Toronto Mortgages

Oil Prices and The Battle of Fixed vs Variable Mortgage

Your mortgage is up for renewal or you just bought a home and it is time to decide: fixed mortgage or variable mortgage.  Both options are at historic lows, which sounds like a broken record since the economic collapse of 2008. With 5 year fixed rates hovering around 2.89% and variable mortgages at prime less 0.6%, either option is attractive.  But how do you choose? The answer is in oil prices.

With oil prices collapsing from $140 per barrel to $45-$50 range in the last 6 months, Canada's GDP growth will slow down and there are talks of Alberta going into recession, yes the "R" word. Over the last 4 years, Alberta has been carrying the country with its economic growth. As Alberta slows down, inflation will be lower, unemployment will be higher (in Alberta, NewFoundLand and Saskatchewan).

Slower economic growth (GDP and employment) will lead to lower inflation, below 2-3% target range for the Bank of Canada which would keep prime rate at current levels.  If the economy shrinks, the Bank of Canada will cut prime rate to stimulate economic growth (as I write this post, the Bank of Canada has surprised the market by cutting the benchmark rate by 0.25%. Effective tomorrow, prime rate is 2.75%!)

Until the economy returns to "its full capacity" which the Bank of Canada is predicting to be late 2016, or later in my opinion, the benchmark rate which drives prime rate will probably not increase till then.

So, as oil prices go, so does the Canadian economy.

What Is Mortgage Increase And Blend?

Homeowners are taking advantage of historic low interest rates whether they are fixed, around 3%, or deeply discounted variables around prime less 0.5%.  Majority of homeowners and real estate investors choose a 5 year term, but what happens in the future if it is required to increase the mortgage amount for the purpose of debt consolidation, equity take out for investment purposes, or moving to a new home?

Home Equity Take Out Options

Example: Property value $480,000. Current mortgage balance is $250,000 at 3.09% with 3 years remaining till maturity and the homeowner wants to borrow $150,000 to buy an investment property.  There are 3 options for the homeowner to entertain:

  1. Break the mortgage and restructure up to 80% based on current market value. Con: paying a penalty and refinancing at a higher interest rate (assuming interest rates will not be at 2.99% in 3 years time)
  2. Add a HELOC up to 80% of current market value: HELOCs are offered at prime+0.5%. Good option since it is setup separately and interest costs can be easily tracked for income tax deductions
  3. Increase & blend: Leaving the current mortgage at 3.09% unchanged, the homeowner can add another $150,000 to the mortgage based on current mortgage interest rates with the new mortgage maturing at the original date. In this case, a 3 year fixed term would the product choice.

The above illustrates the options for a fixed mortgage holder. The options are different for variable mortgage holders:

  1. Refinancing the mortgage with the penalty being 3 month interest
  2. Adding a HELOC up to 80% of current home value
  3. Increase and blend is not an option lenders offer. To my knowledge only one lender allows increase and blend for variables. ING Direct used to allow it, however that might have changed after the acquisition by Scotiabank and renaming to Tangerine

One thing to look out for is the fine print detail for no frills mortgages (ultra low rates) as some might restrict the homeowners ability. For example, BMO's 2.99% offer allowed the homeowner to refinance only with BMO and did not allow adding a HELOC. Since the homeowner has no negotiating power they are at the mercy of the bank when it comes to interest rates.

There is more to mortgages than interest rates. Rates are the cost of getting into the mortgage, however the fine print can cost thousands more.

To navigate through the mortgage minefields and for a hassle free transparent experience please contact Nawar.

The Fine Print Of 2.99% Mortgage Rate

It is that time of year again....spring market. This is when the majority of real estate transactions occur and hence when the banks tend to get aggressive on mortgage pricing to gain market share. Another 2.99% offer was made by BMO which was in the headlines across various media outlets.  My objective in writing this article is to explain the fine print of BMO's mortgage. In 2014 homeowners ought to expect more transparency and explanation from their mortgage professional or bank employee.

Here are the fine print details of the 2.99% offer:

  • 25 Years Maximum Amortization: It is advantageous to payoff your home early, however one size does not fit all.  If the homeowner, intends to buy an investment property, cottage or a second home in the future, the higher mortgage payment due to the lower amortization would restrict mortgage qualification. Other cases where 25 year amortization is disadvantageous are: self employed homeowner, family that's expecting a child and income will drop due to maternity leave, family that has to support a child through university, single parent,  homeowner who is looking to leave their job and start a business......
  • Pre-Payment Privileges: 10%. Although the majority of lenders offer 15%-20% pre-payment privileges, I believe 10% is decent since majority of homeowners do not max out that privilege
  • Increase Payment Privilege: 10%. Decent but again, not the best in the industry (15%-20%).
  • Fully Closed Term: This is where BMO has their clients locked up. The homeowner can get out of the mortgage if they sell the home via bona fide sale (arms length sale) or refinances with BMO. In negotiations, if one has only option or entity to negotiate with they would not be in position to get a good deal.  The interest rate differential (IRD) for this mortgage product is punishing since it is 2% below the posted rate (4.99%) and it's equivalent to approximately 4% of the outstanding balance.

It is important for homeowners to sit with their mortgage professional and ask about the cost of getting into the mortgage (interest rate) and inquire about the costs of getting out of the mortgage (penalties, portability, restrictions).  A mortgage is one piece of the puzzle in a homeowner's financial plan and it is important to ensure the right product is chosen based on features and not just rates.

What Is The Mortgage Qualifying Rate (MQR)?

The mortgage qualifying rate is used to qualify all variable mortgages and fixed mortgages of 1-4 year term. The Bank of Canada updates the mortgage qualifying rate (MQR) every Monday at 12:01am.  5 year fixed or longer fixed terms qualify using the contract rate (the actual borrowing rate).  Here is an explanation:

Mortgage Qualifying Rate Example

Assumptions

  • Household income: $100,000
  • Assume 20% downpayment
  • Freehold home, no condo fees
  • 5 year fixed mortgage 3.19% amortized over 30 years
  • 5 year variable mortgage at prime - 0.5% amortized over 30 years
  • Mortgage qualifying rate (MQR): 4.99%

Maximum fixed mortgage: $577,000 (Purchase price: $721,250) Maximum variable mortgage: $466,000 (Purchase price: $582,500)

One way to increase the purchase power of a variable or fixed mortgage is obtain a 35 year amortized mortgage. Once the homeowner takes possession of the home, they can set the payment at the 30 year amortization level to avoid paying additional interest over the life of the mortgage.

To find out what you qualify for and a have a winning strategy for bidding wars, please contact Nawar.

HB 5 - notsurewheretostart

CMHC Insurance Premium Increase

On February 28, 2014, CMHC announced mortgage insurance premium will increase effective May 1, 2014 for homeowners, self employed and 1-4 rental properties. Here is a chart of the current and new insurance premiums for owner occupied homes

CMHC Insurance Premium

What exactly does this increase translate into dollars and cents? Here is an example based on 5% downpayment, 3.49% mortgage amortized over 25 years

CMHC Increase Premium Payment Example

As you can see the increase is moderate ($8.98 per month) and should be manageable by homebuyers. It will be interesting to see what happens in the future since CMHC stated they will review insurance premiums annually and make announcements in the first quarter moving forward.

Genworth wasted no time in announcing similar increases to their premiums effective May 1, 2014.  Canada Guaranty took a few days to mull over their decision but they will increase their insurance premiums as well.

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How To Find A Trustworthy Mortgage Broker?

Home Sweet HomeReferrals are still the primary method of getting introduced to a mortgage broker when buying a home or an investment property, however more and more Canadians are searching for mortgage brokers online.  Borrowing hundreds of thousands of dollars is a serious undertaking and requires due diligence.  Based on my years of experience here is a checklist of how to find a trustworthy mortgage broker.

Trustworthy Mortgage Broker Checklist

  1. Online Presence: Everyone, well pretty much everyone, has a website nowadays. However, are they active in publishing material relevant to the market? Are they experts in a niche market (real estate investment, self employed, first time home buyers, bad credit, private mortgages....) or are they the jack of all trades?  Going through their website you will get a good feel if they are experts in a specific field.
  2. Strategy vs No Strategy: Quoting rate requires no skills, afterall most brokers and lenders have the same rates with a possible difference of up to 0.1% ($100 for every $100,000 per year).  Unfortunately, obtaining a mortgage licence is easy; one course, a few hundred dollars and off you go!  If a broker or agent is only quoting rates without explaining the following, run away:
    • Pros and cons of each product
    • How each product helps you achieve your financial goals
    • Fine print terms (penalties, mortgage features)
    • A plan to pro-actively manage the mortgage post funding
  3. Execution: A financial planner engages their clients on an ongoing basis to adjust their portfolios as economic conditions and clients' lifestyle change, why wouldn't you expect the same from your mortgage broker? Building net worth is achieved through 2 ways: 1/ increasing assets and 2/ decreasing bad debt.  How will the mortgage broker track your mortgage and keep you informed? Why not have a debt manager on your team?
  4. Full Time vs Part Time: Since mortgage agents have a low barrier of entry, there are some out there who operate on a part time basis.  There is nothing wrong with someone building their business to transition full time into the profession, but would you trust a part time lawyer, a part time doctor, a part time real estate agent or a part time contractor?
  5. Experience: I'm into sports, so I'll use a sports analogy: great coaches used to be players in the past.  If you are looking to invest in real estate, shouldn't you engage a mortgage broker who invests in real estate, whose been through the ups and downs? If you are self employed, shouldn't you approach a full time self employed mortgage broker who personally experienced the challenges of getting mortgage financing? If you are a first time buyer, shouldn't you meet with a mortgage broker who had a terrible experience getting a mortgage for their first home?
  6. Job Interview: I view hiring a mortgage broker as applying for a job.  You probably can recall going for a job interview, where the interviewers asked lots of questions and based on your answers (and references) got a gut feel for you.  Hiring a mortgage broker is the same, use the above information to ask questions and get a good gut feel for who you should hire.  You are trusting a professional with hundreds of thousands of dollars.

If you are buying your first home, an investment property or you are self employed and looking to interview a professional mortgage broker, please contact me.

3 Tips When Renewing Your Mortgage

Mortgage QualificationI have to share this personal experience since it resembles what I deal with on a daily basis with my mortgage clients. My home and auto insurance policies have been with a company for years now until I got my renewal letter a few weeks ago. The jump in insurance premium caught my attention especially since my wife and I are responsible drivers: we have 2 young children, and our records have been impeccable; no tickets, no violations, no accidents.....Usually I get my renewal, go through it to ensure there aren't major changes, the price is reasonable based on the previous premium and then renew.

Sounds familiar? You get your mortgage renewal, too busy with kids, work and life, numbers look ok and you renew?  I wasn't happy with the increase in premium and decided to look around.

I tried a price comparison site which provided a low price but after connecting with the insurance company it turned out the information transferred to them from the rate site was inaccurate and the quoted price was invalid; it was higher.

Sounds familiar? You check out a mortgage rate site to find out the rates being quoted are for 30 day closings, have restrictive conditions, not valid for rental properties, you can't refinance the mortgage in the future.....and the list goes on.

By investing some time I saved 25% off what was offered by the existing insurance company.

3 Mortgage Renewal Tips

  1. Don't sign the renewal letter sent by your incumbent lender
  2. Rate sites provide a number but don't tell the full story
  3. Take the time to consult with a professional, it could save you thousands of dollars

In my business, new and repeat clients are provided with superior service and their business is never taken for granted.  I don't understand why some businesses take their existing clients for granted.

If your mortgage is up for renewal, you don't want to be taken for granted and looking for professional unbiased advice, please contact me.

I Dislike Mortgage Pre-Approvals And You Should Too

Toronto's real estate spring market is about to get started or some might argue it has already begun with a semi-detached in The Junction selling for $210,000 over asking with 32 offers, yes 32 offers!  The spring real estate market is the hot season where most transactions are made since many buy in the spring with closings in the summer before schools start in September.  One thing you will hear many times from real estate agents, mortgage brokers and bankers is "Get Pre-Approved".  I dislike mortgage pre-approvals for the following reasons:

1. Pre-Approvals Underwriting

Pre-approvals are underwritten conservatively relative to an actual deal.  The Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS) requirement for pre-approvals is 32/40, however real deals can go up to 39/44.  This means a pre-approval purchase value will be lower than what a buyer can qualify for.

2. Interest Rate Variations

This is where things get really tricky.  Some lenders add a premium (safety buffer) to pre-approvals, typically 0.1%, since they do not know the exact cost of funding off the bond market until there is a deal with a closing date.  Furthermore, lenders have different rates based on:

  1. Closings within 30 days, 45 days or 120 days
  2. Deals that are insured (less than 20% downpayment)
  3. Features built into the mortgage (fully loaded vs no frills mortgage)
  4. Occupancy of property: owner occupied or rental
  5. Some lenders won't do pre-approvals

Get Pre-Qualified

What I do with all my buyer clients is get them pre-qualified per the following steps:

  1. Complete financial analysis and mortgage application
  2. Establish a monthly cash flow budget
  3. Get a rate hold in a rising interest rate environment
  4. When they see a property they want to put an offer on, I complete the mortgage qualification analysis based on the property details to establish a maximum price for a bidding war scenario

The fourth step is critical since my clients are emotionally ready to walk away from a property after they have established the maximum price they are willing to pay. So far, they have been quite successful.

In conclusion, pre-approvals are nothing more than a rate hold which is a good thing to obtain in a rising interest rate environment which doesn't look like is happening anytime soon.

If you are looking to dive into Toronto's hot real estate market and win a bidding war, please contact Nawar.

Home under magnifying glass

Is Toronto's Real Estate Affordable?

home imageSold over asking, bidding war, multiple offers, over asking....These expressions are synonymous with Toronto's real estate.  The latest RBC affordability index report came out in November 2013 which shows eroding affordability in the city:

  • Bungalows: 55.6%
  • 2 Storey: 63.7%
  • Condos: 33.8%

What do these numbers mean?  The affordability index is based on 25% downpayment at 5 year fixed mortgage rate amortized over 25 years.  The percentages mean the following: To buy a bungalow, 55.6% of one's pre-tax income is required to cover the mortgage, property tax and utility costs.  Assuming homeowner's tax bracket is 40%, this leaves 4.6% (100%-55.6%-40%) to cover the costs of food, transportation, entertainment, emergency and any child care costs.  Clearly in Toronto, 2 incomes are required to afford detached and bungalow homes.  On the other hand, condos continue to be affordable.  Single income homeowner (100%-33.8%-40%) would have 26.2% of their income to cover living costs.  This is one reason why the condo market continues to be stable in Toronto.

How To Get Into Toronto's Hot Real Estate Market

Yes, there is hope and options to get into the market.  Here are some to consider:

30 & 35 Year Amortization Mortgages

For conventional mortgages (20% or more downpayment), 30 & 35 year amortization mortgages are available.  Lower monthly payments would make the home more affordable, however planning for renewing into a higher interest rate environment is important.  An extended amortization mortgage backed by the inflation hedge mortgage strategy is a sound financial approach.

Basement Rental Suite

Renting the basement has its pros and cons. Offsetting homeownership costs is a benefit and makes the home more affordable, however some aren't comfortable with someone living in the same house due to noise concerns and/or loss of space. Basement rental income can range from $750-$1400 depending on location and condition.

Legalizing Basement Rental Apartments

Buying A Home? Buy A Duplex

Combining both options is a possibility for frustrated homebuyers who are tired of losing bidding wars.  To discuss your mortgage options and strategies, please contact Nawar.

Home Buyers Videos Guide - Nawar Naji Toronto Mortgage Broker

US Government Shutdown & Variable Mortgages

Interest RateAnother self inflicted US crisis is underway; the US Government has shutdown as of October 1, 2013 and overnight 800,000 Americans have lost their jobs.  To put this in perspective, imagine the whole population of Mississauga and Oakville being unemployed overnight!

Canada's Prime Rate Impact

How does this chaos affect Canada's mortgage rates?

  • US Federal Reserve is committed to its bond buying stimulus program till unemployment is at 6.5%.  Currently, unemployment in the US is at 7.3% and with 800,000 Americans losing their jobs and the ripple effect of small businesses that do business with the US Government, the unemployment rate will increase if the shutdown is prolonged hence would force the US Federal Reserve to maintain its stimulus program and ultra low benchmark rate (prime rate)
  • Bank of Canada's second in command, Tiff Macklem, said this week the Bank of Canada is lowering its outlook for Canadian GDP for this year and 2014
  • August's core inflation was at 1.3%, well below Bank of Canada's target of 2%
  • Bank of Canada's benchmark rate cannot deviate far off US Federal Reserve benchmark rate since it would result in a higher Canadian dollar which negatively affects exports, i.e, bad for the economy

With the prospect of the benchmark rate (prime rate) holding steady for one to two years, the case for variable mortgages is stronger today.  There are two catches however:

  1. Applicant has to qualify based on the posted 5 year rate, which is at 5.34% today.
  2. If US Government defaults mid October, we all remember what happened in 2008 when the financial market seized and costs of borrowing spiked since no one was willing to lend money (supply of money disappeared overnight), cost of borrowing would increase.

If you are looking for professional mortgage advice based on facts, numbers and detailed analysis, please contact Nawar.

Buying A Home E-Book

What Are The Closing Costs in Toronto?

Buying a home is an exciting and sometimes can be a nerve racking experience whether you are a first time home buyer or have owned multiple homes in the past.  Getting excited about how to furnish the new home, fixing a few items, putting on a fresh coat of paint, addressing issues that came up in the inspection is part of the process.  There are many costs to consider during the home buying process and they do add up.

Here is a list of costs to budget for at closing above and beyond the downpayment

Toronto & Ontario Land Transfer Tax

Two land transfer taxes are paid if one is buying in Toronto (Ontario & Toronto land transfer taxes).  First time home buyers can be eligible for up to $2,000 credit from Ontario and $3,725 from the City of Toronto.

Download Closing Costs Calculator

Legal Fees, Disbursements and Title Insurance

It is prudent to budget for $1,300 for legal fees and $300 for title insurance. HST is added to the legal fees.

Property Appraisal

If the mortgage is insured (less than 20% downpayment), the appraisal is covered by insurer (CMHC, Genworth or Canada Guaranty). In cases such as private sales, regardless of the downpayment, an appraisal will always be required.  The cost of an appraisal is between $250 to $350 plus HST.

Other Costs

Once the home owner takes possession of the property, other costs to take into account are: moving costs, repairs, furnishings, utility setup and deposit fees.  The repairs cost will vary depending on the condition of the home whether it is a fixer-upper or requires minor touch ups.

Download 4 Things You Must Do Before Buying A Home E-Book

Buying A Home E-Book

Got a mortgage question? Contact Nawar

Will You Qualify For A Mortgage?

Mortgage QualificationFor the last 2 months, 5 year fixed mortgage rates have increased from 2.89% to 3.69% and 10 year fixed mortgages from 3.69% to 4.19%.  Historically, a rapid increase in this short period is not typical.  On the other hand, the prime rate which is set by Bank of Canada's benchmark rate has been steady at 3% for 3 years now.  How will these rate movements affect one's ability to qualify for a mortgage?

Fixed Mortgages

The bond market (bond yields) drive fixed mortgage rates.  With better economic news and the US Federal reserve hinting towards slowing down the bond buying program, bond yields have spiked resulting in higher fixed mortgage rates.  Here is an example to show the impact of rising rates on mortgage qualification:

  • Household Income: $100,000
  • Property Tax: $4,000
  • Mortgage Amortization: 30 years*
  • At 2.89%: maximum mortgage $539,653, purchase price $674,566
  • At 3.69%: maximum mortgage is $488,576, purchase price $610,720
  • Reduction of $63,846 in purchase price

*Assume 20% downpayment is available in order to qualify mortgage at 30 year amortization

Variable Mortgages

Although prime rate has not moved in 3 years, the Minister of Finance changed the rules to require all variable mortgages and fixed mortgages of 4 year term or less to qualify using the posted 5 year rate (which has increased to 5.34%).  As fixed mortgage rates increase, the posted 5 year fixed rate increases which makes qualifying for variable mortgages difficult.

Using the same figures as the above example, here are the qualification results:

  • Household Income: $100,000
  • Property Tax: $4,000
  • Mortgage Amortization: 30 years*
  • Variable mortgage at Prime-0.4% qualified at 5.34%: maximum mortgage $403,915, purchase price $504,894

*Assume 20% downpayment is available in order to qualify mortgage at 30 year amortization

Based on the above, one can understand why more Canadians are choosing fixed mortgages over variable mortgages. I don't see how homeowners will qualify for variable mortgages when 5 year posted rate normalizes at 6%-6.5% level.

Real Estate Sales Numbers

As the latest real estate numbers show, Toronto house prices continue to appreciate with strong sales numbers.  This is good and bad for the following reasons:

  1. Consumers feel more confident as their home prices appreciate which leads to further spending and economic stimulus
  2. As consumer spending increases, debt levels increase which is one indicator the government of Canada is focused on slowing down
  3. As home prices continue to increase, it is more difficult to afford homes in Toronto without larger downpayments and/or gifted downpayments
  4. As home prices continue to rise, the government of Canada through OSFI (banks regulator) might introduce additional mortgage rules to slow down the real estate market and consumer debt levels. I would not be surprised to see conventional mortgages maximum amortization reduced to 25 years from 30 years and possibly increasing downpayment requirements to 25% from 20% for conventional mortgages.

Overwhelmed?  Don't worry, work with a knowledgeable mortgage professional to help guide you through the various mortgage qualification land mines.  If you are looking for a trustworthy, knowledgeable and experienced mortgage professional, please contact Nawar.

Home Buyers Videos Guide - Nawar Naji Toronto Mortgage Broker

Caught In A Bidding War?

Toronto's real estate has been active for many years now with the exception of late 2008 and early 2009 when the economy contracted.  Ground level (townhome, semi-detached and detached) homes have had considerable shortage on the supply side creating bidding wars which is considered normal in Toronto.

Bidding Wars

Bidding wars are set up to maximize the selling price and benefit from potential buyers' emotions during the multiple offer process.  However, lenders require appraisals done on the property to obtain "market" value to lend on.  What if there is a discrepancy between the purchase price and appraisal value?

Example:  

Purchase price: $850,000. Appraisal value $820,000.  Mortgage amount: $656,000 (80% of $820,000) not $680,000 (80% of $850,000).  The buyers are short $24,000.

Possible Solutions:

  1. Buyers happen to have additional funds to cover the shortfall
  2. If buyers don't have $24,000, a second mortgage can be arranged for the $24,000.  Keep in mind not all lenders allow second mortgages behind their first mortgage.  Knowing which lenders do is important
  3. Gifted funds from family of $24,000
  4. Pull equity from other properties through a line of credit or refinance.  The additional debt would have to be calculated into the overall debt service ratios (GDS/TDS)

Due diligence is required especially for cases where a home was bought in a multiple offer situation and the buyers have to sell their home. What if the buyers don't get the desired selling price for their home? What if the two closing dates are far apart?  Should one buy or sell first?

http://youtu.be/71csf00xqE0

Consult a mortgage professional upfront to run through the scenarios to have contingency plans just in case. Also work with real estate agent who specializes in the local area and has the pulse of the neighbourhood's real estate market.  To discuss whether you should buy or sell first or plan buying your next home, please contact Nawar.

Home Buyers Videos Guide - Nawar Naji Toronto Mortgage Broker

What Is Happening To Mortgage Rates?

For a while, mortgage rates in Canada have been steady and below 3%.  That all changed quickly:

  • Early June, it was announced 95,000 jobs were created in the month of May in Canada

Nawar Naji Twitter June 7,2013

  • Mid June: US Federal Reserve chairman, Ben Bernanke, suggested the bond buying program would slow down towards the end of 2013 as the US economy is showing signs of recovery.

The chairman's statement set off a bond selling frenzy since mid June which resulted in sharp increases in bond yields. Remember, bond yields increase with good economic news.  As investors move their monies from very secure low risk bonds, yields increase to entice investments back into the bond market.  The higher bond yields drive fixed mortgage rates higher.

Mortgage rates have increased from 2.89% to 3.39% in a short period of time.  Timing an unpredictable market is difficult and can be risky.  Now that mortgage rates have increased and further upward pressure is expected as the US bond buying program slows down, planning for higher mortgage rates at renewal is a prudent financial approach. Are you ready for higher mortgage rates?

To find out about adjusting your mortgage for higher interest rates, absorbing payment shock at renewal and reducing effective amortization, please visit www.iMortgageToronto.ca

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