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.

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.

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.

 

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.