Tag Archives: mortgage qualification

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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Preparing for a House Appraisal

How to Get a Home Ready for an Appraisal

Whether you are selling, purchasing or refinancing a home, the lender’s appraiser has the final word on how much money the home is worth. Therefore, the appraisal can make or break the real estate transaction. Unlike a home inspection, where the inspector determines any existing mechanical or system problems in the house, the appraiser’s job is to compare your house against comparable homes that have recently sold to determine its market value. Some items on the appraisers list you can’t change, such as location, but others, such as condition and updating, depending on your budget, may be appropriate tasks to perform to prepare your house for an appraisal.

 

Cleaning and Organizing

While these may not be the most desirable tasks, cleaning, organizing and removing clutter from your house are among the best ways to prepare for an appraisal. A clean home looks well-maintained – something the appraiser will be looking for. Organizing the garage, closets and cupboards helps them appear larger, which is a great way to add value. Finally, removing excess clutter from your house, such as items on counter tops, makes a room appear both larger and cleaner.

Whether you are selling, purchasing or refinancing a home, the lender’s appraiser has the final word on how much money the home is worth. Therefore, the appraisal can make or break the real estate transaction. Unlike a home inspection, where the inspector determines any existing mechanical or system problems in the house, the appraiser’s job is to compare your house against comparable homes that have recently sold to determine its market value. Some items on the appraisers list you can’t change, such as location, but others, such as condition and updating, depending on your budget, may be appropriate tasks to perform to prepare your house for an appraisal.

Curb Appeal

Check out how your home stacks up against those that have recently sold in the area insofar as its exterior appeal, also known as curb appeal. The outside of your house makes a first impression on the appraiser, so make it is as clean and de-cluttered as the interior. Tidy up the landscaping and spread some fresh mulch in the landscape beds. Remove any toys or other clutter from the front yard. A well-maintained yard gives the impression of a well-maintained home.

Whether you are selling, purchasing or refinancing a home, the lender’s appraiser has the final word on how much money the home is worth. Therefore, the appraisal can make or break the real estate transaction. Unlike a home inspection, where the inspector determines any existing mechanical or system problems in the house, the appraiser’s job is to compare your house against comparable homes that have recently sold to determine its market value. Some items on the appraisers list you can’t change, such as location, but others, such as condition and updating, depending on your budget, may be appropriate tasks to perform to prepare your house for an appraisal.

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Make Necessary Updates

Fresh paint is an easy and inexpensive way to add value to your house. This is especially necessary if you have wild or unusual wall colors, advises Loreen Stuhr, an appraiser with Appraisers of Las Vegas. She recommends painting the walls in neutral colors and replacing vinyl flooring with wood, laminate or tile. If it’s in your budget to do so, consider replacing laminate counter tops with tile, granite or other more upscale materials.

Whether you are selling, purchasing or refinancing a home, the lender’s appraiser has the final word on how much money the home is worth. Therefore, the appraisal can make or break the real estate transaction. Unlike a home inspection, where the inspector determines any existing mechanical or system problems in the house, the appraiser’s job is to compare your house against comparable homes that have recently sold to determine its market value. Some items on the appraisers list you can’t change, such as location, but others, such as condition and updating, depending on your budget, may be appropriate tasks to perform to prepare your house for an appraisal.

Repairs

Fix any maintenance issues that the appraiser is sure to notice, such as leaking or dripping faucets, running toilets, torn screens, missing trim and missing or wobbly stairway handrails. If the home buyer is using a loan backed by the Federal Housing Administration (FHA) to purchase the house, keep in mind that FHA requires that the seller repair anything that affects the health and safety of the occupants. An FHA-approved appraiser is required to make note of such property conditions, including an assumption of the structural integrity of the property. Items that require repair before the close of escrow include providing adequate access and exit from the bedrooms to outside the home, leaky roofs, foundation damage and flaking lead paint.

Whether you are selling, purchasing or refinancing a home, the lender’s appraiser has the final word on how much money the home is worth. Therefore, the appraisal can make or break the real estate transaction. Unlike a home inspection, where the inspector determines any existing mechanical or system problems in the house, the appraiser’s job is to compare your house against comparable homes that have recently sold to determine its market value. Some items on the appraisers list you can’t change, such as location, but others, such as condition and updating, depending on your budget, may be appropriate tasks to perform to prepare your house for an appraisal.

Paperwork

Although the appraiser has numerous ways of finding information, she may have no way to know about improvements you’ve made to the home, which could have a positive impact on its value. A good way to let her know is to create a list of the home’s features and benefits, advises David Hesidenz of David Hesidenz Appraisals in Pennsylvania. Hesidenz suggests that you supply the appraiser with a page or two containing the exact street address of your home, the number of bedrooms and bathrooms and the square footage and lot size. Then make a list of any improvements you’ve made to the home and the date they were finished. Some of these improvements may include a new roof, new windows, upgraded plumbing or electrical work, and room additions.

Source: PocketSense.com – Bridget Kelly

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Latest in Mortgage News: Stress-Test Rate Drops After a Year of No Change

 

The benchmark posted 5-year fixed rate, which is used for stress-testing Canadian mortgages, fell yesterday in its first move since May 2018.

The Bank of Canada announced the mortgage qualifying rate drop to 5.19% from 5.34%. This marks the first reduction in the rate since September 2016.

The rate change came as a surprise to most observers, since it’s based on the mode average of the Big 6 banks’ posted 5-year fixed rates. And there have been no changes among the big banks’ 5-year posted rates since June 21.

As reported by RateSpy.com, the Bank of Canada explained today’s move as follows:

“There are currently two modes at equal distance from the simple 6-bank average. Therefore, the Bank would use their assets booked in CAD to determine the mode. We use the latest M4 return data released on OSFI’s website to do so. To obtain the value of assets booked in CAD, simply do the subtraction of total assets in foreign currency from total assets in total currency.”

If that sounds convoluted, RateSpy’s Rob McLister tells us this, in laymen’s terms: “What happened here was that the total Canadian assets of the three banks posting 5.34% fell much more than the total Canadian assets of the three banks posting 5.19%. The 5.19%-ers won out this week,” McLister said.

Of the Big 6 banks, Royal Rank, Scotiabank and National Bank have posted 5-year fixed rates of 3.19%, while BMO, TD and CIBC have posted 5-year fixed rates of 5.34%.

“It’s one of the most convoluted ways to qualify a mortgage borrower one could dream up, McLister added. “It’s almost incomprehensible to think random fluctuations in bank assets could have anything to do with whether a borrower can afford his or her future payments.”

In his post, McLister noted the qualifying rate change means someone making a 5% down payment could afford:

  • $2,800 (1.3%) more home if they earn $50,000 a year
  • $5,900 (1.3%) more home if they earn $100,00 per year

Teranet Home Price Index Continues to Record Weakness

Without seasonal adjustments, the monthly Teranet-National Bank National Composite House Price Index would have been negative in the month of June. Thanks to a seasonal boost, however, the index rose just 0.5% from the year before.

Vancouver marked the 11th straight month of decline (down an annualized 4.9%), while Calgary recorded its 11th monthly decline (down 3.8%) in the past 12 months.

“These readings are consistent with signals from other indicators of soft resale markets in those metropolitan areas,” the report said.

But while Western Canada continues to grapple with sagging home sales and declining prices, markets in Ontario and Quebec are already posting increases following weakness in the first half of the year.

Prices in Toronto were up 2.8% vs. June 2018, while Hamilton saw an increase of 4.9% and London was up 3.3%. The biggest gains continue to be seen in Thunder Bay (up 9.2%), Ottawa-Gatineau (up 6.3%) and Montreal (up 5.4%).

Don’t Expect Housing Market to Catch Fire Again

Don’t hold your breath for another spectacular run-up in real estate as seen in recent years, say economists from RBC.

“A stable market isn’t a bad thing,” noted senior economist Robert Hogue. “This is sure to disappoint those hoping for a snapback in activity, especially out west. But it should be viewed as part of the solution to address issues of affordability and household debt in this country…It means that signs indicating we’ve passed the cyclical bottom have been sustained last month.”

Home resales in June were up marginally (0.3%) compared to the previous year, which Hague says provides “further evidence that the market has passed its cyclical bottom.”

Meanwhile, the national benchmark home price was down 0.3% year-over-year in June, “tracking very close to year-ago levels.”

Hague says these readings are good news for policy-makers, who he says want to see “generally soft but stable conditions in previously overheated markets.”

Source : Mortgage Broker News – STEVE HUEBL  

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Mortgages: A Brief History

Mortgages: A Brief History

​Fun facts on how mortgage loans have evolved through the years.

Taking on a mortgage is the most common way Ontarians can get a piece of the housing market – and has been for a long time. The mortgage industry dates back hundreds of years. But while the purpose of these loans has stayed the same, they’ve evolved from a simple repayment plan to a much more complex financial transaction.
Mortgages originated in England when people did not have the resources to purchase land in one transaction. Buyers would get loans directly from the seller – no banks or outside parties were involved. Unlike today, purchasers were not able to live on the land until the entire amount was paid. And, if they failed to keep up with payments, they would forfeit their right to the land as well as any prior payments they made to the seller.
By the 1900s most mortgages involved long-term loans where only monthly interest was paid while the borrower saved towards repayment of the original sum. Major world events, like the Great Depression of the 1920s and the two World Wars however, led to many borrowers being unable to repay even the interest on a property that was often now worth less than their original loan, and many lenders carrying a loan that was not secured by the value of the property.
This resulted in the introduction of long-term fully amortized mortgages that repaid some of the principal and some of the interest each month in a payment that was fixed for upwards of 25 years.
The Canada Mortgage and Housing Corporation (CMHC) was created in 1946 to administer the National Housing Act and today sells mandatory mortgage loan insurance when the buyer is putting less than 20 per cent down on the price of their new home. Mortgage loan insurance compensates lenders when borrowers default on their mortgage loans.
The rise of inflation in the 1970s altered mortgages into the products we know now. As interest rates climbed, lenders and borrowers found themselves locked into fully amortized loans that didn’t reflect interest rate changes. The creation of the partially amortized mortgage, which protects both lenders and borrowers from fluctuations in the market, mean that instead of 20- to 30-year terms, one, three or five-year terms amortized across 20 to 25 years have become a better option. Partially amortized mortgages are now one of the most common mortgage types in Canada.
Making the down payment for a mortgage easier to attain, the Home Buyer’s Plan, which allows Canadians to withdraw money from their Registered Retirement Savings Plans (RRSPs) on a tax-free basis to buy a home, was introduced by the Canadian government in 1992.
On July 1, 2008, under the Mortgage Brokerages, Lenders and Administrators Act, 2006 [New Window], the Government of Ontario has required all businesses and individuals who conduct mortgage brokering activities in the province to be licensed with the Financial Services Commission of Ontario (FSCO). Mortgage brokers and agents play a big role in the mortgage process, with 51 per cent of first-time home buyers using their services according to a 2016 CMHC survey. Under the Act, all mortgage brokers and agents need to meet specific education, experience, and suitability requirements with the goal of increased consumer protection, competition and professionalism in the industry.
Mortgages have evolved from repayments that provided protection and benefits only for the landowner, to a system in which both the borrower and the lender can enter into the transaction with confidence.
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A first-time buyer’s guide to becoming a landlord

Photo: James Bombales

Buying a home isn’t always about finding the perfect place to raise a family or host those summer barbecues — for some first-time buyers, owning real estate is the gateway into the realm of landlordship.

Becoming a small-scale landlord can look easy, but there’s more to it than collecting the rental cheques every month. Whether you lease out an individual property or have a self-contained rental unit in your home, such as a basement apartment, buying to become a landlord requires you to be a hands-on business owner.

“I tell my clients upfront [that] you’ve got to think of it as a business,” says Nawar Naji, a Toronto real estate investor and broker at Chestnut Park Real Estate. “It’s not just about, ‘Let’s go buy a condo and rent it out.’ You’ve got to think of it from a business perspective. Think of the operation side of it, taxation aspect of it, and the other part of it — the exit.”

Want to buy your first home?

With television shows like HGTV’s Income Property showcasing the benefits of owning a rental property, like easy income and a boost in property value, renting out your basement looks appealing. Yet, without proper preparation or knowledge of provincial landlord and tenancy laws, the landlord dream can quickly go sour.

“If people have a bad experience in the first year [of landlording], and the first tenancy is problem-ridden, nine times out of 10 I would think they would get out of the business,” says Susan Wankiewicz, executive director of the Landlord’s Self-Help Centre, a non-profit legal clinic for Ontario’s small landlords.

If you do your homework and plan accordingly, becoming a small landlord can be rewarding. As Naji and Wankiewicz tell it, here’s what you can expect if you’re working towards that first investment property.

Put your back into it

Landlording isn’t a passive investment — it requires maintenance, time and experience to nurture into a successful money-maker. As with any business, being present and aware of your investment’s unique needs will start you on the path to being a successful landlord.

“You’ve got to be active in the business,” says Naji. “It’s not just paying the mortgage, getting the rental cheque and calling it a day. There’s more work to be done to it.”

Naji, who has been investing in real estate since 2006, says a new landlord can expect the operation stage of landlording — running the property — to be the longest and most cumbersome. Semi-annual inspections, repairs, collecting rent and regular maintenance are the landlord’s responsibility. You could hire a property management company to take care of this for you for a percentage of your rental earnings, but Naji advises not to within the first year of a new investment property.

Photo: Julien Dumont/ Flickr

“[That way] when you pass it on to a property manager, and they call you [about a house issue], you’ll understand if it makes sense or doesn’t make sense,” he says. “If you haven’t done it by experience, somebody can call you and can come up with explanations that don’t necessarily make sense — it might not need any repairs.”

Naji also recommends building a team of professionals that specialize in residential investments. Your accountant, repair person or real estate agent, he says, should have knowledge of landlording in order to fully understand your needs.

Know it like the back of your hand

Legal jargon may be a dry read, but understanding tenancy laws in-depth before you become a landlord could save you a whole lot of trouble down the road.

“Usually we meet landlords once they’ve rented and they’re in trouble,” says Wankiewicz. “If they were to do the front-end research and understand what they’re getting into before they rent, I think they’d be better off.”

Wankiewicz has seen every kind of problem come through the LSHC office: tenants that default on rent; pets that suddenly appear unannounced; damage to the property; and tenants that decided to move their whole extended family into the unit. Whatever the issue may be, Wankiewicz explains that landlords who familiarize themselves with the provincial landlord and tenancy laws beforehand have a better understanding of what their rights are. For instance, she still encounters landlords who haven’t fully read Ontario’s Residential Tenancies Actand don’t understand that the law equally applies to both high-rise and second suite rentals.

“Landlords are surprised because they think that [because] they’re renting in their home and they’re the king of the castle. That’s not the case. They’re subject to the same legislation as if it were a high rise rental,” she says.

Photo: James Bombales

If a tenancy isn’t working out and an eviction is required, Wankiewicz warns that the process isn’t a quick fix. If a tenant stops paying rent, a landlord will need to give a termination notice and apply for a court hearing to the Landlord and Tenant Board as soon as possible.

“What we are seeing now is that it’s taking anywhere from four to six months for a landlord to terminate the tenancy and recover possession of the rental unit,” she says.

The price is right

Buying a house ain’t cheap, nor is saving for a downpayment, so you’ll want to ensure that you can get a return on your first investment property, and it starts with picking the right rental unit.

Naji says to follow the money — wherever there’s construction for a master-planned community or an injection of government funding into infrastructure, there will be a demand for rental housing. Highlights of a specific neighbourhood — proximity to transit, a family-friendly community, lots of amenities — will entice tenants over more space. As Naji explains, buying the largest rental unit on the market might allow you to charge slightly higher rent, but it will cost you more to purchase.

Photo: James Bombales

“If you’re buying the largest two-bedroom, two-bathroom condo, it’s not necessarily the best idea because the tenants are not going to pay more rent,” explains Naji. “They might pay a little more rent, but not enough to justify the additional cost of acquisition for that larger, or extra large, unit.”

Instead of focusing on big bedrooms and living areas, Naji says to look for smaller spaces with appealing characteristics. Tenants are feature focused; they’ll value better appliances or a shorter commute time over a bigger kitchen. A semi-detached could bring you in the same amount of money as a fully-detached home with the same number of bedrooms, but will cost you less to buy.

“It might be a little bit smaller, but your cost of acquisition is less, and the numbers are going the be in your favour because your rent is going to be pretty much the same with a lower purchase price,” he says.

When pricing your rental unit, Naji says to compare current neighbourhood rental prices with seasonal demand to determine the right price.

Meet and greet

With a tenant living on your property, you’ll get to know all of their quirks very quickly. Some landlords aren’t prepared for the extra smells, sounds and interesting habits on display that go hand in hand with having a tenant.

“Landlords in a smaller situation, were they’re renting part of their home, they become consumed with tenant behaviour, like if the tenant has an overnight guest and, ‘They didn’t tell me’, ‘The tenant’s taking too many showers’, or ‘The tenant’s leaving the lights on’, or ‘They brought in a pet and I didn’t approve a pet’— issues like that, small-living landlords are unprepared for,” says Wankiewicz.

The landlord-tenant relationship can sometimes be a rocky one. Wankiewicz emphasizes that in addition to good communication and responding to issues quickly, landlords need to conduct a comprehensive screening process to find a trustworthy tenant. She advises that going off face-value alone won’t provide enough information about a person. Using a rental application, speaking to references and checking a tenant applicant’s credit score are good methods to finding a quality tenant.

“So many times the small landlord will just make their decision on how their tenant appears, but they need to dig in and check with previous landlords, not just where they’re living now, but where they lived prior to that, because that’s where they’re going to get accurate information about what their behaviour was like,” says Wankiewicz.

Naji likes to take a personal approach to rental applications; he strongly recommends meeting prospective tenants in-person not only to check for that gut-feeling, but to get to know the person.

“At the end of the day, this is a people business. You’re renting your property to a person or a couple. It’s good to meet them, get to know who they are.”

Source: Livabl.com –  

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A first-time buyer’s guide to understanding Canada’s mortgage stress test

Photo: James Bombales

Livabl is here to help you understand the housing market. With this comprehensive explainer, our aim is to give you a 360-view of this important issue that has been affecting the market.

For prospective homebuyers, there are several financial hoops to jump through on the way to property ownership: growing a healthy downpayment, securing a preapproval, and finding a home that fits within budget, to name a few. Yet, even with years of financial planning, the dream of homeownership can quickly come crashing down if one cannot jump through the hoop that trips up first-time and repeat buyers alike: the mortgage stress test.

In January 2018, the Office of the Superintendent of Financial Institutions, a federal watchdog and the sole regulator of Canadian banks, implemented the Residential Mortgage Underwriting Practices and Procedures guideline — otherwise known as B-20. Under B-20, all new and renewing homebuyers who opt for a regulated mortgage lender are subject to a mortgage stress test, which evaluates the borrower’s ability to afford residential mortgage payments against higher interest rates. OSFI says that this policy protects Canadian homeowners from excessive debt and unaffordable mortgage payments.

“The stress test, which is one component of our B-20 guideline, is a safety buffer that ensures a borrower does not stretch their borrowing capacity to its maximum, leaving no room to absorb unforeseen events,” says OSFI in a statement to Livabl. “Borrowers across Canada face different risks that could impair their ability to pay their mortgage: changes to income, changes to expenses, changes to interest rates.”

However, the mortgage stress test does not affect everyone equally. In Canada’s most expensive markets, such as Toronto, where the average price of a home is expected to surpass $820,000 in 2019, buyers have been disqualified for mortgages by the test based on high down payment requirements. Meanwhile, in cheaper real estate markets, such as Regina, the RBC reports real estate prices fell in the third quarter of 2018. Yet, as the job market remains stagnant in some cities, meeting the income standards to pass the stress test creates a provincial disadvantage.

“The one downside is that it’s made it harder for some buyers to get into the market because what they can spend on a home now is a lot lower than what it was a year or two ago before the stress test,” says John Pasalis, Founder and President of Toronto-based brokerage Realosophy.

In other cases, desperate buyers are opting to avoid the stress test altogether by choosing to work with private lenders, who are not federally regulated by OSFI and offer much higher interest rates. Some have questioned the financial stability of the market with this increased presence of higher interest rate lenders.

“People are going to private lenders, and that brings on other risks,” says mortgage broker Elan Weintraub. “It brings on economic risks because if people are paying $4,000 a month for a private lender mortgage payment, they can’t go to restaurants, they can’t buy clothes, they can’t spend money on other things.”

If you’re a first-time buyer, don’t stress about the stress test. We turned to mortgage and real estate professionals to help answer key questions about the test.

Photo: CafeCredit.com

What does the stress test do?

All Canadian buyers are required to take the mortgage stress test, but how you are tested depends on the size of your down payment.

If you have a downpayment of less than 20 percent of the home purchase price, your mortgage is automatically insured. With the added insurance premiums, your payment rates are increased up to 4 percent higher. Insured mortgages will be tested between the interest rate offered by the regulated mortgage lender — typically, one of the top five banks of Canada — against the Bank of Canada’s conventional five-year mortgage rate (5.34 percent as of February 2019).
Those with uninsured mortgages and down payments greater than 20 percent, will be have their current rate tested, plus a two percent point increase, against the five-year bank rate. To pass the stress test, the calculated interest rate must meet the Bank of Canada’s qualifying rate or the contracted rate plus two percentage points, whichever is higher. For example, if your lender offers an interest rate of 2.99 percent for your uninsured mortgage, plus two percentage points, your calculated interest rate would need to meet the Bank of Canada’s minimum qualifying rate of 5.34 percent, since it is the greater of the two.

The mortgage stress test will consider elements such as your gross income, debt and expenses. A mortgage qualifier calculator can give you an idea how much income and down payment amount you’ll need to pass, but Pasalis recommends speaking with a mortgage broker before you begin the process.

“In the past, you could just go on some mortgage calculator and try to estimate yourself,” he says. “But with stress tests and all of these new mortgage rules, you want to go to a mortgage broker for them to tell you, in theory, what you qualify for, because that kind of really sets your expectation of what you can afford to spend on a home.”

Does it matter if I choose a variable or fixed-rate mortgage?

If you wish to secure a fixed-rate mortgage, the stress test may dash those hopes.

Fixed-rate mortgages are typically priced higher than variable-rate mortgages, as variable-rate payments fluctuate with interest rates and a higher proportion of a mortgage payment goes to principal. These higher fixed-rates can limit your options when applied to the stress test. As Weintraub describes, borrowers looking at a fixed-rate of 3.69 percent with an uninsured mortgage, plus two percentage points, wouldn’t qualify against the Bank of Canada’s rate.

“There are some clients who are so tight they can’t have a 5.69 [percent] stress test, they need a 5.34 [percent] stress test, so they have to get the variable rate even if they want fixed,” says Weintraub. “If you make a lot of money you can have both options, but if you have a very tight file, you might only have the option of variable.”

I want to change mortgage lenders. Will I have to retake the stress test?

A common criticism of the stress test is its tendency to trap borrowers with their current lenders. Buyers who purchased their home prior to the stress test are still required to participate. For those who won’t pass, it means staying with the same mortgage lender to avoid disqualification.

“Imagine that you want to renew your mortgage but you technically don’t qualify under the new stress test. You’re technically handcuffed with that same lender,” says Pasalis. “They can charge you eight percent interest and you can’t do anything about it.”

While OSFI ensures that the stress test, “contributes to public confidence in the Canadian financial system,” Weintraub questions whether this element of the policy benefits the market overall.

“If the bank knows the borrower cannot leave, how competitive are they going to be with their rates?” he says. “Some of my lowest interest rates are when their mortgage is expiring and I can move them to a new lender. But if they don’t pass the stress test, they’re basically forced to stay with their current lender, which doesn’t make sense.”

Photo: PlusLexia.com

Can I avoid the stress test?

If you’re a nervous test taker and want to sit out, then you do have the choice to not take the stress test — but at a cost.

The mortgage stress test does not apply to unregulated mortgage finances companies, called MFCs. While provincially regulated, these lenders operate in the private market, which makes loan approvals easier to obtain, but at higher rates. Weintraub suggests that an MFC lender should be reserved for short-term loan options.

“If you’re a first time buyer dying to buy a place and you go to a private lender, I don’t necessarily know if that’s the right solution,” says Weintraub. “I think private lenders are meant for very short term solutions, to help someone in a very specific situation, and then to get out of that situation ideally in 12 months or less.”

Pasalis says that MFCs tend to take on riskier borrowers, so higher interest rates compensate for that liability. But these higher payments, Weintraub says, can push new buyers into being house poor.

“It’s meant to be a stop gap, it’s not meant to be a long-term, sustainable way to borrow money, because it’s very expensive,” he says.

What happens if I fail the stress test?

Flunking the stress test is not the end — you can always retry later with a higher down payment or increased income. Weintraub says that the Bank of Mom and Dad could be available for some buyers looking for a mortgage co-signer or a boost in down payment funds. However, he recommends evaluating whether homeownership is truly worth it if this is the case.

“I would say that buying is not for everyone and sometimes we get into this whole, ‘I need to buy, I need to buy,’ mentality,” says Weintraub. “But there are certain situations where renting is a great option.”

While there has been increasing pressure for OSFI to provide policy relief for those in expensive markets, they remain firm on preventing “relaxed mortgage underwriting standards.” Pasalis says that there is always future potential for first-time buyer relief, but overall, exceptions to a national policy are unlikely to be made for individual market conditions.

“They can’t craft out different policies for Vancouver and Toronto and by municipalities,” he says. “I think the market will adjust to it.”

Source: Livabl.com –   

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