Self Employed Mortgages

Business Owners Mortgage

With round 4 of the mortgage rules taking effect on November 1, 2012, mortgage qualification for business owners got tougher.  Don't despair, since there is still hope for a business owner to get their last mortgage....ever. As you are aware, the new mortgage rules reduce the maximum mortgage to 65% of home value for business owners who use a stated income (income that is not verified by Canada Revenue Agency documents). However, as previously explained in a blog post regarding business owners mortgage options, a mortgage up to 90% for a purchase or 80% for a refinance can be obtained.

Business Owners Mortgage....The Last One

Many homeowners choose a 5 year mortgage term over other terms, however in today's economy the difference between 5 year and 10 year fixed mortgage has never been this small (2.99% vs 3.79% at the time of writing this blog post).  The 10 year fixed mortgage provides the following to a business owner:

  • Stability and security of fixed cost of borrowing over a 10 year period
  • Not worrying about qualifying for a mortgage in 5 years time frame and providing pages and pages of financial statements
  • Protection from rising interest at renewal time
  • Freedom to focus on growing the business, being profitable and tax reduction strategies

The chart below compares 2 options for a $350,000 mortgage: 2 5 year fixed mortgage terms and a 10 year fixed mortgage term

2 5 year fixed mortgage terms vs 10 year fixed mortgage term

To summarize, the above chart shows if one believes mortgage interest rates in early 2018 will be higher than 4.75%, the 10 year fixed mortgage is a viable option. As difficult as it is to predict where mortgage rates will be in the future, why would anyone want to renew at higher than 3.79%-3.89% interest rate in 5 years time?

This mortgage option powered by the inflation hedge mortgage strategy (explained in this video) provide a solid plan to achieve mortgage freedom.

To discuss your mortgage options whether you are buying a home, an investment property or renewing your mortgage, please contact me.

Home Buyers Videos Guide

Business Owners Mortgage Options

More and more Canadians are working for themselves which is a growing sector of the Canadian economy. For mortgage financing, business owners mortgage options have been limited as the government has introduced 4 rounds of changes over the last few years. In this post, I will discuss the prime (triple A) lending options and in a future post will discuss the alternative lending options which are more costly.

Business Owners Mortgage Options

Before we get into the bread and butter of mortgage options, I want to elaborate on who is considered a business owner by the lenders and insurers:

  • Sole Proprietor
  • Partnership
  • Corporation

Commissioned salespeople such as mortgage brokers and real estate agents are not considered business owners unless they are incorporated.

The insurers (CMHC, Genworth and Canada Guaranty) look at business owners depending on length of owning a business:

  • Less than 2 years: None will finance a mortgage (note there are the odd exceptions depending on applicant's scenario). This type of applicant is best served by alternative lenders.
  • 2-3 years: All 3 insurers will consider providing a mortgage up to 90% loan to value for a purchase (all refinances regardless of employment status have been reduced to 80% loan to value in Canada)
  • More than 3 years: Genworth and Canada Guaranty will consider providing a mortgage up to 90% loan to value

A business owner can obtain 90% loan to value mortgage using a "reasonable" stated income as per the above pending credit score and history.  The insurance premium for a stated income applicant can be as high as 4.95% of the mortgage amount.

Business Owners Mortgage Downpayment

There are cases where the business owner has access to a large downpayment and wants to avoid the mortgage insurance premium which can be costly.  If the business owner can:

  • Put 35% downpayment
  • Provide proof of operating business for 2 years or more (article of incorporation)
  • Provide proof of not owing taxes to Revenue Canada (notice of assessment)

The borrower can obtain a mortgage up to 65% loan to value using a stated income without paying an insurance premium. The stated income option is not available when the borrower is buying an investment property, the actual income income per Notice of Assessment is used which complicates the mortgage approval process.

Overwhelming? Here is a flowchart summarizing the above options:

Business Owners / Self Employed Mortgage Options - Nawar Naji Toronto Mortgage Broker

Confused? No problem, this is what I do for a living; finding the right mortgage option for my clients. If you are buying a home, an investment property or renewing your mortgage, please contact me.

 4 questions your bank doesn't want you to ask

Mortgage Rules Restrict Qualification

Mortgage Qualification

As of November 1, 2012, the Office of Superintendent of Financial Services (OSFI), has brought new mortgage rules to restrict qualification and curb Canadians' household debt to protect the Canadian economy from a US style housing correction. Here is what you need to know:

 

1. Cashback Mortgage

Cashback cannot be used for downpayment, only for closing costs. Downpayment must be from own resources or gifted from family (parents or siblings) only.

2. Home Equity Line of Credit (HELOC)

Restricted to 65% of home value. One can have a mortgage of 15% of home value bringing the total to 80% (65% HELOC + 15% mortgage) as long as HELOC does not exceed 65%.

3. Mortgage Qualifying Rate

1-4 year fixed mortgages and variable mortgages to qualify at Bank of Canada benchmark rate (in other words 5 year posted rate). This will make it very difficult for Canadians to qualify for shorter term mortgages and variable mortgages. How will anyone qualify for a variable mortgage when when the 5 year posted rate is at 6-7% range? I hope OSFI would revisit this rule in the future.

4. Self Employed Mortgage

The maximum allowed loan to value (mortgage and HELOC) for stated income applicants is reduced to 65%. Stated income programs are for business owners who maximize their tax write offs to reduce taxable declared income.  Commissioned applicants such as real estate agents and mortgage brokers do not fall under the self employed program unless they have an incorporated business.

5. GDS/TDS

For applicants with 680+ beacon credit score, the maximum GDS/TDS is 39/44.  For applicants with less than 680 beacon credit score, the maximum GDS/TDS is 35/42.

As you can see the new mortgage rules restrict qualification and might not be popular with various groups of Canadians, however they are designed to protect the economy since a significant real estate correction would have a major impact on employment numbers.  In my opinion, the new rules unfairly penalize self employed Canadians since they will be forced to access funding through secondary more expensive channels; alternative and private lenders.

To discuss how the new mortgage rules impact your qualification whether you are a first time home buyer or self employed, please email Nawar. 

Home Buyers Videos Guide - Nawar Naji Toronto Mortgage Broker

Apple, RIM And Your Mortgage Freedom

June 29th is a special day for the following reasons:

  • 5 years ago, Apple's iPhone was launched. It was the birth of Blackberry's nemesis
  • Today is the first day after RIM announced major losses, delays in launching Blackberry 10 operating system and 5000 additional layoffs
  • It is also the busiest day for lenders in Canada as the highest number of mortgages close today

You might be wondering what's the connection between the above 3 points.  Last year, I was meeting with a few investment banker friends who, at that time, said RIM's stock was a buy since it's price of $16 was undervalued and the company had lots of cash.  Fast forward 9 months, RIM's stock is at $7.4 (June 29, 2012 stock price). It has lost half of its value.  It is important when buying a stock, mutual fund or investment property to buy based on economics: how much revenue is generated (sales of company, rental income a property demands), profits (net profit, cash flow after all expenses are taken into account) and potential appreciation (R&D and innovation for a company, solid area that will experience growth due to jobs, infrastructure or immigration).  Buying (stock or investment property) because someone said it is good to buy is speculation and could result in disaster. Do your own due diligence.

As for the Apple connection, emulating their drive to innovate and improve by continuously reviewing the mortgage, adjusting it and understanding the opportunities leads to financial freedom. Being complacent by getting a mortgage, setting a payment and forgetting about it would be following RIM's path.  There is more to mortgage than rates.

Having a vision (building a portfolio of positive cash flow properties or being mortgage free) and executing a plan would result in financial freedom and not arranging a mortgage on the busiest day for lenders.

To discuss how to achieve mortgage freedom or build your real estate investment portfolio, please contact me.

Numbers Tell The Truth!

There is never a dull moment in the Canadian mortgage landscape with new rules introduced by the Minister of Finance and OSFI, Office of Superintendent of Financial Institutions.  I want to state upfront that I support these changes with the exception of reducing secured lines of credit (HELOCs) from 80% to 65% of home values.  Canada's housing market has been very hot since the credit crunch of late 2008 and the house prices to income ratio gap has grown significantly due to stimulus low mortgage rates. I want to clarify what families will be facing in 2016, 2017 and beyond.  Today's 5 year fixed rates are in the low 3's (3.09%-3.19%) which are fantastic.  However, the extended period of low interest rates will be followed by periods of high interest rates due to the following:

  • Focus will turn from stimulus in the global economy to combating inflation due to excessive stimulus (money printing and quantitative easing) since 2008
  • Cost of borrowing will increase due the European credit crisis which will only intensify as Italy & Spain (3rd & 4th largest economies in Europe) deal with their debt issues. As you recall, in late 2008 when Lehman Brothers collapsed, money (capital) disappeared from the market, creating a supply issue and variable mortgages went from primes less 0.75% to prime plus 1% in a short period of time

I want to share the following numbers to help you see where I am going:

Family household income (pre-tax): $100,000 Income tax bracket: 45% Mortgage amount: $400,000 Interest rate: 3.09% Mortgage amortization: 30 years Monthly payment: $1912 Renewal Rate in 2017: 5.5% (an increase of 2-2.5% over 5 years is very reasonable based on historical data and the above stated issues) Mortgage payment at renewal: $2103 (increase of $416 per month)

Some would assume taking on an additional $416 per month in 5 years is doable.  Let's dissect a little further:

In order to absorb $416 of additional mortgage payment, the family's pre-tax income has to increase by $9,000.  That might sound reasonable , however, it's equivalent to getting 2.5% raise every year for the next 5 years.  The economy is not in the greatest condition: not many companies are hiring, some are cutting back and the reality is keeping a job nowadays is great news. Furthermore, the increased cost of living (property taxes as municipalities deal with their debt and deficit issues, gasoline which affects goods prices, higher hydro rates....) will eat away into a family's affordability. I didn't mention that children cost more as they grow up!

This blog post is a reality check.  We have been drunk for too long on cheap money.  Plan for the long term and understand how future events should play into your decisions today.  This is a golden opportunity to consider long term mortgages such as a 10 year fixed.

To get more information please visit: www.10YearFixedMortgages.com

Whether you agree or disagree with me, I would love to hear from you.

What You Need To Know About The New Mortgage Rules

The Minister of Finance, Mr. Flaherty, announced today the following regarding insured mortgages which will take effect on July 9, 2012:

  • Refinances will be limited to 80% of home value from 85%
  • Maximum amortization will be lowered to 25 years from 30 years
  • GDS limited to 39% (currently no GDS requirement for 680+ credit scores) and TDS to 44%
  • Mortgages over $1 million will no longer be insured

Here is how these changes will impact the following groups:

First Time Buyers

  • They will be squeezed out of the market if they don't have the 20% downpayment.  Qualifying at 25 years, especially in Toronto, is difficult due to home prices in the city (condo fees are taken into account when qualifying for a mortgage as well)
  • More potential first time home buyers will turn into longer term tenants which is good news for real estate investors
  • Parents, get ready to co-sign for your children if they want to buy their first home

Real Estate Investors

  • Since more first time buyers will have to wait for their first home, the tenant pool will increase.  This is good news since more demand results in higher rental income
  • Qualifying for additional investment properties should not change since government requires minimum 20% downpayment. This is pending conventional mortgage amortization is not lowered to 25 years.  Please note there are lenders offering 35 year amortization for investment properties.

 Homeowners

  • If one has 20% equity or more in their home, 30 & 35 year amortized mortgages are available for now.  The changes are not impacting this group, but we will have to wait and see if lenders will reduce mortgage amortization to 25 years

This announcement came out of nowhere and it surprised many.  If this announcement is intended to cool off investors buying condos in downtown Toronto, I'm not sure it will achieve that since the changes are targeted towards insured mortgages only.  Furthermore, this change gives the Bank of Canada room to hold its benchmark rate steady for a longer period of time due to a slowing global economy.  I believe since the Bank of Canada's hands were tied, Minister of Finance came in to help control the high household debt level.

There will be more clarifications coming out in the next few days from the lenders which I will elaborate on. To discuss how these changes will impact your mortgage financing, please contact me.

Bad News If You Are A Real Estate Investor Or Self Employed

OSFI, Office of the Superintendent of Financial Institutions, which regulates the banking system in Canada is proposing to limit the home equity lines of credit (HELOCs) to 65% of home value from the current 80%.  This is a significant change for the following reasons:

  • Real estate investors access their home equity to finance investment properties (downpayment for buying an investment property, renovating an investment property until the property is refinanced and emergency funds if required)
  • Self employed Canadians access their home equity to fund business capital requirements, cash flow requirements, as well as safety net if urgent matters arise

Canadians have taken on significant amounts of debt over the last few years (debt to income ratio is at all time highs around 1.5:1 ratio), however the mortgage delinquency rate in Canada is less than 1%.  The new HELOC change will have a significant impact not only on self employed Canadians and real estate investors but also other Canadians who use their HELOCs to invest into the stock market to create a tax deductible loan and be tax efficient.

In my opinion, OSFI is overreacting by reducing HELOCs to 65%.  75% of home values would be a reasonable change. Afterall, Canada is known for moderate changes.  Time will tell if this move is a good one for the economy and protects the housing market from a real estate bubble.

To discuss how these changes will impact your mortgage financing needs and options to address your capital requirements, please contact me.

 

Is It Time To For 10 Year Mortgages?

As a mortgage professional who enjoys numerical analyses and economic discussions, I have had numerous conversations with financial planners, colleagues and clients of mine regarding the direction of interest rates in the future. What's happening in Europe? What if Greece pulls out of the Euro zone? Impact of US dollar on Canadian dollar? Inflation? Mr. Carney and Mr. Flaherty warnings regarding increased household debt?

The above video captures the compelling argument that now more then ever is a golden opportunity to lock into a 10 year fixed mortgage.

I really hope that as many people as possible see this post. I think there is a small window of opportunity since rates may rise at anytime.  Please share this post via social media. Afterall knowledge is power and making decisions based on data is powerful.

Please feel free to contact me to discuss your questions or comments regarding the 10 year mortgage.

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Variable Mortgages Are Not Portable!

Variable mortgages up to late summer of 2011 were very attractive due to the large discount off prime at that time (prime less 0.75%).  Many homeowners and real estate investors took advantage of getting a variable mortgage on their home or real estate investment properties.  The mortgage product is portable and assumable which means the homeowner or real estate investor can port (transfer) the mortgage to a new home as long they qualify and it's done within a certain period of time between selling one property and buying another (typically 90 to 120 days). As for being assumable, the mortgage can be taken over by the buyer should they qualify. There is a catch however when porting a variable mortgage.  Unless the exact mortgage amount is transferred over to the new property, lenders will reset the rate to whatever the market rate is at that time.  Here is an example, let's say the borrower got a variable mortgage at prime-0.75% and the balance at the time of moving is $250,000. They are buying a home which will require the mortgage amount to increase to $300,000.  The borrower can consider 2 options:

  • Port the mortgage of $250,000 and obtain a line of credit for the difference, in this case $50,000 in order to maintain the prime-0.75% on the variable mortgage
  • Obtain a new $300,000 variable mortgage at today's rates (prime-0.1% to prime+0.1%) with the same lender without incurring a penalty

In the above case, it's clear that keeping the mortgage at prime-0.75% is a wise option.  It's important to understand the fine print of the mortgage and and discuss the available options with your mortgage professional.

As for the blog post title, yes variable mortgages are portable, but with a catch!

To discuss your personal mortgage financing situation, please contact me.

How To Get Your Renovations On Budget And On Time

Recently I completed a renovation job of a duplex investment property in the upper beach area.  Yes, I was on time and on budget! I have been approached by a few people who wanted to know how did I get a 3 month, $100k renovation job right on budget and on time.  The answer is simple: plan, communicate and trust. Plan As a retired Engineer who spent 10 years as a project manager, I gained valuable skills in managing projects. Initially, when I viewed the property of interest, I brought in my contractor to show him the scope of work I intended to do and my vision for the property once completed.  We sat down and created a timeline with contingency factored in over the 3 month period.  Based on the timeline and required manpower, he was able to complete his quotation.  During the renovation period, I had weekly reviews with my contractor to see where we were per the timeline and if there were any issues that we didn't plan for. An important factor I was always 2-3 weeks ahead in having materials ready to avoid a situation where work would stop since they didn't have tiles or vanities or kitchen....

Communicate I stopped by the property 3-4 times a week in the first month, 2-3 times in the second month and 1-2 time in the last month to communicate with the contractor and subcontractors (HVAC, electrician, plumber...). I also clearly stated to the team what I wanted and how I wanted certain things to save them the time/money of redoing the work.

Trust You might be wondering what does trust have to do with renovations.  In my opinion, it's very important since I trusted my contractors' skills to do an excellent job and I trusted the professionals that were referred to me.  By trusting the contractor and subcontractors, I gave them the space and confidence to do the job without micromanaging and being overbearing.  Imagine you being at work and your boss pops in every half an hour to see what you are doing. I'm sure it would drive you crazy! I choose to treat my team the way I like to be treated.

We did have problems and challenges, we dealt with them and got the job done on time and on budget.

I hope you find this blog post helpful and if you ever need to connect with my trusted team (contractor, electrician, realtor....) or to discuss financing your home/investment property renovations, please contact me.

Do US Elections Impact Canadian Mortgage Rates?

Over the last month or so, I have heard some mortgage brokers promoting the 4 year fixed rates to their clients since it coincides with the US presidential cycle based on the argument that in US election years, mortgage rates remain low for the incumbent President to be re-elected.  As a mortgage broker who is driven by data and facts, I had to do some research to justify these statements. Before we dive into data, let's understand what drives mortgage rates:

  • Fixed rates are driven by the bond market which moves up and down based on economic news. Good news drive the bond yields higher, therefore increasing rates and vice versa; bad economic news drive the bond yields lower therefore reducing fixed mortgage rates.
  • Variable mortgages are driven by prime rate which is set by the Bank of Canada (independent of government) and the discounts on prime are driven by liquidity and credit risk factors. In good times, variable mortgages were at prime-0.8%, during the financial meltdown of late 2008, variable mortgages were at prime+1%
Based on the above 2 points I don't see how US elections can drive the bond market or influence the decisions of the Bank of Canada.  The only connecting factor is the Bank of Canada benchmark rate has to remain relatively close to the US Federal Reserve benchmark rate.  If Canada's benchmark rate was much higher, the Canadian dollar would rise in value negatively affecting exports and would dampen the economy.

Let's look at the numbers.  Over the last 25 years, fixed rates on US re-election years: 2012, 2004, 1996 and 1988 the fixed rates based on the chart do not show a dip in these specific years.  The data shows that interest rates have been decreasing over the last 25 years.
Finally, when someone makes a statement, always ask for data to back up their claim. It's easy to make generic statements.
To discuss your mortgage situation and to make decisions based on data and facts, please contact me.

 

 

 

 

 

 

 

 

 

Getting A Mortgage Is Like Day Trading!

Have you recently shopped for a mortgage? Were you trying to choose the lowest available rate? Many Canadians shop based on "lowest rate" and I don't blame them.  When was the last time a homeowner sat down with a mortgage broker or banker to discuss a strategy for their mortgage?  I'm sure you will understand where I'm going with this, let's say you have $50,000 to invest:

  • How would you go about choosing a financial planner?
  • Would you choose a financial planner based on the stock/mutual fund price on that day?
  • How will you choose which financial planner gets to manage your investments if all them have the same stock/mutual fund price?

I believe the majority of people choose their financial planner based on their belief the planner can deliver the proposed strategy that will achieve their long term goals.

Now let's go back to mortgages, let's say you receive 3 different rate quotes which are exactly the same, how will you choose who will get the privilege of managing your debt?  If you have an asset manager shouldn't you have a debt manager?

I believe that a mortgage professional is ought to provide more than filling out applications and quoting rates.  They should provide a well executed strategy to achieve your desired mortgage freedom, a mortgage product that fits your changing lifestyle and a mortgage term based on current and projected economic conditions.

A stock is chosen by a day trader by timing the market whereas a mortgage is a vehicle to achieve your financial freedom.

To discuss your personal mortgage financing needs, please contact me.

How To Get A Mortgage If You Are Self Employed

Starting a business is rewarding and challenging.  Entrepreneurs put their heart and soul into growing the business and wear multiple hats in running their operations.  Understanding the impact of being self employed on getting a mortgage is not a top priority for entrepreneurs.  There are options that exist for self employed borrowers but not as many options as someone who is full time salaried employee. There are 3 factors in determining which mortgage option suits the business for self borrower:

  1. Length of time being self employed: Being self employed for more than 2 years provides more mortgage options.
  2. Amount of downpayment available for mortgage financing: Increased equity into the property reduces lenders' risk and provides security since the borrower has sweat equity invested into the property.  There are mortgage products with as little as 10% downpayment for buying a home & 85% for refinancing.
  3. Credit score: Having a 680 credit score or higher with excellent credit track record is beneficial
There are different mortgage options for the self employed borrower whether they have a smaller downpayment or their credit score is not the greatest or having been self employed for a shorter period of time.  A mortgage broker who has expertise in arranging mortgages for the self employed would provide mortgage options and explain the pros and cons of each alternative.
To discuss your personal mortgage situation, please contact me.

Risks Of 5 Year Fixed Mortgages

Have rates ever been this low? With historic lows for the 5 year and 10 year terms, it is very enticing to take advantage of today's low interest environment.  The question is whether one should go for 5 or 10 year. Before I answer the question, consider the following:

  • US Federal Reserve stated its benchmark rate will remain at or near zero till the end of 2014
  • Canadian household debts is at an all time high and will continue to increase since Bank of Canada has to remain close enough to the US Federal Reserve benchmark rate, otherwise the Canadian dollar will skyrocket negatively affecting exports in a sluggish global economy
  • Governments around the world have been "stimulating", printing, money since late 2008 to get the global economies growing again which has lead to high government debts and deficits. Basically, governments are carrying the load until the private sector feels it is their time to start spending again.
  • The European zone is in crisis and it is taking on huge amounts of debt by bailing out countries

These factors will eventually lead to inflation, but when will it happen? in 2015? 2016? 2020? No one really knows, but it will happen.  In my opinion, the longer the rates remain superficially low, the more aggressive the increases will be to control inflation.

Homeowners who are taking on or renewing their mortgages in 2012 will renew in 2017 (if they take a 5yr term).  Based on the fact the US Federal Reserve will keep its rate at or near zero and the Bank of Canada will stay relatively close till end of 2014, it is likely aggressive rate increases will commence in 2015 to control inflation and slow down Canadian household debt.

Today's 10 year fixed mortgage term is at an all time low and provides a good protection from economic and rate shocks.  Consider this: would you take a 5 year fixed at 3.99% in 2017? What's the risk of a 10 year term one might ask?  The mortgage is portable and assumable and the day after the 5 year anniversary, the penalty is based on 3 month interest NOT interest rate differential. I believe it is a great time to consider a long term safe mortgage strategy. To run your personal mortgage analysis comparing 5 year term versus 10 year term, please contact me.