3 Tips When Renewing Your Mortgage

I 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.

Investment Property Mortgage Qualifications Don't Make Sense!

There have been many changes with respect to mortgage qualifications in Canada. Above and beyond the 4 major changes announced by the Minister of Finance over 4 years, there have been changes on the backend on how lenders qualify applicants.  The most recent one is mind boggling!

Investment Property Mortgage Qualification

For an applicant reporting a surplus on their T1 general (line 126), the surplus (line 126)  is added to their income.

Example: Applicant's income is $100,000 and line 126 is showing $5,000, total applicant's income is $105,000. If the applicant owns other investment properties, here is the part that makes no sense: The principal portion off the annual mortgage statement is deducted from applicant's income!

Example: Applicant has paid down $10,000 of mortgage principal in the previous year, total income: $100,000 plus $5,000 less $10,000 = $95,000.  This rule effectively penalizes real estate investors who build equity in their investment properties.  Last time I checked statements made by Minister of Finance, Bank of Canada, Bankers..... they all advocate paying down debt and building equity now while interest rates are low (Canadians are at record high debt to income ratio).

This rule effectively encourages not paying down mortgage principal. Had the applicant paid more interest than principal in the previous year, the mortgage principal deduction would have been less and therefore their net income higher!

If you are thinking of showing a loss on line 126, it's even worse: Income less loss on line 126 less mortgage principal.

Are you confused and frustrated with all these guidelines? Rest assured this is what I do on a daily basis and I am here to help you navigate through the mortgage qualification  land mines to build your real estate investment portfolio. It's all in the setup.....Happy Investing!

How To Mortgage 8 Investment Condos

There is no denial it is more challenging today to mortgage investment condos in Toronto.  Some of the changes over the recent years are:

• The days of 5% downpayment and 40 years amortization are long gone
• Some lenders have a minimum square footage requirement
• Some lenders require more than 20% downpayment
• Some lenders require borrower pay for insurance premium above 65% loan to value

and the list goes on.  But don't be discouraged. Here is mortgage underwriting 101 and a road map to help the investor mortgage 8 Toronto investment condos:

1. Start With The End Goal

The mortgage setup of each investment condo plays a critical role in helping or hindering the qualification of the next investment condo. Knowing what the investor's ultimate goal (8 condos or 3 condos) requires a different mortgage financing strategy. Some investors approach investment properties with "I'll buy another one" which is a problem in today's financing world. Over the years, I  have come across many situations where the mortgage was setup with a short amortization period or the wrong mortgage product which restricted qualifying for another property.

2. Focus On Cash Flow

Setting up each condo to positive cash flow helps to qualify the next investment condo.  There are 4 methods of cash flow analysis lenders would consider in mortgage qualification:

T776 Statement of Real Estate Rentals

Some lenders would use line 9946 to add to investor's income if the figure is positive.  This is where many investors go wrong. They try to show a loss which reduces taxable income however it hinders qualifying for the next investment condo since the negative figure translates into a liability on the mortgage application.  Showing a positive figure and paying some taxes is not a bad thing!

50% of Rental Income

This method is a deal killer.  For example, assuming the investment condo is rented for $1600 per month, the lender would only use $800 as revenue then deduct 50% of condo fees and mortgage payment.  Good luck getting a positive number without a large downpayment.

Rental Surplus Calculator

Lenders use the rental income generated by the condo and deduct mortgage payment, condo fees and 15% of the rental income figure.

The Wash Method

This is where the lender would look at the rental income being generated and as long as the rental income covers mortgage payment, condo fees and property taxes, the investment condo would not help or hinder in qualifying for a mortgage.

Stretching the amortization to 30 or 35 years and getting a variable mortgage would increase cash flow and help qualify the next investment condo.  In real estate it is location, location, location and in the investment property mortgage world it is cash flow, cash flow, cash flow which sometimes means a greater than 20% downpayment.

Keep in mind today's qualification guidelines could be different next month. The mortgage financing landscape changes frequently based on government requirements and lenders' risk analysis. So what works today, might not work tomorrow!

Mortgage Broker or Bank 

Most, not all, lenders have a cap of 4 investment properties per borrower. Understanding where the investor wants to be long term helps in structuring the mortgages appropriately and placing them with lenders who accept a portfolio of more than 4 investment condos. Choosing an experienced mortgage professional who knows where and how to place these mortgages can save the investor tens of thousands of dollars. No investor wants to be in a situation where they walk into the bank to finance their 5th investment condo and get "sorry, we can't help you since you are capped". Then what?

Looking to invest in Toronto condos or have an existing portfolio? Please contact Nawar to help you achieve your long term goals.

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.

Is Toronto's Real Estate Affordable?

Sold 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.

Legalizing Basement Rental Apartments

Basement rental apartments are popular in Toronto and make homes affordable for many in the city since they have the potential of generating $1000-$1500 per month in rental income. Legalizing a basement apartment requires meeting electrical, fire and building codes. It seems daunting initially but working with a knowledgeable architect can alleviate lots of headaches.  As a real estate investor, I have viewed many properties and found the most challenging part of legalizing a basement apartment to be the ceiling height requirement. There are 2 building code requirements; one for existing basement units and one for new basement units.If the basement rental apartment is existing, the code requires at least 50% of the floor area to be 6'5" high.  If the basement rental apartment is new, the code requires at least 50% of the floor area to be 6'8" high.  The majority of homes' basements built in the city of Toronto were used as utility /storage areas and not as living space.  Nowadays, basements are considered part of the living space for in-home offices, guest bedrooms, children's play area and entertainment space. Lowering the flooring to achieve legal height can be accomplished through underpinning or benching. Both methods can be costly depending on the house foundation conditions, soil conditions and existing interior walls.  In cases where the basement ceiling height is 4"-6" below the required height, there is a third more cost effective option: lowering concrete slab (see image below).

A bonus of this option is installing new PVC drains since the old ones are made out of clay and over the years have deteriorated in condition. This method requires drilling holes into the existing concrete slab to locate it relative to the wall footing.  In my experience, I had to underpin one property and managed to lower the concrete slab on another to achieve required legal basement height.  The cost of underpinning can range between $50-70,000 where as concrete slab lowering $15-20,000.

References For Adding A Secondary Unit in Toronto

• Carson Dunlop Basement Apartments Untangling the Web
• Second Suites
• Basement Accessory Apartment Specifications

If you are looking for an experienced mortgage broker to help you navigate through adding a basement rental apartment and analyze the investment property, please contact me.

**Disclaimer: The above information is for reference only and it is best to consult with a professional architect and a licensed basement lowering company as part of your due diligence**

US Government Shutdown & Variable Mortgages

Another 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.

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

Got a mortgage question? Contact Nawar

2014 Ontario Rent Increase...The Good, The Bad & The Ugly

Quietly during the dog days of summer, the Ministry of Municipal Affairs and Housing released its allowable rent increase for the period between January 1, 2014 to December 31, 2014.  The rent increase for 2014 is capped at a maximum of 0.8%, yes zero point 8 of a percentage point. Click here for the Ministry of Municipal Affairs and Housing news release.

2014 Ontario Rent Increase: The Good

There are a few exemptions to rent control if one of the following conditions is met:

1. If you are real estate investor who owns a condo that was built after June 17, 1998, then it is not subject to rent control which means the real estate investor/landlord can increase rent to an amount the market can bare without the tenant moving out.
2. If the rental unit has not been rented since July 29, 1975. A good example if one decides to convert their basement into a separate rental apartment. Again in this case, the rental unit is exempt from rent control.

2014 Ontario Rent Increase: The Bad

When was the last time property taxes, hydro rates, heating prices, water & sewers and insurance costs all went up by a total of 0.8%? It is important as a real estate investor to have utility costs (heat, hydro, water & sewers) paid for by the tenant.  Having the tenants pay for utilities puts the responsibility on the tenants' shoulders to conserve energy and pay for what they use.

Controlling rental increase at 0.8% reduces the real estate investor's cash flow as expenses rise. No business owner (real estate investor) would be happy with less cash flow from their business venture.

2014 Ontario Rent Increase: The Ugly

One phrase caught my attention in the news release: "This year’s rate will be the second lowest in history". Is this something to be proud of? I will leave that for you to decide.

Keep in mind, if your tenant moves out, you are allowed to increase the rent to what the market can bare. However, if the tenant is staying, an N1 or N2 must be provided with 90 days notice of the rental increase per the Ministry's guidelines.

If you are looking to start investing  in real estate and not sure where to start or an existing real estate investor looking to grow your positive cash flow portfolio, please contact Nawar.

Will You Qualify For A Mortgage?

For 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.

How To Qualify For Investment Property Mortgage

The mortgage lending landscape has changed considerably in the last few years and investment properties qualification is more stringent nowadays.  A few years ago, one can qualify for an investment property mortgage with less than 20% downpayment. Nowadays, 20% is the minimum downpayment not to mention the amortization has been reduced to 30 years (Note 35 years amortization is available but at a rate premium).Understanding how investment properties are qualified with various lenders can sometimes be complex, however here is an explanation to help the first time real estate investor what they are up against.  The examples below are based on the following:

• Purchase price: $625,000 (duplex)
• Mortgage: $500,000 (80% LTV)
• Monthly mortgage payment: $2,127 (based on 3.09% amortized over 30 years)
• Monthly rental income: $3800
• Monthly property tax: $275

50% Rule

This is the most penalizing rule used by lenders where it only accounts for 50% of the rental income. Based on the above numbers, the net monthly result is a shortfall of $502 (50% * $3800 - $2127 - $275 = -$502). This figure is added to the liability section of the mortgage application hence reducing applicant's qualification amount.

70% Rule

This is more favourable method, where 70% of the rental income is accounted for.  The above example would net in a surplus of $258 which is added to the applicant's income which strengths the mortgage application. At the time of writing this blog post, this method will be scrapped in a few days.

T1 General Line 126

Some lenders allow the applicant to use line 126 in the T1 general for existing investment properties when qualifying for a new property.  Typically, real estate investors maximize capital cost allowance (CCA) depreciation and expense deduction to show a loss.  This might be advantageous from a taxation perspective, however the negative figure on line 126 would be added to the liability section of the mortgage application. Having a positive line 126 figure would strengthen the application since it is added as income (Disclaimer: Please consult a professional accountant to provide tax advice as I am licensed a mortgage broker only).

Rental Surplus/Shortfall

A calculator is used with set figures for vacancy, repairs & maintenance, insurance and management. This is the most favourable method as it nets $638 monthly which is added to the applicant's income.

If a real estate investor is buying a home to for personal occupancy, the above methods are used by lenders in assessing the the applicant's qualification. Qualifying for a mortgage when one owns an investment property can be a daunting task and stressful.  It is important to work with a mortgage professional who is well versed in investment property qualification guidelines to avoid future disappointments. How would one feel if they can't buy their dream family home because they own one or two investment properties?

To avoid disappointment in buying your family home or investment property, please contact Nawar.

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.

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

• 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

Mortgage Fine Print: Collateral Mortgage

There are 2 types of mortgage registration in Canada: standard charge and collateral charge.  Homeowners usually don't inquire about the type of mortgage registration due to lack of knowledge or lack of disclosure by the lender/broker arranging the mortgage.  Mortgage registration is an important fine print detail.There are pros and cons associated with collateral mortgages:

Collateral Mortgage Pros

1. It allows the homeowner to access equity as they pay down the mortgage
2. Legal fees are not required (saving of approximately $1,000) to access further equity
3. Good product if homeowner intends to refinance/access equity prior to mortgage maturity

Collateral Mortgage Cons

1. Due to registration, homeowner will incur legal fees (approximately $1,000) to move the mortgage to another lender at renewal
2. Homeowner loses negotiation advantage if they need to access additional equity since they can't leave the current lender without paying a penalty (3 month interest or IRD) plus legal fees
3. Homeowner might not qualify with existing lender leaving no options to access needed funds
4. Some lenders register the collateral at 125% or 100% of home value, effectively blocking the total amount and restricting the homeowner from accessing equity

Collateral mortgage registration is designed to retain clients at renewal.  With slowing real estate market, less sales therefore less new mortgage originations, lenders want retain more clients.  Homeowners will be faced with a decision to renew at a less competitive rate or pay legal fees to move their mortgage to another lender at renewal.  CBC marketplace did a show on collateral mortgages where they focused on one banking institution. Be aware that other lenders employ similar strategy as well.

Understanding the costs of getting into a mortgage and out of the mortgage at renewal, is important in deciding which mortgage product makes financial sense.  There is more to mortgages than just rates.

Mortgage Pre-Approval vs Mortgage Qualification

I have had cases of angry clients expressing their frustration of being pre-approved by a bank but couldn't get a mortgage when an offer to purchase a property was accepted. Have you ever been pre-approved by a bank only to find out when you have put an offer you don't qualify for a mortgage?Before I explain the difference of mortgage pre-approval and qualification, it is good to understand how lenders determine if someone qualifies for a mortgage. There are 3 legs to the mortgage qualification stool:

1. Applicant's income
2. Applicant's credit score and history
3. Property

Depending on the type of employment (self employed, hourly, salaried, salaried with annual bonus), the underwriting guidelines vary.

Mortgage Pre-Approval

A pre-approval can be turned around in literally a few minutes.  Getting a pre-approval is as simple as telling the bank your income and pulling your credit bureau. As you can see from the above points, income and property details require further analysis to approve the applicant.

Furthermore, lenders do not issue a pre-approval for buying an investment property, recreational properties such as cottages, mixed use commercial properties (storefront with apartments on top) or multi-unit rental properties. It is important to state the purpose of the pre-approval when applying with your mortgage broker or bank.

Mortgage Qualification

Being qualified upfront requires thorough analysis of the income, credit score & history and lenders' requirements based on the type of property the applicant is considering to purchase. Here are 2 examples:

1. Buying An Investment Property

As you know by now, lenders don't issue pre-approvals for buying an investment property. In this case the applicant will undergo full analysis taking into consideration:

• Downpayment requirement for an investment property whether the funds are available or borrowed. If borrowed, the additional debt is taken into account for debt servicing calculations
• Rental income calculations: different lenders calculate rental income differently, some are more conservative than others

2. Buying A Home

Cases where the applicant's employment might be best described as one of the following:

• Started their own business within the last 2 years
• Started a new job on contract
• Have been working an hourly job for less than 2 years
• Work in the service industry where tips are not included on their T4s
• Work multiple part time jobs
• Work full time and has a part time/second job
• Business owner who pays him/herself minimal income

As you can see, not all Canadians work 9 to 5 as salaried employees. Our economy is diverse and one size does not fit all.

I hope you can understand why I ask lots of questions when I'm told "I'm pre-approved"; to ensure you qualify for a mortgage and there aren't any last minute surprises.

5 Year Versus 10 Year Fixed Mortgage

Just when I think mortgage rates won't get any lower, they drop. With real estate sales volume slowing down across Canada and lots of bad economic news globally, mortgage rates have hit an all time low for 5 year fixed and 10 year fixed mortgages.  The battle of 5 year versus 10 year fixed mortgage is back!

5 Or 10 Year Fixed Mortgage

How do you choose which product makes sense?  Per Bank of Canada, average 5 year posted rate for the last 10 years is 6%.  It wasn't too long ago, in 2007 and 2008 5 year discounted mortgages were at 5.79%-5.99%.

Let's look at data to analyze which option makes sense by calculating the break even mortgage rate:

• Mortgage balance: $350,000
• Mortgage Amortization: 25 years
• Compare 5 year fixed mortgage at 2.89% versus 10 year fixed at 3.69%

 

What the abort chart shows is if one selects a 10 year fixed mortgage, sets the payment and forgets about it for a 10 year period versus choosing 2 5 year fixed mortgage terms, the breakeven mortgage rate is 4.49%.  If one believes that mortgage rates will be higher than 4.49% in 5 years from now, the 10 year fixed mortgage option makes more sense, or if one believes that rates will be lower than 4.49% in 5 years from now, the 2 5 year fixed mortgage terms option makes more sense.

BUT, as a mortgage professional, my clients don't get away with setting the mortgage and forgetting about it. Utilizing the inflation hedge mortgage strategy, pro-actively managing the mortgage and adjusting the payments for inflation, the breakeven mortgage rate drops to 4.35%. The inflation hedge mortgage strategy protects the homeowner from payment shock when renewing at higher mortgage rates and reduces mortgage amortization by achieving mortgage freedom earlier.

Understanding historical interest rates data and the breakeven mortgage analysis, the decision of choosing 5 year fixed mortgage or 10 year fixed mortgage should be an easier one.

Disclosure

• The breakeven mortgage rate will vary depending on mortgage amount and amortization.
• Above mortgage products are fully portable, assumable and have 20% pre-payment and 20% increased payment privileges built into them.
• Above mortgage products can be ported to a new property and mortgage amount can increased which is known as port, increase & blend in the mortgage broker world. This is important feature since it would be a bad mistake to break these low rate mortgages in the next 3-5 years if one decides to move.
• 10 year fixed mortgage penalty the day after 5 year anniversary is 3 month interest (not interest rate differential) per Interest Act.

To run your personal mortgage breakeven analysis, please contact Nawar.

First Time Home Buyer? Buy A Duplex

Toronto's real estate market has been hot for so many years now and it is getting tougher for first time home buyers to enter the market for a few reasons:

• Mortgage rules restricting maximum amortization to 25 years with less than 20% dowpayment
• Home prices have increased faster than inflation and income rise
• Supply of homes (excluding high rise condos) such detached, semi-detached and townhomes is lower than demand, creating bidding wars in areas of Toronto

So how can you buy your first home?

First Time Home Buyer? Buy A Duplex

There are a number of properties in the city with a basement suite.  Having rental income from the basement would offset some of the homeownership costs for first time home buyers.  Here is a real example:

• Purchase Price: $447,000
• Downpayment: 5% ($22,350)
• Basement Rental Income: $850
• Monthly Mortgage Payment: $2,222.44 (10 year mortgage, 3.69% amortized over 25 years)
• Monthly Property Tax: $223
• Total Monthly Mortgage Payment and Property Tax Less Rental Income: $1,595.44

The first time buyer is living in a 3 bedroom/2 bathroom house for just under $1,600 a month.  Yes, there are additional living expenses such as hydro, heat, cable, internet and home insurance, however for $1,600 a one bedroom plus den can be rented in downtown Toronto and there the additional costs of hydro, cable & internet. The first time home buyer is getting into the market and building equity into their home as opposed to paying their landlord's mortgage.

Using their RRSPs, through the Home Buyer's Plan, the first time home buyer is able to buy their first home.

You might be wondering why the first time home buyer chose a 10 year fixed mortgage.  Since they plan on moving up the homeownership ladder within 4 to 5 years, they plan on renting their existing home (rent main unit & basement unit).  With this strategy, they will avoid renewing the mortgage in 5 years at a higher interest rate which would eat into their monthly cash flow.

If you are first time home buyer, please contact Nawar to discuss how you can own a home and start building long term wealth through real estate.

Why 30 Year Amortization Mortgages Are Good

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.

Mortgage Freedom

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!

To discuss your mortgage financing needs whether you are buying a home, an investment property or renewing your mortgage, please contact Nawar.

RRSP Home Buyers' Plan & A Free Downpayment!

It is that time of year, when many Canadians rush to make their RRSP contributions prior to the deadline for the previous tax year. The RRSP home buyers' plan for first time home buyers is a great program to access money tax free money for downpayment purposes.Contributing to your RRSP prior to the deadline will achieve the following:

• Increase downpayment from RRSPs up to $25,000 per person
• Reduce taxable income and possibly generate a tax refund (free money) which can be used for downpayment or closing costs

RRSP Home Buyers' Plan Fine Print

You are right, there is fine print to be aware of:

• One must not have owned a home in the last 5 years. Verify with a qualified real estate lawyer your situation in the cases where one borrower has owned a home and other has not.
• Money deposited into RRSPs has to stay in the account for 90 days prior it is taken out
• Money taken out of the RRSPs has to be used for a home purchase and you have to have an agreement of purchase & sale in place (form T1036 needs to be completed at time of withdrawal for declaration purposes to CRA)
• The purchased home is your primary residence and not an investment property
• The monies have to be paid back over 15 years. If you don't pay it back it is considered taxable income. Should you payback your RRSP home buyers plan?

You can find more details on the RRSP home buyers on Canada Revenue Agency's website.

To discuss your mortgage financing needs whether you are buying a home, an investment property or renewing your mortgage, please contact Nawar.

The End Of Mortgage Brokers?

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:

Mortgage Options

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.

Mortgage Strategy

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 

If you are looking for a professional mortgage broker whether you are buying a home, an investment property or renewing a mortgage, please contact Nawar.