joint tenancy, tenants in common and more

Source: MoneySense.ca – by 

Consider alternative ownership options when buying a home

As housing affordability recedes in the rearview mirror of Canada’s fast moving real estate market, it’s time to look at different housing ownership options.

Freehold interest

The term freehold is synonymous with ownership of a property. In a freehold interest, the owner has full use and control of the land and buildings on the property, subject to governmental rights as well as local by-laws.

Leasehold interest

When purchasing a leasehold interest, you are really purchasing the rights and ownership of a building or structure but not the rights or ownership of the land the property sits on. Homes built on Native Canadian or Crown land fall into this categories. Examples of this type of ownership can be found scattered throughout the Greater Vancouver Area.

While leasehold ownership can make owning your home far more affordable there are a number of factors to consider. For instance, you’ll want to determine whether or not the land-owner will more than likely renew the lease once the term expires? Also, if you do decide to vacate the land, does the contract allow you to move the building or must you relinquish all rights? You’ll also want to pay attention to whether or not the lease is fixed or variable. Just like mortgages, a fixed lease means the terms are locked in for the duration for the lease. So, if a leasehold is for 99 years, you or your heirs will not have to go through a review or renewal of the lease until 99 years have passed. A variable lease, on the other hand, will have periodic reviews within the leasehold agreement—the standards is once every 33 years on a 99-year lease.

You can buy a new leasehold contract or you can assume ownership of an existing one. For instance, a seller could list their 99-year leasehold for sale after living in the home for 20 years. This means you would be buying the lease and allowed to live in the home for the remaining 79 years.

Keep in mind, though, that it’s harder to find a lender that will offer a mortgage for this type of ownership—although, credit unions have historically offered favourable rates for leasehold interests.

Co-ownership

If you decide to purchase a property with friends or family this is informal co-ownership—an agreement of responsibility and use must be agreed upon by all those involved. Or you can buy into a co-operative, which is a formalized co-ownership of a building where you have exclusive use and rights to a specific unit.

If you are buying with family and friends you’ll want to pay attention to the type of ownership, and the are two basic types: joint tenancy and tenancy in common.

Joint tenancy is common for anyone purchasing with a spouse or partner. In this type of tenancy, when one of you dies the other becomes the sole owner. That’s because the entire ownership transfers to the surviving owner, without having to go through probate, under joint tenancy. That means neither owner can leave their portion of the property to a third party in their will.

Tenancy in common, however, is where each owner may have equal or different ownership shares in the property. As a result, one party may sell her share without the permission of others. In this type of co-ownership, there can be more than two owners, and the owners may sell their portion of the property to anyone, unless stipulations or restrictions are built into the ownership contract.

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Ten ways the new mortgage rules will shake up the lending market

THE CANADIAN PRESS

 

Source: The Globe and Mail – SPECIAL TO THE GLOBE AND MAIL

T-minus 76 days and counting until Canada’s banking regulator launches its controversial mortgage stress test. It’ll be squarely aimed at people with heavier debt loads and at least 20 per cent equity – and it will be a tide turner.

Given where Canada’s home prices and debt levels are at, this is easily the most potent mortgage rule change of all time. Here are 10 ways it’s going to shake up Canada’s mortgage market for years to come:

1. It’s like a two-point rate hike: Uninsured borrowers can qualify for a mortgage today at five-year fixed rates as low as 2.97 per cent. In a few months that hurdle will soar to almost 5 per cent. If you’re affected by this, you could need upward of 20 per cent more income to get the same old bank mortgage that you could get today.

2. Quantifying the impact: An OSFI spokesperson refused to say how many borrowers might be affected, calling that data “supervisory information” that is “confidential.” But at least one in six uninsured borrowers could feel the blow based on the Bank of Canada estimates of “riskier borrowers” and predictions from industry economists like Will Dunning. Scores of borrowers will be forced to defer buying, pay higher rates, find a co-borrower and/or put more money down to qualify for a mortgage.

3. Why OSFI did it: Forcing people to prove they can afford much higher rates will substantially increase the quality of borrowers at Canada’s banks. OSFI argues that this will insulate our banking system from economic shocks, and to the extent it’s correct – that’s good news.

4. A leap in non-prime borrowing costs: Many home buyers with above-average debt, relative to income, will resort to much higher-cost lenders who allow more flexible debt ratio limits. At the very least, more will choose longer amortizations (i.e., 30 years instead of 25 years) and take longer to pay down their mortgage. Non-prime lenders will also become pickier. Why? Because they’ll see a flood of formerly “bankable” borrowers getting declined by the Big Six. That could force hundreds of thousands of borrowers into the arms of lenders with the highest rates. If you have a higher debt load, weak credit and/or less provable income, get ready to pay the piper.

5. A safer market or riskier market? The shift to expensive non-prime lenders could boost mortgage carrying costs and overburden many higher-risk borrowers, exacerbating debt and default risk in the non-prime space. “We’re very aware of the potential migration risk [from banks to less regulated lenders],” Banking superintendent Jeremy Rudin told BNN on Tuesday. “It’s not something that would be a positive development.” If rates keep rising, non-prime default rates could spike over time. Albeit, keep in mind, we’re talking a single-digit percentage of borrowers here. The question people will ask is: Does growing debt risk in the non-prime mortgage market, combined with home price risk and a potential drop in employment and consumer spending truly lower banks’ risk?

6. Provincially regulated lenders win: Unless provincial regulators follow OSFI’s lead (if history is a guide, they won’t), it’ll be a bonanza for some credit unions. Many credit unions will still let you get a mortgage based on your actual (contract) rate, instead of the much higher stress-test rate. That means you’ll qualify for a bigger loan – if you want one. We could also see a few non-prime lenders charge lower rates to help people qualify for bigger mortgages, while tacking on a fee to mortgage for that privilege.

7. Trapped renewers: Lenders are thrilled about one thing: customer retention. As many as one in six people renewing their mortgage could be trapped at their existing bank because they can’t pass the stress test at another lender. And if a bank knows you can’t leave, you can bet your boots they’ll use that as leverage to serve up subpar renewal rates.

8. A short-term spurt: Expect a rush of buying in the near term from people who fear they won’t qualify after Jan. 1. The question is, how much of that short-term demand will be offset by people selling, as a result of the rule change’s perceived negative impact. In the medium term – other things equal – this is bearish for Canadian home prices. Period. That said, borrowers will likely adapt within two to five years. And prices will ultimately resume higher.

9. The stress test could change…someday: While few credible sources expect OSFI’s announcement to trigger a housing crash, the higher rates go, the more this will slow housing. Financial markets expect another rate hike by January, with potentially two to four – or more – to come. Mr. Rudin says OSFI may “revisit” the restrictiveness of the stress test if rates surge, but will the regulator act in time to prevent diving home values? That’s the trillion-dollar question. The good news is that rates generally rise with a strengthening economy, which is bullish for housing – for at least a little while.

10. Questions abound: Tuesday’s news will undoubtedly spark contentious debate over whether this was all necessary, given already slowing home prices, provincial rule tightening, rising rates and the fact that uninsured default rates are considerably lower than for people with less than 20 per cent equity.

OSFI says its responsibility is to keep banks safe and sound. Overly concerning itself with the side effects of its mortgage stress test is not its mandate, it claims. Well, in a few years we might be either congratulating OSFI, or asking if that mandate needs to change.

THE CANADIAN PRESS

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What the new mortgage rules mean for homebuyers – There are two scenarios new buyers can anticipate

mortgage math

 

Source: MoneySense.ca – by  

 

 

Today, the Office of the Superintendent of Financial Institutions (OSFI) introduced new rules on mortgage lending to take effect next year.

OSFI is setting a new minimum qualifying rate, or “stress test,” for uninsured mortgages (mortgage consumers with down payments 20% or greater than their home price).

The rules now require the minimum qualifying rate for uninsured mortgages to be the greater of the five-year benchmark rate published by the Bank of Canada (presently 4.89%) or 200 basis points above the mortgage holder’s contractual mortgage rate. “The main effect will be felt by first-time buyers,” says James Laird, co-founder of Ratehub.ca. “No matter how much money they put down as a down payment, they will have to pass the stress test.” The effect of the changes will be huge, resulting in a 20% decrease in affordability, meaning a first-time homebuyer will be able to buy 20% less house, explains Laird.

MoneySense asked Ratehub.ca to run the numbers on two likely scenarios and find out what it would mean for a family’s bottom line. Here’s what they found:

SCENARIO 1: Bank of Canada five-year benchmark qualifying rate

In this case, the family’s mortgage rate, plus 200 basis points, is less than the Bank of Canada five-year benchmark of 4.89%.

According to Ratehub.ca’s mortgage affordability calculator, a family with an annual income of $100,000 with a 20% down payment at a five-year fixed mortgage rate of 2.83% amortized over 25 years can currently afford a home worth $726,939.

Under new rules, they need to qualify at 4.89%
They can now afford $570,970
A difference of $155,969 (less 21.45%)

SCENARIO 2: 200 basis points above contractual rate

In this case, the family’s mortgage rate, plus 200 basis points, is greater than the Bank of Canada five-year benchmark of 4.89%.

According to Ratehub.ca’s mortgage affordability calculator, a family with an annual income of $100,000 with a 20% down payment at a five-year fixed mortgage rate of 3.09% amortized over 25 years can currently afford a home worth $706,692.

Under new rules, they need to qualify at 5.09%
They can now afford $559,896
A difference of $146,796 (less 20.77%)

If a first-time homebuyer doesn’t pass the new stress test, they have three options, says Laird. “They can either put down more money on their down payment to pass the stress test, they can decide not to purchase the home, or they can add a co-signer onto the loan that has income as well,” says Laird. The stress test will be done at the time of refinancing as well, with one exception. “If on renewal you stay with your existing lender, then you don’t have to pass the stress test again,” says Laird. “However, if you change lenders at mortgage renewal time, you may have to pass the stress test but it’s not crystal clear now if this will be the case for those switching mortgage lenders.”

So if you’re a first-time homebuyer, it may mean renting a little longer and waiting for your income to go up before you’re able to buy your first home. Alternatively, some first-time buyers will buy less—maybe a condo instead of a pricier detached home. Or, the new buyers may opt to get a co-signer to qualify under the new rules.

But whatever you do, if you’re a first-time buyer, make sure you understand what you qualify for using the new regulatory rules, and get a pre-approved mortgage before you start house-hunting. “This shouldn’t be something that shocks you partway through the home-buying process,” says Laird.

And finally, do your own research and run the numbers on your own family’s income numbers. You can use Ratehub.ca’s free online mortgage affordability calculator to calculate the impact of the mortgage stress test on your home affordability.

mortgage math

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How rising interest rates are squeezing homeowners

Mortgage holders on tenterhooks as they prepare for Bank of Canada’s next rate announcement Oct. 25

Gerry Corcoran is bracing for Oct. 25. That’s when the Bank of Canada will make its next interest rate announcement, on the heels of two consecutive rate hikes. Corcoran said he can’t afford a third.

“A lot of us with variable rate mortgages are on pins and needles because we’re like, ‘Are we going to get hit again?'”

‘It’s kind of smacked my finances around a little bit.’– Gerry Corcoran, new homeowner

Corcoran, 38, signed the mortgage for his two-bedroom condo in Stittsville back in June.

Two weeks later, on July 12, the Bank of Canada announced a rate increase of .25 per cent, the first increase in seven years. It was followed by a second .25 per cent increase in September.

As someone with a variable rate mortgage, Corcoran says those small rate hikes have had a sizeable impact. He estimates they’ll cost him about $65 per month.

While it’s a cost he says he can absorb, as a new homeowner Corcoran only has a few hundred dollars a month in disposable income. It’s also meant he’s had to put on hold his plan to enrol in his employer’s matching RRSP program until next year.

“It’s kind of smacked my finances around a little bit,” he said. “It hurts.”


 


Gerry

‘A lot of us with variable rate mortgages are on pins and needles because we’re like, ‘Are we going to get hit again?” (Ashley Burke/CBC News)

Homeowners in ‘panic mode’

After years of record-low interest rates, people in the mortgage business say they’ve been waiting for this other shoe to drop.

Erin MacDonell, a mortgage agent with Mortgage Brokers Ottawa, says she saw a spike in calls after the rate hikes. Many callers were eager to buy — or refinance their mortgages — before rates went up again.

“People are in a little bit of a panic mode,” MacDonell said.

But even if interest rates continue to climb, she says a new federal “stress test” will help mortgage holders weather the changes.

Erin MacDonell, mortgage agent, ottawa mortgage brokers

Mortgage agent Erin MacDonell says calls from both potential buyers and homeowners looking to refinance spiked when the Bank of Canada announced a rate increase in July. (Ashley Burke/CBC Ottawa)

Under the safeguard introduced last October, a borrower had to be approved against a rate of 4.64 per cent for a five-year loan — even though many lenders are offering much lower rates. That rate is now 4.84 per cent.

The test applies to all insured mortgages where buyers have down payments that are less than 20 per cent of the purchase price.

“No one should be struggling too, too much,” MacDonell said.

Instead, she predicts future rate hikes will simply mean “people won’t be qualifying for as big of a house as they maybe wanted in the past.”

Gerry Corcoran says despite being forced to tighten his belt, buying was still the right choice for him.

“At the end of the day, even with mortgage and condos fees, I am still paying less to own this place than [I’d pay] to someone else to rent it.”

Source: Karla Hilton · CBC

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CMHC explores cutting red tape for self employed borrowers

The national housing agency is exploring ways to make it easier for entrepreneurs and new immigrants to buy a home by cutting some of the red tape required to prove they can afford to pay the mortgage.

“Right now, under our mortgage insurance policies, you have to be able to document income to get mortgage insurance, to a level of specificity that discriminates against new Canadians, because they can’t do that,” Evan Siddall, the CEO of the Canada Mortgage and Housing Corp., said in a wide-ranging interview with The Canadian Press.

“It discriminates against entrepreneurs, as well, because they can’t prove their income as well, so we’re looking at our own policies to try and make sure that there is more equity in our mortgage insurance programs,” he said.

Anyone who wants to buy a home in Canada without a down payment of at least 20 per cent of the purchase price is usually required to get mortgage loan insurance from the CMHC, which requires a smaller down payment of five per cent on a home worth up to $500,000.

A 10-per-cent down payment is required for the portion of the price over $500,000, with $1 million being the maximum property value allowed.

The mortgage insurance comes with a premium, which the lender will then pass on to the person buying the home.

Borrowers need to satisfy lenders they will be able to make their mortgage payments, which usually means providing proof of employment and a few pay stubs. But that can be tricky for people who just started their own business.

It can also be a barrier to those whose employment history has gaps for other reasons, such as having recently immigrated to Canada.

People who are self-employed, for example, usually need to provide notices of assessment for the previous two years. Their income is determined by averaging those two years, although the most recent year can be used if it has increased annually for at least four years.

They also need to have been doing the same type of work for at least two years.

Dan Kelly, president of the Canadian Federation of Independent Business, said more flexibility would be welcome, especially for startups.

“If one starts a business or is self-employed, the lines between their personal and business finances are often quite blurry,” said Kelly.

“Often, their personal assets are required to get financing for the business. But then they also have a challenge getting financing on the personal side, because they don’t have the nice, clean letter of offer from an employer that is often quite convincing in these situations,” he said.

Any relaxation of the rules would naturally increase the risk. So Siddall said the agency is looking at how to manage that, including different ways to document income, and higher premiums.

“Can we charge for that risk? Better to charge that risk than not to make it available,” he said.

Jack Fiorillo, a broker with TMG The Mortgage Group in Woodbridge, Ont., said he expects the CMHC to be fairly conservative on this front.

“It will be a very small sandbox that CMHC will play in, probably at the beginning, and then maybe if once their risk appetite increases, maybe they can expand that box,” said Fiorillo.

He said he expects the potential change to make it easier for a relatively small number of self-employed people to get a mortgage, and they will likely have to pay higher interest rates.

The CMHC said it has been compiling data on how many would-be homeowners have their mortgage applications rejected for these reasons, but cannot disclose those numbers right now because it is based on conversations with commercial lenders.

“We are still doing research and development to move this forward,” CMHC spokesman Jonathan Rotondo said in an email.

Siddall said the Crown corporation has raised the idea with its board and expects to announce something within the next six months.

Source: The Canadian Press

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Proposed mortgage rules aim to reduce financial risk in Canada’s hot housing markets

Vancouver has one of the hottest housing markets in Canada. New mortgage rules proposed by OSFI aim to mitigate the financial risks.

New rules proposed by the federal government to curb financial risks associated with the country’s hot housing markets could make it more difficult to secure a mortgage.

The Office of the Superintendent of Financial Institutions’ new guidelines proposed Thursday include stress tests for uninsured mortgages — loans secured with a deposit of at least 20 per cent on the value of the home.

Those homebuyers will now have to show that they can withstand a two per cent increase on their contractual mortgage rate. This would apply to variable and fixed-rate mortgages, regardless of term.

Using a million-dollar home as an example, buyers looking to secure a mortgage with a 20 per cent down payment at a three per cent interest rate would have to prove they could pay up to $4,652 per month instead of the $3,786 on their contract — a difference of $866 per month.

The changes come as the Bank of Canada looks set to increase interest rates as soon as next week for the first time in seven years.

CANADA-HOUSING/

The B.C. and Ontario governments have been using different tactics to try to cool housing prices in major cities. (Mike Cassese/Reuters)

“Persistently low interest rates, record levels of household indebtedness, and rapid increases in house prices in certain areas of Canada (such as Greater Vancouver and Toronto), could generate significant loan losses if economic conditions deteriorate,” OSFI wrote in a public letter.

But those working in and studying the real estate market say those changes aren’t likely to make a difference, especially given that those uninsured mortgages tend to be less risky because owners have already proved they have access to capital for a down payment.

What experts say will have a greater effect on housing markets is the office’s proposal to ban co-lending arrangements, or bundled mortgages, that sidestep rules designed to clamp down on risky lending.

The regulator said it is considering “expressly prohibiting co-lending arrangements that are designed, or appear to be designed, to circumvent regulatory requirements.”

Fear of a housing bust

Reuters reported in January that regulated mortgage providers were teaming up with unregulated rivals to circumvent rules limiting how much mortgage providers can lend against a property.

The arrangements have proliferated as Canadian regulators tightened lending standards to shield borrowers in case a decade-long housing boom goes bust.

“Bundled” or co-lending agreements with an unregulated entity can enable lenders to offer combined mortgages worth up to 90 per cent of a property’s value. Under federal rules, regulated lenders in Canada are not allowed to lend more than 65 per cent of the value of a home to borrowers with bad or nonexistent credit records.

They also cannot lend more than 80 per cent of a property’s value — even to borrowers with solid credit — without obtaining government-backed insurance.

city of vancouver empty homes

B.C. recently implemented a tax on foreign homebuyers as part of an attempt to reduce real estate demand and prices. (Rafferty Baker/CBC)

Under rules rolled out last October, that insurance requires the banks to run income stress tests on borrowers.

“When you’re looking at excited housing markets, you’re really concerned about where the capital is coming from,” said Tsur Somerville, a senior fellow with UBC’s Centre for Urban Economics and Real Estate.

“In terms of trying to cut down on the flow of capital in the housing, in particular in Toronto and Vancouver, cutting down on the bundling is probably the most important piece.”

Somerville guessed the intention behind the new regulations is likely a mix of wanting to cool those hot housing markets and mitigate risk in the financial sector.

Mortgage brokers concerned

Grant Thomas, founder and partner with The Mortgage Group, said he was concerned about the proposed changes — especially in big-city markets where homes often sell for millions of dollars.

Thomas said bundled mortgages are probably less than a third of all mortgages, but are often used when homeowners are financing the construction of a new home or are in between selling and buying a home.

Mortgage delinquency rates in Canada remain low even in cities like Toronto and Vancouver, he points out.

“The government has been intrusive in our industry in the last three years, and they continue to be so at a rate that is probably unnecessary,” he said.

“I’m not overjoyed whenever the government involves itself in business.”

Affordable housing in Nova Scotia.

Canadian regulators have tightened lending standards to shield borrowers in case a decade-long housing boom goes bust. (Robson Fletcher/CBC)

Thomas said his company and Mortgage Professionals Canada are planning to spend the next few days examining the proposed changes.

The Office of the Superintendent of Financial Institutions is accepting comments until Aug. 17. It said it will finalize the guidelines and set an effective date for implementation later in 2017.

The office said the proposed changes would be guidelines that federally regulated financial institutions would be expected to follow.

 

Source: Maryse Zeidler, CBC News

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