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.

What You Need To Know About The New Mortgage Rules

The Minister of Finance, Mr. Flaherty, announced today the following regarding insured mortgages which will take effect on July 9, 2012:

• Refinances will be limited to 80% of home value from 85%
• Maximum amortization will be lowered to 25 years from 30 years
• GDS limited to 39% (currently no GDS requirement for 680+ credit scores) and TDS to 44%
• Mortgages over $1 million will no longer be insured

Here is how these changes will impact the following groups:

First Time Buyers

• They will be squeezed out of the market if they don't have the 20% downpayment.  Qualifying at 25 years, especially in Toronto, is difficult due to home prices in the city (condo fees are taken into account when qualifying for a mortgage as well)
• More potential first time home buyers will turn into longer term tenants which is good news for real estate investors
• Parents, get ready to co-sign for your children if they want to buy their first home

Real Estate Investors

• Since more first time buyers will have to wait for their first home, the tenant pool will increase.  This is good news since more demand results in higher rental income
• Qualifying for additional investment properties should not change since government requires minimum 20% downpayment. This is pending conventional mortgage amortization is not lowered to 25 years.  Please note there are lenders offering 35 year amortization for investment properties.

 Homeowners

• If one has 20% equity or more in their home, 30 & 35 year amortized mortgages are available for now.  The changes are not impacting this group, but we will have to wait and see if lenders will reduce mortgage amortization to 25 years

This announcement came out of nowhere and it surprised many.  If this announcement is intended to cool off investors buying condos in downtown Toronto, I'm not sure it will achieve that since the changes are targeted towards insured mortgages only.  Furthermore, this change gives the Bank of Canada room to hold its benchmark rate steady for a longer period of time due to a slowing global economy.  I believe since the Bank of Canada's hands were tied, Minister of Finance came in to help control the high household debt level.

There will be more clarifications coming out in the next few days from the lenders which I will elaborate on. To discuss how these changes will impact your mortgage financing, please contact me.