The larger the downpayment, the lower the mortgage rate should be. The more capital the applicant has into a property, the less risk there is to the lender, right? Wrong! Why less downpayment gets you a lower mortgage rate!
I know, this is against what I stand for: achieving mortgage freedom and building long term wealth, but let me explain why 30 year amortization mortgages are good. The exception is for home buyers putting less than 20% downpayment, the maximum allowed amortization is 25 years per government requirements.
Why 30 Year Amortization Mortgages?
Lately, I have been coming across clients where certain events have dictated changes in their housing situation:
- A couple where one spouse has gone back to school to upgrade their skills. The are down to one income for a few years. Having 30 year amortization mortgage instead of 25 year amortization mortgage makes a difference in their cash flow requirements.
- A first time home buyer who wants to move up the home ownership ladder by renting their existing home instead of selling. Having a 30 year amortization mortgage would improve the cash flow on the income property (current home) which helps in qualifying for the next home.
- A couple where one spouse has lost their job and have young children. This is another case of a 30 year amortization mortgage would make a big difference for cash flow purposes.
- A homeowner who bought a home with 25 year amortization mortgage is looking to move prior to mortgage maturity. To save client penalty money, my recommendation was to port mortgage and increase mortgage amount. However since original mortgage is amortized over 25 years, they qualify for a lower amount than they desire.
- Real estate investors who got financing through institutions that required investment properties to be amortized over 25 years are having issues acquiring further properties since 25 year amortization mortgages result in lower net cash flow.
With today's low interest rates, porting a mortgage and doing and increase & blend will be more popular in the future. It doesn't make sense to break a mortgage at 2.99% in 3 years from now. Having a 30 year amortization mortgage provides the qualification flexibility for future moves.
I have arranged mortgages for clients who wanted to amortize their mortgage over 10 years. So how can a 30 year mortgage be paid off in less than 10 years? Mortgages, typically, come with 20% pre-payment privileges. If the homeowners utilize this privilege they can be mortgage free in less than 5 years by applying the 20% pre-payment privilege every year. Here is an example:
Mortgage Amount: $400,000 Mortgage Interest Rate: 2.99% Annual Pre-Payment: $100,000 Mortgage paid off in 4 years
I realize the above example is extreme, where very few homeowners can pre-pay $100,000 annually of after tax dollars. This example illustrates homeowners shouldn't focus on shorter amortization mortgages since the pre-payment feature is a more powerful tool.
Oh and you can still get a 35 year amortization mortgage in Canada today!
In today's do it yourself world from DIY renovations, DIY buying & selling homes, DIY investing, DIY looking for the lowest mortgage rate....is this the end of mortgage brokers?
Recently there have been a few articles in the media regarding mortgage brokers and banks:
- Money Sense: The Future of Independent Mortgage Brokers
- Mortgage Broker News: Client Uses Twitter to Challenge TD Bank
- Globe & Mail: Your Bank Mortgage: Is It Fair Or Does It Suit Your Needs?
As a mortgage broker, believe it or not, I am arguing for the need of a mortgage professional arranging the financing for a homeowner for the following reasons:
A mortgage professional provides different mortgage products and options to suite homeowners' needs. Here are 3 examples:
1. Young Family
A couple are expecting children and their income will be reduced to one income, cash flow is important for them in the near future. Hence, a mortgage product with 35 year amortization would be beneficial with generous pre-payment and increased payment options to help them catch up once they go back to two incomes.
2. First Time Home Buyer & Real Estate Investor
First time home buyers buying with 5% downpayment but have the intention of renting their existing home in 4-5 years time frame once they move up the homeownership ladder. A good option to consider is a 10 year fixed mortgage to set the cost of borrowing and eliminate the need for the first time home buyers to requalify their first home as a rental property in 5 years time frame at higher interest rates which would restrict their ability to qualify for their next home.
3. Business Owner
Self employed who wants to access their home equity as they pay down the mortgage without the hassle of qualifying. An option to consider is a re-advanceable mortgage where as the mortgage principal is paid down, the secured line of credit increases by the paid principal amount providing additional secured equity if needed by the homeowner
Clearly, one size does not fit all. 5 year mortgage term is the most recommended product, I wonder why?
Mortgage Terms & Fine Print
This is very important since I believe the majority of homeowners sign without really knowing what they are signing for. Per the article mentioned above (Client uses Twitter to Challenge TD Bank), it is probable the client didn't know what the mortgage restrictions (penalties) were. Either he didn't ask or the mortgage professional did not explain the details. Many homeowners focus on lowest rate (What's Your Lowest Rate?) without considering the mortgage product fine print which could cost them thousands of dollars on the back end. This is a result of confusing lowest rate as saving money.
When choosing a financial planner or advisor, one wouldn't choose based on the price of mutual fund or stock on that specific day, they would choose based on the plan they provide and one's belief in the planner's ability to execute the plan. As for mortgages, a homeowner gets a quote, signs the paperwork and doesn't hear till mortgage renewal time or they might they get an offer for a credit card, mutual fund or chequing account in the mail. Why would a homeowner choose their asset advisor any different from their debt advisor? What separates the true mortgage professional from the "application filler and rate quoter" is providing a sound strategy to help the homeowner achieve their financial goals. One wouldn't give a financial planner $50,000 and talk them after 5 years, so why would one borrow hundreds of thousands of dollars and not expect a proactive approach?
Professional Mortgage Brokers
I hope I have laid out the case why mortgage brokers are needed. A word of caution: there are good and bad mortgage brokers. To find a mortgage professional ask lots of questions of the mortgage broker or banker regarding the mortgage options, terms, fine print and strategy. To get a copy of the 4 questions one should ask when shopping around for a mortgage, go to: Shopping Around Questions
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
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.
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
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:
How do you determine how much you can afford? I will provide you with insight on how banks and lenders determine affordability. There are 2 important ratios to consider:
- Gross Debt Service (GDS)
- Total Debt Service (TDS)
GDS = (Mortgage principal + mortgage interest + 50% of condo fees (if applicable) + property tax + heat )/Gross income
TDS = (GDS + other debts such as car payment, lines of credit, credit cards and investment loans) / Gross income
Expenses such daycare, home insurance, cable, internet and cell phone are not included in the above ratios. The GDS/TDS ratios vary from one lender to another due to their internal underwriting guidelines. Furthermore, the ratios are more stringent for borrowers with less than 680 credit score. Generally speaking, a GDS/TDS ratio of 32/40 would increase the likelihood of getting a mortgage approved. For borrowers with a credit score of 680 credit score or higher, the TDS requirement can go up to 44.
In summary, lenders have various levels of credit risk and they look at unsecured debt (credit cards & unsecured lines of credit) differently. Another point to take away is strong credit score applicants have a better opportunity of getting approved for a larger mortgage amount.
It is best to consult with a mortgage professional prior to starting the home buying process to ensure one is qualified. To determine your affordability and financial goals, please click contact me.
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.
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:
- Length of time being self employed: Being self employed for more than 2 years provides more mortgage options.
- 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.
- Credit score: Having a 680 credit score or higher with excellent credit track record is beneficial
As mortgage lending rules have become more strict and real estate prices have appreciated over the last few years, it's becoming more challenging for some first time home buyers to qualify for a mortgage without a co-signer.
I was approached by a first time home buyer who was interested in buying her first home, a condo in downtown Toronto, and she needed her mother to co-apply in order to qualify for the mortgage. As a first time home buyer in Ontario, she would qualify for up to $2,000 land transfer tax rebate and up to $3,725 from the City of Toronto depending on her purchase price. Since her mother, who is a homeowner, is on title, the first time home buyer would have lost 50% of the rebates (since she's 50% owner in the property).
In order to save the buyer a few thousand dollars, with the lender's approval, the buyer was registered with 99% interest in the property and her mother with 1% interest. This setup allowed the first time home buyer to maximize the land transfer rebates available from the Province of Ontario and the City of Toronto.
It's important to work with a professional who is experienced and understands how to reduce their clients homeownership costs.
To discuss your personal mortgage needs, please contact me.
Keep in mind the next time you are looking for a home or an investment property in a city, to take a look at job creation activities such as companies relocating or expanding, infrastructure investment or a city that is diversified in multiple industies. Afterall, having all the city's eggs in one basket is risky!
To discuss your personal mortgage needs, please contact me.
Toronto and GTA's real estate values have increased significantly over the last 10 years. The prices continue to increase as the global economy struggles to emerge out of the slowdown since late 2008. There are 2 factors that can negatively affect the housing market in Toronto, GTA as well as Canada: Interest rate and/or unemployment spike.
For the last 3 years, Canadian homeownerns and real estate investors have enjoyed historically low interest rates which have resulted in record sales and prices. Interest rates have remained low to stimulate consumer spending and promote GDP growth. As Canadians reach record debt levels (approximately $1.50 of debt to $1 earned), Canadians are running out of steam for further debt accumulation. Many Canadians have fixed mortgages in the 3.3%-3.8% and variable mortgages at the prime minus level.
In order to save the global economy from a depression, governments around the world took on aggressive stimulus (printing money) since late 2008 which will result in high inflation sometime in the future. As inflation becomes the primary objective of governments, interest rates will have to rise to control and moderate inflation. Canada is already experiencing high inflation numbers, however the Bank of Canada is choosing to keep its benchmark rate low due to the uncertainty originating out of Europe.
A spike in interest rates would effect Canadians since mortgages will renew at higher interest rates and unsecured loans would cost more. Based on August 2011 data, the affordability index in Toronto for 2 storey homes and bungalows is at 61.4% and 51.9% respectively (http://goo.gl/8rK5B). If one assumes that an income earner is taxed at 40%, it means that in order to buy a 2 storey or bungalow in Toronto, 2 incomes are required. Condos are a more affordable option in Toronto at 34.2%.
A spike in interest rates which diminish the ability of many to qualify for a mortgage especially insured since qualification is based on posted rates. Demand would therefore be reduced since less buyers can qualify for a mortgage.
The main point to take away from this post is to have a plan regarding mortgage/debt paydown and plan to renew ones mortgage at a 6% level. For more information, click here.
My next post will discuss unemployment spike.
Mortgage brokers promote dealing with 20 or more lenders. However, many homeowners only recognize the big 6 banks they have seen on street corners. So who are these other lenders that brokers promote? In Canada, approximately 25% of homeowners use the services of a mortgage broker. These lenders are Canadian owned and operated, but choose to fund their mortgages through the broker channel to cut overhead costs on "brick and mortar". Afterall, having full-time salaried employees with benefits cost money, not to mention the costs of operating a bank branch. Due to the reduction of expenses for the "non-bank" lenders, they tend to pass on the savings to borrowers through lower rates.
What are The Risks of Dealing With Non-Bank Lenders?
There is a mis-conception, especially after the financial credit crunch in late 2008, that borrowers will lose their homes if the mortgage is funded by a non-bank lender. This is absolutely not true. The risk is assumed by the lender since they are the ones giving out their money with the understanding the borrower will repay the mortgage on time. Also, keep in mind these lenders function under the Canadian Government rules and laws.
Why Should I Choose a Non-Bank Lender Over A Bank?
You don't have to. A non-bank lender is an option that is presented by your mortgage professional to consider. Other important factors to consider when choosing a lender are:
- How is the mortgage penalty calculated?
- If I decide to lock in, do I get the posted or discounted rate (typically 1.5% difference)?
- What features are built into the mortgage (pre-payment, increased payment, portable, assumable...)?
- What are the fine print terms that I should be aware of?
- Who & how will my mortgage be managed? Afterall, getting a mortgage is one thing but working with someone who will oversee the mortgage and optimize it to reduce overall interest is another skill (click here for inflation hedge mortgage strategy)
Bottom line, if you pay your mortgage on time no on will take your home away! This is Canada afterall.
To discuss your personal mortgage financing situation, please contact me.
A client approached me a few weeks back with interest of getting pre-qualified for a mortgage to buy their first home. During our initial meeting, we discussed their goals, where they see themselves in 5 years and cash flow projections based on mortgage interest rates over the next 5 years. One of the questions I ask, is how the person's credit score is. The client stated they had no outstanding debt with very little credit card balance that is paid off every month. Once all the necessary information was gathered, a credit check was completed and I was shocked to what I saw in their report. There was an outstanding student loan which showed delinquency for over 21 months which literally had destroyed the client's credit score and history. I contacted the client to notify them of the issue and they were surprised to hear there was a balance since they stopped receiving a bill after they moved to their new address. They had thought the loan was paid off. Unfortunately, the outstanding balance was minimal but had accumulated lots of interest over the 21 months.
In this case, the client will have to re-establish their credit and show 2 years of good credit history to qualify for a mortgage at a decent mortgage interest rate. There are other alternatives, but are more costly.
By checking your own credit score annually from Equifax (http://goo.gl/5xqCP) these type of issues would be resolved. Similar to a medical annual check up, an annual credit check is important to verify there aren't any errors or items that need to be addressed immediately. The cost of checking your credit score is $24.95.
To discuss your personal mortgage financing needs, please contact me.