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.

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.

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.

Don't Payback Your RRSP Home Buyer's Plan!

RRSP Home Buyer's Plan is a great tool for first time home buyers to access money for the downpayment of their first home. The maximum allowed withdrawal is $25,000 per person which has to be paid back over 15 years. I will save the details of the RRSP Home Buyer's Plan for another blog post. Here is a controversial idea: Don't payback your RRSP Home Buyer's Plan back! Let me explain.

RRSP Home Buyer's Plan Scenario

• Mortgage amount: $300,000
• Interest Rate: 5% (mortgage rates are much lower now, but I want to use a reasonable interest rate over the life of the mortgage)
• Amortization: 25 years
• Required RRSP Home Buyer's Plan Payback: $138.89 monthly ($25,000/15 years/12 months per year)

My suggestion is not to payback into the RRSP but rather put the $138.89 into the mortgage above and beyond the normal monthly payment. If one pays $138.89 extra into the mortgage, after 15 years the results would be:

• Mortgage balance would be at $127,929 vs $164,894 (savings of $36,965 in principal and mortgage amortization is reduced to 22 years & 4 months from 25 years)
• 47.86% Return on investment: $25,000 of RRSP Home Buyer's Plan generated mortgage principal savings of $36,965
• First time home buyers saving 32 months of mortgage payment (25 years less 22 years & 4 months): $1,744 x 32 months = $55,808 which could be invested into RRSPs then

Since the first time home buyer is not paying the RRSP Home Buyer's Plan back, their income tax would rise by $1,666.68 ($138.89 x 12) annually. Assuming they are in the 45% income tax bracket, their income tax would rise by $750.

I realize this concept might be controversial and some might disagree with, but I hope the above numbers present a case for consideration. Paying down or paying off debt is an important step in achieving financial freedom. I would love to hear from you whether you agree or disagree.

Disclaimer: I am not a licensed financial planner and you should consult with your own financial advisor/planner prior to making any investment decisions. This is article is my personal opinion.

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

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.