Tag Archives: second mortgages

Second mortgages in Canada: 6 reasons you may need one

We’re living in a world where certain financial obligations must be settled on time. It could be college tuition, renovation costs, emergency repair bills, debt consolidation or even paying for a wedding. Whatever it is, it can’t wait, and it needs to be resolved as soon as possible.

As the saying goes, time waits for no one. And, neither do the bills lurking around the corner.

So what are your options? You may think of getting another credit card, but you’re past the limit or have a poor credit score. Traditional lenders have turned you down too, and you couldn’t be more disappointed.

However, if you’re a Canadian currently paying for a primary mortgage, you could have an ace in the hole to sort out your financial hurdles. This is where a second mortgage comes in.

What are second mortgages?

A second mortgage is a secondary loan held on top of your current mortgage. A different mortgage lender will typically provide this product. It’s important to note that second mortgages have their own rates and terms, and is paid independently of your primary mortgage.

In layman’s terms, second mortgages are loans that are secured by your home equity. Usually, you can acquire up to 80 percent of your home equity through a second mortgage and if you’re in a major city, up to a maximum of 85 percent.

In contrast to the primary mortgage, a second mortgage has its own terms and conditions. Hence, the second mortgage is paid separately with different rates from the first mortgage. Nonetheless, in case of a default, the second mortgage will only be repaid after the primary mortgage has been sorted out.

So what are some of the reasons you may need a second mortgage?

1. You want to pay off high-interest consumer debt

A recent report released by Statistics Canada shows that for every dollar of disposable income, Canadians owe $1.68 in credit market debt. In fact, Statistics Canada estimates that the accumulated consumer credit is $627.5 billion; not including mortgages. If you’re an average working Canadian, it is very likely that you have consumer debt.

Keep in mind that the average credit card interest rate in Canada is 19.99 percent. Of course, the longer you delay the payment, the more you keep paying higher interest rates. No wonder, most Canadians prefer low-interest credit cards.

However, there is another option. Even though the interest rate of a second mortgage is higher than the primary mortgage, it is lower than the accrued interest on credit cards and personal loans. A minimum payment of a second mortgage can be much lower than that of a credit, creating better cash flow for the borrower.

That means you can acquire a second mortgage to pay off high-interest consumer debt and save a lot of money in the long-run.

2. You have a poor credit score

According to the Huffington Post, the average Canadian credit score is 600 points. If you’re a Canadian, anything below 650 points is considered a bad credit score and you will probably find it challenging to obtain new credit.

Maybe it was that single loan that you defaulted for a month or that credit card charge-off—as long as you have a poor credit score, you will likely be the last in line when applying for loans.

The good news is that you can get a second mortgage even with a poor credit score. The lender can overlook the poor credit score based on your consistency on paying the primary mortgage and if you have a lot of home equity, albeit the interest rate will be higher due to the risk involved.

If you can pay off bad credit loans and defaulted debts by leveraging a second mortgage, you can start to repair your credit.

3. You’ve been turned down by traditional lenders

You never know when mortgage rules will change. Since the recent strict new rules on mortgage lending, more Canadians have been turned down by traditional lenders. In fact, mortgage brokers reckon that the rejection rate has increased by 20 percent. Even those who were approved for a mortgage before 2018 can have their mortgage renewal or refinance request turned down due to the stress test.

So what should you do if you’ve been turned down by traditional lenders? Simple; apply for second mortgages offered by private lenders. Unlike traditional banks, private lenders don’t have their hands tied down by the new OSFI rules.

4. You need funds quickly

There are many reasons why you would need quick funds. Perhaps you’ve experienced an unexpected tragedy or looking for a new job, and you need quick cash until you’re back on your feet.

You could go for an unsecured loan, but you don’t want to end up paying high-interest rates. Payday loans are even worse, the fees and interest rates are exaggerated. Even if you did get a payday loan, the credit limit is $1500, and you probably need more than that.

What about RRSP withdrawal? Well, you will get penalty taxes for making that early withdrawal. For instance, if you withdraw $30,000, you will only receive $21,000 after the bank remits $9000, or 30 percent, to the government.

On the other hand, second mortgages will give you liquidity to your home equity without too much interest rates or taxes especially if the amortization is short-term.

5. You want to avoid high mortgage penalties

Prepaying the remaining balance of a closed low fixed rate mortgage loan can be expensive for Canadians. Most lenders will impose a breakage fee if you decide to walk out of the contract before the term expires. Sometimes, the mortgage lenders can overestimate the liability and proceed to double or triple the penalties, leaving you in a tight spot.

Nevertheless, instead of pre-paying the first mortgage early and selling the house to gain funds for investment capital or debt relief, you could apply for a second mortgage to access the funds and wait a little longer. A short-term second mortgage would prove to be cheaper than paying the high mortgage penalties.

6. You want to outsmart PMI

Canadians who can’t afford 20 percent down payment of the property’s value when applying for a mortgage are required to pay private mortgage insurance (PMI). There are also borrowers who don’t want to give out the 20 percent down payment so they can have funds for renovation and repairs. Even so, PMI premium rates aren’t cheap especially if you’re putting up 5% to 9.99% down payment.

But did you know taking a second mortgage could lower the overall mortgage expenses than going the PMI route? Despite second mortgages having higher annual payments than first mortgages, they cost less than PMI.

Consult a professional to find a convenient second mortgage

As much as applying for a second mortgage seems like a straightforward process, finding a second mortgage without professional assistance is like climbing a slippery mountain without a harness.

Every situation is different, and there are always details in the contracts that you need to understand clearly.

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What is a second mortgage? 5 tips you need to know

In certain circumstances, you may even have to think about getting a second mortgage. This is a mortgage typically taken out by homeowners who need cash for emergency repairs, working capital for business or investments, renovations, funding education, paying for a wedding, or even to consolidate other debts and lines of credit.

Let’s take a closer look at exactly what is a second mortgage, and what it means to you.

An overview of second mortgages

A second mortgage can mean two things: a mortgage you take out on a second home, some refer to literally as a second mortgage, and a mortgage which sits on top of a primary mortgage. The latter is the most accurate use of the term second mortgage, and is what we will be discussing today.

In this sense, a second mortgage is not a mortgage you get on a new home — it’s actually a secondary mortgage that you can take out on your existing property.

Second mortgages extract equity from a home, which allows homeowners to access capital when they need it. The basic form of second mortgage comes in the form of an lump sum loan.

With a standard equity loan, you can borrow up to 85 percent of the value of your home in major cities in B.C., Alberta, and Ontario. For most other cities in Canada, the maximum is typically 80 percent.

Over time, you will pay off the entirety of the loan and the interest, much like you would with a car loan. Regardless of the loan option you pursue, you should make sure you understand all the intricacies of second mortgages before getting started.

How a second mortgage works

What is a second mortgage and how does it work? As we mentioned above, a second mortgage is a secondary loan you can take out on top of your current home mortgage. They are typically held by a different mortgage lender than the one who lent you your primary mortgage. Getting a second mortgage enables you to access equity from your home without making any changes to your primary mortgage.

The distinction between primary and secondary mortgages is an important factor to keep in mind. Rather than simply increasing the principal of your initial mortgage loan, second mortgages have their own terms, rates and rules, which means you pay it off independently of your primary mortgage. When you get a second mortgage, you will continue to pay your primary mortgage, along with additional mortgage payments for your new loan.

Before you can apply for a second mortgage, you will need to find out how much equity you have in your home, your home’s value, and your credit score. All of these details will affect your ability to secure a second mortgage, and they also influence second mortgage rates and terms.

Next, you will need to shop around for the best rates from various banks and lenders. As always, it’s best to partner with a knowledgeable mortgage professional who tailor a loan product to your specific needs.

TALK WITH AN EXPERT 866-243-2207

After choosing a lender, you will fill out an application for a second mortgage. If you are approved, you can review the terms of your loan before signing an agreement.

In many ways, applying for a second mortgage is similar to applying for a primary mortgage. A major difference, however, is that second mortgage rates are typically higher than those associated with primary mortgages. This is because lenders that offer second mortgages typically have to assume more risk of delinquent payments or loan defaults.

The higher interest rate is also a result of the primary loan taking precedence over the secondary one. For example, should there be a forfeiture, the secondary lender will only get money after the primary one is paid in full. This makes secondary lending riskier.

Second mortgages can range greatly, but a borrower with good equity and credit history could get a 6.99% or 7.99% rate. While this may seem high, it’s low compared to most unsecured credit lines and credit cards

Below you will find some tips when it comes to second mortgages:

Tip #1 – Second mortgages are commonly used for…

Individuals and families may face a variety of circumstances that might lead them to consider a second mortgage loan. Generally, those who apply for a second mortgage do so out of necessity because they need capital quickly. In the interest of freeing up financial resources from home equity, they will assume the higher rates that come along with a second mortgage.

The following are some of the most common reasons people apply for second mortgages in Canada:

  • Working Capital: Getting access to your home equity is a primary funding method for those looking for working capital. This can include opening a new business or funding a current one, investing in businesses, retirement, or real estate, and any other forms of investing that requires a lump sum of capital.
  • Debt consolidation: If you have several loans and lines of credit from various lenders, banks or agencies, the payments, loan terms and interest rates may overwhelm you. When you have to concern yourself with numerous loans, you may be more likely to miss payments or pay excessive amounts of interest. A second mortgage loan allows you to pay off debts and consolidate loansinto one manageable mortgage agreement.
  • Renovations and repairs: It is common for home appliances and roofs to fail unexpectedly and necessitate emergency repairs. This kind of work on your home can be costly, and you might not have much time to save money for the repair. In other situations, you may simply want to make an improvement to the appearance or function of your home. Whatever the reasons, a second mortgage could allow you to finance these improvements.
  • Avoiding high penalties: Finally, a common use for a second mortgage is people who may have a first mortgage with a low rate locked in, and their penalty is high to break in order to access funds. It is far cheaper to get a 1-2 year second mortgage than pay a high breakage fee. This can provide access to funds for debt relief or investment capital. When the first mortgage matures, the two loans can then be blended into one.

Tip #2 – Helps those with bad credit

One of the top benefits of second mortgages is that it is possible to get one even if your credit history is mediocre or poor.

If you have paid off a significant amount of your primary mortgage loan, you have a record of making consistent and on-time payments and you have a lot of equity in your home, a lender may overlook your credit score (within reason) and approve you for a second mortgage.

Because a lender evaluates your suitability for a loan based on your equity and track record with your primary mortgage, you may even have an easier time getting a second mortgage than you would a standard loan—assuming you have been making your payments on time and you have plenty of equity.

Second mortgages are also a great way to clean up bad debt, such as high interest consumer debt, debt that is in collections, or even tax arrears.

Tip #3 – Private lenders are often more flexible

All federally regulated banks must operate within certain laws and guidelines. These rules reduce risk for the lender, but they often cause them to overlook reliable borrowers simply due to minor disqualifications.

Because every person is different, it’s important to ensure that your case is examined individually so that you have the best chance of getting the loan you need at a fair rate. To accomplish this, your best course of action can be to work with a private lender.

A private lender is a business—rather than a traditional bank or financial institution—who agrees to finance your loan. In the past, private lending was equated with individuals loaning out money at high interest rates. Although some still do this, private lenders include professional organizations, like CMI, who can offer a variety of loan products at competitive rates.

Tip #4 – Common costs associated

As with any loan, you may be subject to additional fees, including closing, legal, and appraisal fees.

When it’s all said and done, you may be on the hook for several thousands of dollars worth of fees, so make sure you know what to expect from your lender before you sign anything. This is why it’s important to work with an experienced broker who can guide you in the right direction.

TALK WITH AN EXPERT 866-243-2207

Tip #5 – Know how to find a second mortgage (talk to a professional)

Financial choices are not always totally clear, and it’s important that you examine all the options available to you to determine which decision is best for you and your family.

As a general rule, you should not make a big decision about your finances if you feel pressured or rushed. That said, you are considering a second mortgage because you are in a tough financial spot, and likely need some quick cash. This why it’s so important your partner with a knowledgeable and reputable broker to help guide you through the process in a timely manner.

Considering that there are so many different factors at play when it comes to second mortgages, you also shouldn’t attempt this process on your own. Look for guidance from a mortgage professional who you trust and who is looking out for your best interests.

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Shadow Lending Growing as Canadians Chase Housing Dream

Mortgage broker Samantha Brookes is trying to figure out how to get one of her clients out of a housing-fueled debt hole.

The couple, a 59-year-old Toronto city worker and her husband, 58, have so much debt that they stopped making payments on the C$410,000 ($318,000) mortgage for their suburban home. They wanted to refinance but regulations imposed last year will disqualify them. In a few weeks, they won’t even qualify for an uninsured loan at an alternative lender as more rules come into effect.

They opted for a third route: adding a second mortgage with an interest rate of 10.5 percent to pay off their debt. Their salvation came from a private unregulated lender, a move many other Canadians are making as the government tries to rein in a home-price surge that’s driven household debt to a record. But like a giant game of Whac-A-Mole, the risk to the financial system from tapped out borrowers is merely shifting — this time to a market where there’s no oversight from the country’s national bank regulator and new stress-test rules don’t apply.

“We’re transferring risk from the regulated segment to the unregulated segment of the market,” Benjamin Tal, deputy chief economist at Canadian Imperial Bank of Commerce, said by phone from Toronto. “If we have a significant correction, clearly the unregulated markets will suffer even more because that’s where the first casualties would be. And then you will see it elsewhere.”

Erik Hertzberg / Bloomberg

Brookes says more than 90 percent of her business in the last two months has been lining up funding from non-bank and private sources, or shadow banks — versus a 50-50 mix previously. “People aren’t going to stop buying, they’ll just find different ways of doing it.”

For the government, it may be a case of careful what you wish for. Anxious to prevent a repeat of the kind of taxpayer-funded bank bailouts that occurred in the U.S. after its housing crash a decade ago, the federal government has been moving to reduce its exposure to the mortgage-insurance market.

Read More: Canada’s Bank Regulator Toughens Mortgage Qualifying Rules

Rules last year added a stress test for insured loans backed by the government. That sent more buyers to the uninsured space, where a 20 percent down payment is required. As of Jan. 1, these borrowers will also need to qualify at a rate two percentage points higher than their offered rate, a move which could lower mortgage creation by as much as 15 percent, Canada’s bank regulator has said.

Earlier changes have already had a dramatic effect. Uninsured mortgages made up about three-quarters of new loans at federally regulated banks this year, up from two-thirds in 2014, according to the Bank of Canada. Roughly 90 percent of new mortgages in Toronto and Vancouver this year are now uninsured, in part because government insurance is forbidden on homes priced over C$1 million ($780,000) and prices have risen, the bank said.

Initial Bite

On the one hand, taxpayer risk has dropped as insured mortgage origination fell 17 percent in the second quarter compared with a year earlier, the bank said in its semi-annual financial system review. About 49 percent of all outstanding mortgages are now uninsured, up from 36 percent five years ago. The credit quality of some of the loans at the big banks have also improved as borrowers buy less expensive homes, the Bank of Canada said.

The rules, along with other measures such as a foreign-purchase tax, have had an initial bite — with Toronto house prices falling 8.8 percent from May to November and the average price of a home posting the first annual drop since 2009. Vancouver prices have reclaimed new heights after cooling earlier this year.

But the risks to the financial system haven’t gone away. In the uninsured space, mortgages are increasingly going to highly indebted households and for amortizations for longer than 25 years, the central bank said. And like Brookes’s clients drowning in house debt, more borrowers are turning to lenders whose activities fall outside federal regulatory scope.

These include credit unions and mortgage-investment corporations, pools of money from individual shareholders, which aren’t subject to the new rules, Tal said. Credit unions hold about 17 percent of uninsured mortgages, according to the Bank of Canada.

‘Sub-Optimal’

Canada’s patchwork regulatory system also doesn’t encourage comfort, Tal said. Banks are regulated by the Office of the Superintendent of Financial Institutions, but credit unions and brokerages are overseen provincially. Mortgage-finance companies are semi-regulated, and MICs and other private lenders are unregulated.

MICs currently make up about 10 percent of mortgage transaction volume, or 6 percent of dollar volume, according to research from Tal at CIBC said. Transaction volume will likely grow to about 14 percent under the new rules, and in the event of defaults in a housing correction, those MIC investors would be open to losses, he said.

“Anything over 10 percent is sub-optimal,” he said. “You don’t want this market to be too big because you don’t want to increase the blind spots.”

Sound underwriting is an important element in maintaining a strong and stable Canadian financial system and OSFI will continue to monitor the country’s housing and mortgage markets under the new rules, Annik Faucher, spokeswoman for Ottawa-based organization said in an email.

Need Solutions

Like her clients, Brookes said borrowers will get creative to get around the new rules. Options include companies like Alta West Capital, Fisgard Asset Management Corp. and Brookstreet Mortgage Investment Corp. or just a wealthy individual willing to lend at interest rates starting around 12 percent.

Fisgard didn’t respond to request for comment, Brookstreet declined to comment while Chuck McKitrick, chief executive officer at Calgary-based Alta West said MICs are regulated by the country’s securities commissions and various real estate bodies.

“We’re scrutinized a hundred different ways,” said McKitrick. “There’s very little difference between us and other regulated entities.”

Despite the expectation that MICs will see more business, McKitrick said the big financial institutions will adapt to new regulations to keep lending. Shawn Stillman, a mortgage broker at Mortgage Outlet Inc., said banks could lower their mortgage rates so homebuyers would still qualify under the new stress-test rules.

“The bank doesn’t care because they’re still going to make their fees and get their money,” Stillman said by phone from Toronto.

Alta West predominantly lends to entrepreneurs and new Canadians, groups that typically have a harder time getting a mortgage at one of the big banks. Its rate of mortgages in arrears is about 2 percent, he said. That compares with about 0.2 percent at the big banks and about 0.4 percent for the credit unions, according to data compiled by the Canadian Credit Union Association.

“People need solutions — it could be temporary, but at least they have a home over their head,” Brookes said.

Source: Bloomberg.com – By Allison McNeely and Katia Dmitrieva 

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How Canadian homes became debt traps

underwater mortgage

Source: MoneySense.ca – by   November 13th, 2017

Houses have become another debt-laden income-stream for Canadians

In 1998, Ann bought a one-bedroom condo in the Kitsilano area of Vancouver. Gainfully employed at a printing company, she found the monthly mortgage payments were within her budget (Ann and others quoted in this story asked that Maclean’s not use their full names). The building was on the older side, and eventually she got the itch to update the decor. She intended to replace only her bathroom sink; she ended up renovating the entire bathroom. “I remember thinking, ‘Well, now that I’ve started…’ ” The kitchen came next, then the living room and finally the bedroom. Ann thought the renos, funded partly on credit and spaced out over a few months, would boost her condo’s value. She also wanted to keep up with her neighbours. “Everyone was doing something,” she says.

Finances became tight afterwards, and she only paid the minimum on her credit card each month. Every year, her condo fees rose while her salary at the printing company (where she still works) stagnated. She began relying on credit for everyday expenses, and later took out a second card.

Soon, one of her banks began calling with a solution to help manage her debt. She ignored the inquiries, preferring not to think about her finances, but she started to feel desperate: “I just wanted to do something, and that was the only thing coming my way.” The bank offered a loan at a low rate to pay off her high-interest credit card debt, and she ended up taking out a second mortgage for $80,000. The interest rate still wasn’t manageable. “It was a huge mistake,” she says.

Saddled with two mortgages, rising condo fees and a flat income, she continued relying on credit cards. Surprise expenses, such as dental work, added to her debt. Embarrassment kept her from seeking help. Three years ago, she decided to sell her condo. Despite Vancouver’s booming market, the sale didn’t solve Ann’s financial problems. She moved in with a friend and was able to pay off her mortgages, but she couldn’t make much of a dent in her credit card debt.

This year, Ann turned 64. She was carrying $70,000 in debt, and knew she couldn’t work another decade to pay it down. That realization prompted her to seek help, and she eventually met with an insolvency trustee. Earlier this year, Ann’s trustee filed a consumer proposal on her behalf. Less severe than personal bankruptcy, a proposal is an offer to all of an individual’s creditors to pay a portion of debt under a strict plan over a maximum of five years. The remainder is discharged. Creditors typically agree to these arrangements since they are guaranteed to recoup at least some of their money. For Ann, filing a proposal came as a relief. “I actually feel like I can breathe again,” she says.

Other Canadians are still suffocating. Earlier this year, the household debt-to-income ratio hit another record of 167.8 per cent. A long period of abnormally low interest rates has enabled Canadians to carry massive debts, since monthly payments appear manageable. Further, in cities with rising home values, particularly Toronto and Vancouver, homeowners can secure a home equity line of credit (HELOC) to pay other debts or simply fund their lifestyles. Last spring, the Financial Consumer Agency of Canada warned that the increased use of HELOCs “may lead Canadians to use their homes as ATMs, making it easier for them to borrow more than they can afford.”

Insolvencies, though, are rare. As of the end of July, there were nearly 123,000 consumer proposals and personal bankruptcies filed by Canadians this year, a decline of 1.2 per cent from the same period last year. That might be a sign of fiscal prudence, but it’s also the result of record low interest rates that ease debt-carrying costs. Scott Terrio, an insolvency estate administrator and president of Debt Savvy in Toronto, calls this phenomenon “extend and pretend.” Canadians can extend their debt repayment terms and pretend to live a lifestyle they can’t otherwise obtain. He sees it all the time—couples with decent jobs carrying large mortgages, and putting daycare, cars and vacations on credit.

Some reach a trigger moment when they can no longer pretend—a job loss, say, or divorce or illness. But lately Terrio has noticed a change in his business. More clients are coming in because they’re simply tapped out. As with Ann in Vancouver, there is no trigger. “It’s a gradual realization for some people,” Terrio says. “They can’t do it anymore.” Lana Gilbertson, an insolvency trustee in Vancouver, has seen the same change. “Nowadays, they have jobs, they’re making money, they’re plugging along, but they’re just in over their heads,” she says.

The cost of borrowing is set to rise, adding strain to households. The Bank of Canada hiked rates twice this year, signalling more could be coming—depending, in part, on whether households can handle it. Economists at TD Bank Group believe two more rate hikes are likely next year. That will cause rates on everything from lines of credit to car loans to mortgages to tick up. At the same time, house prices are not rising as quickly as they once were in many Canadian cities. RBC Economics forecasts home prices in Canada will increase 11.1 per cent this year—and just 2.2 per cent in 2018. Canadians won’t be able to pull cash out of their homes so easily to get themselves out of trouble. “The insolvency business is cyclical, and we’re at least a year overdue for shedding blood in the system,” Terrio says. “If ever we were poised to hit that right on the head, it’s now.”

For some Canadians who struggle with debt, the problem can be traced back to real estate. In a survey TD released in September, 56 per cent of respondents from across Canada were willing to exceed their budget by up to $50,000 to purchase a home. At the same time, 97 per cent of homeowners said they wished they’d factored in other obligations before buying, such as property taxes, maintenance costs and “overall lifestyle expenses.”

The problem is not confined to Toronto or Vancouver, where huge price gains have enticed buyers to stretch themselves for fear of getting permanently priced out. In Regina, Joshua and his wife purchased a house in 2014 when expecting their first child. Both 24 years old at the time, they carried about $35,000 in debt between them, mostly tied to student loans. “We rushed into getting a house because we just thought it would be the right thing to do,” Joshua says. “It almost felt wrong to be renting and having a kid.” (Joshua’s mom pressured them to buy, too.) In one weekend, they viewed 16 houses. The very last one felt right. They put down five per cent and moved in.

But the couple was blindsided by maintenance costs. Their furnace needed repairs, and they later had to replace the water heater, which set them back hundreds of dollars. After expenses, the pair has virtually no cash to put toward their debt. Joshua’s card is maxed out, and his wife’s card is close to the limit. Joshua says they’re frugal (splurging means going to Subway) and live paycheque to paycheque. The situation became worse this year. His wife is on maternity leave with their second child and their variable mortgage rate ticked up. “Just the way the rate is fluctuating is killing us,” Joshua says, who works in sales at a telecommunications firm. “It can’t keep changing like this.”

Staring down tens of thousands of dollars in debt, rising mortgage costs and no foreseeable way to substantially boost their incomes, the couple decided to sell their house and rent. They’re not expecting a windfall. A while back, their basement flooded and they used the insurance money to repair the foundation. The basement had been finished, but there’s no cash to renovate it, so it will be sold in “as is” condition. The market in Regina is also soft, and the average home price is down slightly from 2014. Joshua hopes to at least get his down payment back, and their financial situation should improve when his wife returns to work as a massage therapist. “We’ll be able to really hack away at our debt,” he says, “but it’s going to take years.”

While real estate has led to financial distress for some Canadians, it’s been a saviour for others. The home equity line of credit has allowed millions of households to borrow against their properties, providing cash for everything from renovations to investing to debt consolidation. HELOCs have been around in Canada since the 1970s, but in the mid-1990s, lenders started marketing them to a wider swath of consumers. Between 2000 and 2010, HELOC balances soared from $35 billion to $186 billion, according to the Financial Consumer Agency of Canada, an average annual growth rate of 20 per cent.

The pace of growth has slowed since then, but balances still hit $211 billion last year. Lenders have been all too eager to dole out HELOCs, creating the perception of instant, easy money. An animated commercial for Alpine Credits, a lender in B.C., features a room full of employees rubber-stamping loans—even for a client who wants to install a four-storey waterslide. (The employees celebrate by cheering while one pops open champagne and another tears off his shirt.)

One common use of HELOCs is to pay off higher-interest debt. Last year, according to Scotiabank, Canadians used $11.6 billion (or 28 per cent of HELOC withdrawals) for debt consolidation. Doug Hoyes, a founder of licensed insolvency trustee Hoyes, Michalos & Associates, has witnessed the shift. The firm has offices across Ontario and in 2011, roughly one-third of the firm’s clients owned a home when they filed for bankruptcy or a consumer proposal. Last August, just six per cent of insolvent consumers were homeowners. “You don’t need to file a proposal to pay off your debt,” he says. “You just go out and get a second mortgage.”

If the pace of home price appreciation slows down—or worse, prices drop—there will be consequences for households that have been piling on debt. The slowdown in the southwestern Ontario real estate market is already creating stress. Hoyes recently saw a couple who purchased a home four years ago and accumulated $70,000 in unsecured debt. They bought furniture, hired landscapers and borrowed to finance a swimming pool. Before the slowdown, the couple might have earned $100,000 by selling their home. Now they might get $70,000, which would barely cover their debts. They’re also reluctant to sell and move to a different neighbourhood. And because of the softening in the market, they haven’t been able to find a lender willing to issue them a HELOC large enough to cover their unsecured debt. Their solution? Convince one set of parents to take out a second mortgage, and borrow from them. “It’s the bank of mom and dad,” Hoyes says.

And while debt consolidation is an effective strategy if consumers don’t fall back on bad habits, Terrio says recidivism is a problem. “They go ka-ching out of their house and pay off their credit card debts, but they go and run up their cards again,” he says.

Borrowing against her home wasn’t enough for Charis Sweet-Speiss to pull herself out of debt. A registered nurse, she divorced and moved from Ottawa to Oliver, B.C., a town south of Kelowna, in 1998. Her then-boyfriend (now husband) wasn’t working at the time, and the couple used the divorce settlement to start building a new life; they bought a used car, a place to live and furniture. “Then that money was gone, so I just started using credit cards,” she says. “And it was so easy.” Their debt started building, and their income wasn’t sufficient to pay more than the minimum. New credit cards she’d never asked for arrived in the mail, and Sweet-Speiss started using them. She had 13 on the go at once, and eventually they were all maxed out. “I’ve always been employed. I make a good salary. But just paying the minimum every month was a lot of money,” she says. Every six months, she phoned each credit card company to wheedle them into reducing her interest rate. She caught some breaks, but never enough to make a big difference: “It was a horrible way to live.”

Sweet-Speiss says she wasn’t frivolous with her spending, but in retrospect, she made questionable decisions. When her daughter would run up a large balance on her own credit card, Sweet-Speiss sent her money—even though it meant sinking deeper into debt herself. Sweet-Speiss borrowed against her home at one point and withdrew money on two separate occasions to consolidate her debt, but was still left with $40,000 on her cards, and it built up again.

After more than a decade of amassing debt, Sweet-Speiss turned to the Credit Counselling Society for help ridding herself of nearly $67,000 spread across 13 cards. Once enrolled, her interest payments stopped and she was put on a plan to pay down principal. She completed the program this year. She still has a mortgage and a line of credit, but is finally free of high-interest credit card debt.

Sweet-Speiss says her mortgage would have been paid off a decade ago had she never borrowed against her house. Indeed, one of the problems with home-equity loans is that they cause debt persistence. HELOCs are marketed with little or no obligation to repay in a timely manner. For years, one of the main advantages of owning a home is the forced saving effect—paying the mortgage, combined with rising property values, builds equity. A HELOC undermines that dynamic, tempting consumers to access cash now rather than build wealth over the long term.

It marks a fundamental shift in the way Canadians think about homeownership. “Whatever happened to getting to the end of a mortgage and owning your home?” says Gilbertson, the trustee in Vancouver. “It’s less about truly owning our homes today and more about having another revenue stream to fund our lifestyles.”

That Canadians are carrying record amounts of debt is not in dispute. But the magnitude of the problem is contested. “I think the fears are overstated,” says Paul Taylor, CEO of Mortgage Professionals Canada. “Canadians are incredibly prudent, and history will show that.” As the head of an industry association for mortgage lenders, brokers and insurers, Taylor isn’t exactly impartial on the issue. But he points to a report from the Parliamentary Budget Officer released earlier this year showing that, since 2009, the debt service ratio—a measure of income spent to pay debt—has remained steady at around 14 per cent, not much higher than the long-term average. That’s a sign that even though we have more debt than 20 years ago, we’re not overextending ourselves, Taylor says.

But the same PBO report projects the debt service ratio will rise to an all-time high of 16.3 per cent by the end of 2021. Taylor says the premise is a “little bit flawed” because it presumes Canadians will make no changes to their finances owing to higher interest rates. “I’m certain people will become prudent again to ensure they retain that [historical] expense ratio,” he says. Already, brokers have been fielding calls from Canadians about locking in their mortgages to guard against future increases, for example.

Bank of Montreal chief economist Douglas Porter also contends that too much emphasis is placed on the debt-to-income ratio. “We have long been of the view that much of the commentary on this topic has been overwrought,” he wrote in a research note this month. The savings rate is close to the 25-year average of five per cent, which doesn’t point to a consumer debt apocalypse. Rather, Porter expects spending to “gradually moderate” as borrowing costs rise.

Still, numerous surveys show Canadians are worryingly close to the edge. A report from MNP Ltd., an insolvency trustee, released in October found 42 per cent of Canadians said they don’t think they can cover basic expenses over the next year without going deeper into debt. An earlier survey this summer found 77 per cent of respondents would have trouble absorbing an additional $130 per month in interest payments. And as organizations such as the IMF and the OECD have constantly warned, high household debt renders the country far more vulnerable to economic shocks.

When a downturn does hit, even a high income won’t necessarily provide enough protection. Gene moved from the U.S. to Calgary 12 years ago to take a job with a major oil company, earning more than $300,000 annually. He purchased a home for close to $1 million and supported his wife, two kids and mother-in-law. In 2015, Gene lost his job when the price of oil crashed, and was out of work for nine months. He took out a home equity loan for $30,000 to make ends meet, and eventually found another job at a pipeline company, but for half his previous salary. A six-figure income would be more than enough for most Canadians, but Gene and his family were accustomed to their lifestyle. The kids were enrolled in extracurricular activities, and housing costs added up to $4,100 every month.

A year later, Gene was laid off again. “It was just devastating for us,” he says, adding that he began questioning his self-worth if he was unable to provide for his family. He eventually found another job, but at a still smaller salary. On top of the mortgage and the line of credit, Gene had another $20,000 loan. When he first purchased his house, he didn’t quite hit the 20 per cent down payment threshold; his bank offered him a loan to cover the difference. He had a couple thousand in credit card debt and a small, high-interest loan from EasyFinancial he’d taken to cover an unexpected medical expense for a family member. Finally, he faced a $90,000 tax bill, since he opted not to pay after he lost his job. Gene sought help from an insolvency trustee earlier this year. “I just wasn’t making enough money, and I had to protect the family,” he says. Gene submitted a consumer proposal, but one of his creditors rejected the terms. In October, Gene filed for bankruptcy—just over two years after making a salary most Canadians can only dream of.

This sort of precariousness worries some experts, who fear wider implications for the Canadian economy. “We continue to see the household sector as accident-prone, with a complacency toward debt which could prove disruptive to the economy,” wrote HSBC Canada’s chief economist recently. The result is Canada is at “some risk” of a balance sheet recession—a period of slow growth or decline caused by consumers saving and paying down debt rather than spending. David Madani, an economist with Capital Economics in Toronto, doubts the growth Canada has seen in exports recently will be enough to offset the decline in consumer spending. “Canadian policy-makers have allowed household debt to rise above the disturbingly high levels reached in the U.S. in 2007, raising the risk of a similar potentially disastrous deleveraging down the road,” Madani wrote.

Statements like that could be dismissed as fear-mongering, but the reality is Canada hasn’t been in this situation before, and the outcome is impossible to predict. Canadians ignored warnings from policymakers about piling on debt for years because low interest rates were too enticing. Now households will have no choice but to dial it back. The only question is how bad the fallout will be.

underwater mortgage

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When planning home improvements, finding a reliable contractor is an important first step

Hiring the right contractor can make all the difference when renovating your home

Skyrocketing Toronto real estate prices are motivating many existing homeowners to improve their homes, rather than replace them. “We’re seeing a big trend to add value to homes through renovations and to increase living space by building ‘up or out,’” said Kris Potts, president of Toronto’s Norseman Construction & Development. “In doing so, existing homeowners are achieving the living space improvements they would normally seek by moving to another home, but at a much lower cost.”

Whether the homeowner’s goal is to add living space by ‘building up or out’ or just to bring kitchens, bathrooms, and other rooms up to 2017 standards, their biggest challenge is often finding a contractor who can be trusted to do the job right; on time and on budget.

With an impressive 83 per cent score on the consumer rating site HomeStars.com, Norseman Construction & Development is one such contractor. Established in 2005, this family-owned-and-operated company listens to its customers throughout the design and build process; keeping them constantly informed about their project’s progress until it is completed, and each customer has received exactly what they asked for.

“We do our best to take each homeowner’s vision and make it a reality, ensuring that the finished product exceeds their expectations,” said Potts. “We do this by keeping on top of the perpetual advancements in the field, and by addressing the constantly changing needs of local homeowners. Add Norseman’s wealth of experience, superior workmanship and unparalleled attention to detail, and we are able to provide our customers with innovative solutions, competitive pricing and timely results on all their home improvement projects.”

Norseman’s attention to customer needs starts with the company’s consultation process. “Book an appointment on our website, and one of our skilled estimators will come to your home to provide a free quotation on whatever you have in mind,” said Kevin Potts, Norseman’s Operations Manager. “We will do our best to come up with a plan that not only meets your needs, but also fits within your budget and schedule.”

Once the home improvement project is underway, Norseman keeps customers ‘in the loop’ about the project’s progress on a daily basis. “Our people use a program called Buildertrend to upload status reports and photos of each day’s work,” Kevin Potts said. “Our homeowners can log into it as often as they wish to see firsthand how their build is going, and to get answers to any questions they may have.”

“Today’s homeowner is very savvy, thanks to all the home improvement shows on TV,” said Becky Potts, Norseman’s Marketing Manager. “Here at Norseman, we respect this level of awareness by giving homeowners open access to information about their projects at all times. Check out our Facebook, Instagram, and Twitter pages, and you will see our customer-first values in action!”

‘Customer-first values’ is a phrase that means something at Norseman Construction & Development. It is why this contractor provides a two-year warranty on its work – many other contractors only provide a year’s coverage.

It is also why the Potts family insists on alerting customers to project-related issues should they occur. All construction projects carry with them some element of the unknown. Opening walls or floors can bring to light new information not present at the project’s beginning. “Setbacks happen,” said Kris Potts. “When they do, we tell the customer about them upfront, and we fix them in consultation with the customer.”

As well, customer-first values drive Norseman’s approach to its skilled tradespeople. “Unlike some other contractors who are focussed on profits first, Norseman treats its trades fairly,” said Kevin Potts. “In return, we inspire loyalty in the most skilled tradespeople in the industry. The payoff is the best quality work on our customers’ homes.”

That’s not all: Norseman invests money and time in ‘giving back’ to the GTA community. Its charitable efforts include underwriting the annual free Messiah for the City Christmas concert for clients and staff of the United Way. This much-loved music is performed by the Toronto Beach Chorale and members of the Toronto Symphony Orchestra. Norseman also supports Habitat for Humanity, which aids low-income families in attaining affordable housing; serves hot meals at the Scott Mission, and funds numerous local sports and charity events in the GTA.

“The way we treat our customers and our community underscore what Norseman Construction & Development stands for,” concluded Kris Potts. “When you hire us for your home improvement project, you will receive quality-oriented, customer-focussed service from a stable firm that truly puts you first, and who cares about the community we all live in.”

For more information about Norseman & Construction & Development, visit their website or connect on Facebook.

This story was created by Content Works, Postmedia’s commercial content division, on behalf of Norseman Construction.

Source: National Post

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When your mortgage is more than you can handle

On paper, you could afford your mortgage. Your lender even approved the paperwork. But now that you’re settled in your home, maybe you’ve incurred some unplanned-for monthly expenses, such as higher-than-planned utility bills, property taxes that have risen (as they tend to do), or increased insurance premiums, and find that you’re unable to make your mortgage payments. If you’re not sure what to do, the first thing is not to panic. All hope isn’t lost, and you don’t have to let your home own you. You do, however, have to confront the issue head-on in order not to lose control of your finances.

If you think your mortgage is too big, here are some options and avenues to consider going forward.

  1. Budget
The first solution is the most obvious: Cut back on other expenses to try and make up for the shortfall. If you got a mortgage without properly budgeting, then it’s better late than ever. Be honest with yourself and keep track of everything you spend for one month – or even better, categorize all of your spending that took place last month so you can get a jump-start on the process. Quicken, Mint, and YNAB (you need a budget) are popular tools for tracking your spending and creating a budget. By tweaking your lifestyle and spending habits, you might be able to close the gap between the amount of money that you need for your mortgage and housing-related expenses and how much you’re spending elsewhere.

 

  1. Refinance
Refinancing is when you go back to your lender (or a new lender) and renegotiate your mortgage contract, based on your current balance and the current interest rates, before your mortgage term has expired. Note that if you refinance, you’re almost certainly going to end up paying a penalty for breaking your mortgage contract, even if you stay with the same lender. But the upside is that if you refinance at a lower interest rate than the one that’s currently being applied to your mortgage, then you can save money on your monthly payments. Another option would be switching from a fixed rate to a variable rate mortgage during a refinance, since variable rate mortgages tend to have lower interest rates than fixed mortgages. But since the interest rate on your mortgages fluctuates with the market rate, this tactic could also end up backfiring on you if interest rates go up; you’ll be forced to pay the higher interest rate and payments could end up being higher than you were previously paying. Refinancing can also be used as a tool in conjunction with budgeting, so that you withdraw some of the equity in your home to consolidate and get on top of your debt while better managing your cash flow going forward.
  1. Sell, sell, sell
It is always an option to sell your house and get a smaller one. While selling your home and pocketing the profit may seem like a good idea, the profits might not be as big as you’d expect. Between land transfer taxes, the penalty of breaking the mortgage, fees for real estate agents, and other selling expenses such as staging and/or making small repairs, you may find that your profits will be eaten into at such an extent that you can’t sell your house while generating enough cash to pay off the mortgage. Reasearching your housing market and having a frank conversation with a realtor when it comes to how much you could realistically expect to get for your home will be a big factor in determining whether or not you should sell, as well as using online calculators so that you know how much those other incidentals will impact your bottom line.

 

  1. Rent it out
Renting often gets a bad rap as the doomed fate of the poor, the irresponsible, or the nomadic. But the thing is, it’s a fiscally responsible option for many people. If your housing market isn’t favouring sellers, or you aren’t getting any response to your house being on the market, considering whether it may be an option to rent your property to a tenant and live in a less costly option, whether that be smaller or located in a less desirable area. The sale and rental markets are related, so what’s happening in one will impact the other. If your area is experiencing a slow housing market and fewer people are buying homes for whatever reason, then there may be more people who are renting, or open to the idea. Ideally, your income from the rental will cover the costs associated with your home, and all you’ll have to pay for is your new rent, which you would find at an amount that you could actually afford.
  1. Get a private loan
This is not a fail-safe option and the private lending space isn’t for undisciplined borrowers. That being said, if you have a plan, a private loan can be a good way to consolidate other high-interest debt that could free up some money that could go toward your mortgage payment if you’re suffering from a temporary setback such as making ends meet during a period where you had a loss of income, or went through a divorce.
  1. Talk to your mortgage broker
It’s all about knowing your options in this situation, and whether you want to refinance your mortgage, switch lenders, sell your home, you need to know exactly what each option is going to mean in terms of your current mortgage, which means you need to know how much the penalty is going to end up costing you in the long run. Remember, talking to your broker is free, and even though they’re not a financial planner or advisor, they can advise you as to what loans and mortgages would work best for you in your current situation.

Whatever you decide to do, you do have options. They may not always be the best options, but there are ways for you to get your head above water, even if your mortgage is too big for you. If anything, once you get on top of your situation or the next time you buy a house, you’ll know better how to anticipate your true expenses and budget for them going ahead.

Source: WhichMortgage.ca By Kimberly Greene | this page was last updated on the 25 Jan 2017

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