Business Owners Mortgage

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

Business Owners Mortgage....The Last One

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

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

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

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

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

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

Business Owners Mortgage Options

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

Business Owners Mortgage Options

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

• Sole Proprietor
• Partnership
• Corporation

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

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

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

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

Business Owners Mortgage Downpayment

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

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

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

Overwhelming? Here is a flowchart summarizing the above options:

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

 

Can I Afford That Home & How To Qualify For A Mortgage?

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 Are Not Portable!

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

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

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

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

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

How To Get A Mortgage If You Are Self Employed

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

1. Length of time being self employed: Being self employed for more than 2 years provides more mortgage options.
2. Amount of downpayment available for mortgage financing: Increased equity into the property reduces lenders' risk and provides security since the borrower has sweat equity invested into the property.  There are mortgage products with as little as 10% downpayment for buying a home & 85% for refinancing.
3. Credit score: Having a 680 credit score or higher with excellent credit track record is beneficial

There are different mortgage options for the self employed borrower whether they have a smaller downpayment or their credit score is not the greatest or having been self employed for a shorter period of time.  A mortgage broker who has expertise in arranging mortgages for the self employed would provide mortgage options and explain the pros and cons of each alternative.

To discuss your personal mortgage situation, please contact me.

2 Factors That Can Affect Your Home Value

The second factor that can affect your home value is jobs creation or an unemployment spike. Cities or towns that are reliant on one major industry are exposed to large swings in real estate values.

For example cities such as Windsor and Oshawa are reliant on the automotive industry. Since the automotive industry downturn, many jobs that support the auto industry have been lost as well (tool & die, transportation, manufacturing companies, sub suppliers...). As unemployment numbers rise, the supply demand pendulum swings towards more people selling their homes and/or less having the appetite to buy homes since there is a lack of job security which lowers real estate values.  This has been evident in Windsor over the last few years which continues to struggle in creating jobs.

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.

2 Factors That Can Affect Your Home Value

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.

1/ Interest Rate 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.