What's Your Lowest Mortgage Rate?

If I had a dollar everytime someone asked "What's your lowest rate?".....Ok, you get how often people ask this question.  You probably have heard mortgage brokers state there is more to mortgages than rates and the fine print is important.  As a mortgage broker who provides detailed analysis, here is a scenario for you to contemplate:A lender came out with a new mortgage product with ultra low rate with following features:

• Mortgage Rate: 2.89% (conventional and insured mortgages)
• Mortgage Term: 5 year fixed
• Prepayment features: 20/20 (20% lump sum pre-payments & 20% increased payments)
• Portable but not assumable
• No increase and blend (I will explain what this means)
• Early penalty payout: IRD or 3% of remaining balance

I liked the mortgage product till I read the last 2 features for the following 2 reasons:

• If the homeowner moves prior to mortgage maturity, they can transfer the mortgage balance but can NOT add to the mortgage amount which will force them to break the mortgage
• Typical penalty is IRD or 3 month interest. In the latter stages of the mortgage as it get closer to maturity date, 3 month interest is the typical penalty to break the mortgage not 3% of mortgage balance

I did the following comparison between 2 mortgage products to see if this product is beneficial to the homeowner:

• Mortgage 1: 3.04% 5 year fixed, has same features as low rate product with the addition of being assumable, borrower can increase and blend and penalty is IRD or 3 month interest
• Mortgage 2: 2.89% product as described above
• Assume homeowner decides to sell their home and move 4 years into the 5 year mortgage term

As you can see in the above chart, after 4 years of mortgage payment, the difference between the 2 mortgage balances is $789 and the payment savings is $1,488 ($1690-$1659 x 48 months) for a total savings of $2,277.

Increase And Blend

Allows the borrower to increase the mortgage balance without paying a penalty and maintaining the interest rate on the existing balance. Example: The homeowner wants to increase the existing mortgage (assume current balance is $300,000, mortgage rate 2.99%) to $400,000. Utilizing this feature, the homeowner would add $100,000 at current market rate and blends the 2 rates together. The 2.99% interest rate would not be lost on the $300,000 and no penalty would be paid.

Lowest Mortgage Rate Fine Print

The low rate mortgage product does NOT allow the homeowner to increase and blend therefore they would have to break the mortgage and pay a penalty. In this case, since the penalty is 3% of the balance and not 3 month interest penalty, the penalty would be $10,930 (3% of $364,362) as opposed to $2,632 (3 month interest penalty)!  As you can see the original savings of $2,277 are wiped out by the penalty and the howeowners would have to take on a new mortgage at a higher interest rate (assuming rates will be higher in 2017 than 2013).

Now, the lender does state they would "rebate a portion of the penalty if clients return within 90 days of payout". Personally, I would not want to be tied to one lender and who knows if the offered rates would be competitive relative to other lenders.

This mortgage product can be beneficial if the homeowner knows they will be in their home for at least 5 years and do not anticipate any changes in lifestyle prior to mortgage maturity.

You can see from the above analysis, there is more to mortgages than rates.  So, the next time someone asks "what's your lowest rate?".......

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

Bank Of Canada Rate Announcement

As expected, the Bank of Canada rate left its benchmark rate unchanged at 1% on December 4, 2012. Here are 2 things you need to know from the Bank of Canada rate announcement:

Global Economy

US economy grew gradually but is held back by the looming fiscal cliff which could push it back into a recession dragging Canada with it. China's economy is soft landing which is a good thing for Canada's resource economy (oil & minerals) whereas Europe is in recession. The global economic situation is negative which puts less pressure on increasing interest rates in the near future.

Canada's Economy

Canada's economy grew below expectations in the third quarter, housing market is cooling and household credit has slowed. The Canadian dollar continues to be strong and inflation is as expected. These indicators point to a slowing economy and the lack of need to raise interest rates in the near future.

The surprising statement was:"Over time, some modest withdrawal of monetary policy stimulus will likely be required". Based on the current economic situation around the world and Canada, there doesn't seem to be any requirement to increase interest rates, if anything, additional stimulus might be required.

For now, enjoy the variable mortgages and take advantage of the decreasing fixed mortgage rates.

To discuss your mortgage financing needs, 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.

 

The End Of Variable Mortgages!

As of November 1, 2012, OSFI (Office of Superintendent of Financial Institutions) requires lenders to qualify conventional and insured variable mortgages using Bank of Canada's benchmark rate.  Will this lead to the end of variable mortgages?Prior to November 1, 2012, all insured mortgages were required to qualify based on Bank of Canada's benchmark rate.  The new rules will restrict Canadians' ability to qualify for conventional variable mortgages and conventional shorter term (1-4 year) mortgages.

Here is an example:

Annual Income: $100,000 Mortgage Amount: $450,000 (assuming 20% downpayment) Annual Property Tax: $4,500 Annual Heating: $1,200 Monthly Car Lease & Personal Debt: $750

Prior to the new mortgage rules, the borrowers would have qualified for a variable mortgage using a 3 year rate which have put the GDS/TDS ratios at 28.67/37.67.  As of November 1, 2012, the GDS/TDS is 35.3/44.29 since the Bank of Canada benchmark rate (currently 5.24%) is used to qualify.

Is This The End Of Variable Mortgages?

As you can see, the borrowers will be forced to take a fixed mortgage for 5 year term or longer since they can't qualify for a variable mortgage.  My issue with the new mortgage rules is how will anyone qualify for a variable mortgage or fixed mortgage of 1-4 year term when the benchmark rate is at 7-8% as rates normalize in the future? Having borrowers lock into longer terms than they need to might result in paying IRD (interest rate differential) penalty to get out of the mortgage which can be exorbitant.

The solution to this issue is putting more downpayment if possible to get the mortgage qualification ratios in line.

To discuss your downpayment options and how to qualify for short term fixed mortgage or variable mortgage, please contact me.

 

Sell Or Refinance Your Condo?

A large number of condo buyers in downtown Toronto are first time buyers who enter the journey of homeownership with the intent of moving up to a larger home after a few years to start a family. The data is loud and clear about Toronto's condo market; it has shifted into buyers territory and now buyers have the upper hand in the condo market.  The days of bidding wars seem to be long gone.  Condo sellers are having a hard time getting the price they thought they could have gotten earlier in 2012.  Should one sell or refinance the condo and rent it?

Opportunity in Toronto Condos

I recently had a number of clients who had their condos for sale, but didn't get the price they wanted. They had 2 options to entertain:

1. Sell at a price lower than expected and take a loss 2. Refinance condo, pull the equity out and rent the unit

I choose to look at situations with a glass half full perspective.  I showed the clients by taking advantage of today's low rates and the shortage of rental units in downtown Toronto, there is an opportunity to generate positive cash flow, have someone else pay down their mortgage and wait for a few years till the market balances itself out.

In all cases, the clients had multiple offers on their condos for rent, got higher rent what they listed the condo for and rented the condos to professionals who are easier to manage.  Here are examples of what some of the condos were listed and rented for:

List: $1800, Rent: $1900 (Bathurst & King) List: $1600, Rent: $1700 (Cityplace) List: $2300, Rent: $2350 (King & Sherbourne) List: $1450, Rent: $1500 (King & Portland)

Investing In Toronto Condos

If you own a condo in downtown Toronto, this is a great time to consider locking into the historic low mortgage rates and take advantage of the high rental demand.

Now is the best time to consider restructuring the condo's mortgage due to the following 2 reasons:

1. Condo values have not dropped significantly 2. Mortgage rates at historic lows

Waiting for the "right time" can be costly especially if condo values drop there will be less equity to take out and when interest rates rise (even slightly), the monthly carrying costs will increase and might result in negative cash flow.

There is a lot of doom and gloom in the media and blogosphere, but there is always an opportunity if you have a long term approach to real estate investment.

To find out if you can refinance and rent your condo, please email Nawar or call at 416.637.3308.

Mortgage Rules Restrict Qualification

Mortgage Qualification

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

1. Cashback Mortgage

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

2. Home Equity Line of Credit (HELOC)

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

3. Mortgage Qualifying Rate

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

4. Self Employed Mortgage

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

5. GDS/TDS

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

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

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

What Is Bridge Financing?

When Is Bridge Financing Required?

When homeowners move from one home to another, sometimes the closing date for the purchase of the new home and the sale of the existing home do not fall on the same day.

For example, if the purchase of the new home closes on July 1 and the sale of the existing home closes on September 1 where the proceeds from the sale are needed for the downpayment, a bridge loan is provided by the lender to cover the shortfall in downpayment for the two months period.

Bridge Financing Conditions

The bridge financing loan is provided based on the following conditions:

1. There must be a firm sale agreement on the existing home
2. Bridge financing loan is provided for up to 120 days

Bridge Financing Costs

The bridge financing loan is provided at prime plus 2% to 5% depending on the lender.  Some lenders have a bridge finance loan set up fee of a few hundred dollars.  There are some additional legal fees to account for since the lawyer has to do additional work.

It is important to review your options with a mortgage professional and run worst case scenarios if:

1. The existing home is sold for a less than expected price
2. The existing home sale closing date is past 120 days
3. The existing home is not sold

To review your personal mortgage situation and plan your next move, please contact me.

How To Access Your Home Equity

There are a few possible reasons to access your home equity, some are:

• Investment purposes: to buy an investment property or invest in the market (stocks, mutual funds...)
• Consolidate debt: move high interest debt into low interest debt
• Home purchase: buying a home that requires a larger mortgage amount

Canadians are taking advantage of today's low rates and locking into 5 and 10 year fixed mortgages. What happens if the homeowner needs to access additional equity prior to mortgage maturity?  The options are:

Increase And Blend Mortgage

I believe this option will be very popular as more homeowners lock into historically low rates and for most, it won't make sense to break the mortgage in the future.  An example would be: current mortgage amount & interest rates are $300,000 and 3.09%. The homeowner requires to access an additional $150,000 of their home equity.  They would add $150,000 to their existing mortgage balance of $300,000 at current market rate for the remaining term. In this case if the homeowner is 3 years into the 5 year term, the $150,000 would be lent at the 2 year term mortgage rate. The costs associated with an increase and blend option are completing an appraisal on the home and legal fees to register the new mortgage addition.

HELOC: Home Equity Line Of Credit

Secured lines of credit are a great way to access your home equity. The borrower only pays for what they borrow and the funds can be accessed again since this is a revolving credit (you can access whatever is paid back). The costs associated with this option are appraisal and legal fees which are sometimes covered or subsidized by the lender.

Refinance Mortgage

This requires breaking the mortgage, paying a penalty, appraisal and legal fees. It is the most expensive option upfront, however it might be the best option if the homeowner is coming from a higher interest rate mortgage and locking into a lower interest rate mortgage.

It is important to sit with a mortgage professional to discuss your needs and run through the numbers to see which option makes more financial sense.

To discuss your personal options and complete the numerical analysis, please contact me.

Variable Mortgage Holders Celebrate!

The US Federal Reserve announced on September 13, 2012 that it will embark on a third round of stimulus (QE3) to improve the employment numbers in the US.  What does this announcement have to do with Canadian mortgage rates?Mr. Carney, the governor of the Bank of Canada, has to keep the benchmark rate which sets prime rate relatively close the US Federal Reserve benchmark rate, otherwise the Canadian dollar would appreciate and have downward pressure on Canadian exports due to the higher cost of Canadian goods.  This would be bad for the Canadian economy and force the Bank of Canada to hold its benchmark rate at or close to its current level to late 2015 along with its US counterpart.

If you are variable mortgage holder who has a prime minus mortgage, this announcement is great news since prime would probably not move dramatically in the next while.  However, the risk is as central bankers "print" money to stimulate the economy, inflation will become an issue sometime in the future.  The message here is to take advantage of your current variable mortgage but plan and prepare for the future.

To discuss how you can shave 3 years off your mortgage amortization, please click here. To contact me, please click here.